<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
FAMILY RESTAURANTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
<TABLE>
<C> <S> <C>
DELAWARE 5812 33-0197361
(PRIMARY STANDARD
(STATE OR OTHER JURISDICTION INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE
OF INCORPORATION OR ORGANIZATION) NUMBER) IDENTIFICATION NO.)
</TABLE>
FAMILY RESTAURANTS, INC.
18831 VON KARMAN AVENUE
IRVINE, CALIFORNIA 92612
(949) 757-7900
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
TODD E. DOYLE, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
FAMILY RESTAURANTS, INC.
18831 VON KARMAN AVENUE
IRVINE, CALIFORNIA 92612
(949) 852-5721
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE
OF AGENT FOR SERVICE)
--------------
WITH COPIES TO:
<TABLE>
<S> <C>
MICHAEL A. WORONOFF, ESQ. ANTHONY J. RICHMOND, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
LLP LATHAM & WATKINS
300 SOUTH GRAND AVENUE, SUITE 3400 633 WEST FIFTH STREET, SUITE 4000
LOS ANGELES, CA 90071-3400 LOS ANGELES, CA 90071-2007
(213) 687-5000 (213) 485-1234
</TABLE>
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement is declared effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (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. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
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>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE REGISTRATION FEE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share....... 55,000,000 $1.703125 $93,671,875 $27,634
- -----------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Based upon the estimated maximum number of shares of the Registrant's
Common Stock, $.01 par value per share, to be issued pursuant to the
transaction described herein.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) (1) of the Securities Act, based upon the market
value of the securities to be received by the Registrant. Such market
value is based upon the average of the high and low prices of the Common
Stock, $.01 par value per share, of Koo Koo Roo, Inc. as reported on the
Nasdaq Stock Market National Market System on June 29, 1998.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[KKR LETTERHEAD]
MERGER PROPOSED
YOUR VOTE IS VERY IMPORTANT
August , 1998
To our Stockholders:
You are cordially invited to attend the special meeting of stockholders of
Koo Koo Roo, Inc. to be held on September , 1998 at
at local time.
At the stockholder meeting you will vote on a proposal to approve and adopt
an agreement and plan of merger pursuant to which Koo Koo Roo, Inc. will
become an indirect wholly owned subsidiary of Family Restaurants, Inc. In
connection with this transaction, Family Restaurants, Inc. will be renamed Koo
Koo Roo Enterprises, Inc.
If the merger is consummated, each outstanding share of Koo Koo Roo, Inc.
common stock will be converted into the right to receive one share of common
stock of the newly named Koo Koo Roo Enterprises, Inc. (symbol: ). The
accompanying document describes the merger in detail.
THE BOARD OF DIRECTORS OF KOO KOO ROO, INC. HAS CAREFULLY CONSIDERED THE
TERMS AND CONDITIONS OF THE PROPOSED MERGER AND HAS UNANIMOUSLY DETERMINED
THAT THE MERGER IS IN THE BEST INTERESTS OF KOO KOO ROO, INC. AND ITS
STOCKHOLDERS. ACCORDINGLY, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
YOU VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER.
The merger cannot occur unless stockholders holding a majority of the
outstanding shares of Koo Koo Roo, Inc. common stock approve it. YOUR VOTE IS
VERY IMPORTANT. Whether or not you plan to attend the stockholders meeting in
person, please take the time to vote on the proposal by completing the
enclosed proxy card and mailing it to us in the envelope provided. If you
sign, date and mail your proxy card without indicating how you wish to vote,
your proxy will be counted as a vote FOR the proposal submitted at the
meeting. If you fail to return your proxy card, the effect will be a vote
AGAINST the merger.
THIS DOCUMENT PROVIDES YOU WITH DETAILED INFORMATION ABOUT THE PROPOSED
MERGER. FOR A DISCUSSION OF CERTAIN RISK FACTORS, PLEASE SEE PAGE 10 OF THIS
DOCUMENT. IN ADDITION, YOU MAY OBTAIN INFORMATION ABOUT BOTH COMPANIES FROM
DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. WE ENCOURAGE YOU
TO READ THIS ENTIRE DOCUMENT CAREFULLY.
Lee A. Iacocca
Acting Chairman of the Board
A. William Allen, III
Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAS APPROVED THE COMMON STOCK TO BE ISSUED IN THE MERGER
AND THE TRANSACTIONS CONTEMPLATED THEREBY OR DETERMINED IF THIS PROXY
STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE. THIS PROXY STATEMENT/PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES.
Proxy Statement/Prospectus dated August , 1998 and first mailed to
stockholders on August , 1998.
<PAGE>
KOO KOO ROO, INC.
11075 SANTA MONICA BOULEVARD, SUITE 225
LOS ANGELES, CALIFORNIA 90025
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER , 1998
TO THE STOCKHOLDERS OF KOO KOO ROO, INC.:
YOU ARE HEREBY NOTIFIED that a special meeting of stockholders of Koo Koo
Roo, Inc. will be held on September , 1998 at
at a.m., local time (the "Special Meeting"), for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger, dated as of June 9, 1998 (the "Merger
Agreement"), by and among Family Restaurants, Inc., a Delaware corporation
("Family Restaurants" or "FRI"), FRI-Sub, Inc., a newly-formed Delaware
corporation and an indirect wholly owned subsidiary of FRI ("Merger-Sub"),
and Koo Koo Roo, Inc. ("Koo Koo Roo" or "KKR"), pursuant to which among
other things, (i) Merger-Sub will merge with and into KKR, and KKR will
become an indirect wholly owned subsidiary of FRI and (ii) each issued and
outstanding share of common stock of KKR will be converted into the right
to receive one share of common stock of FRI, which will be renamed Koo Koo
Roo Enterprises, Inc.
2. To consider and vote upon such other matters and such other business,
if any, as may properly come before the Special Meeting or any adjournment
or postponement thereof.
Please refer to the attached Proxy Statement/Prospectus, which forms a part
of this Notice and is incorporated herein by reference, for further
information with respect to the business to be transacted at the Special
Meeting.
THE BOARD OF DIRECTORS OF KKR (THE "KKR BOARD") HAS UNANIMOUSLY DETERMINED
THAT THE MERGER IS IN THE BEST INTERESTS OF KKR AND ITS STOCKHOLDERS.
ACCORDINGLY, THE KKR BOARD HAS UNANIMOUSLY APPROVED AND RECOMMENDS THAT YOU
VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY AT THE SPECIAL MEETING.
Only common stockholders of record of KKR at the close of business on August
, 1998, the record date for the meeting, are entitled to notice of, and to
vote at, the Special Meeting or any adjournment or postponement thereof. A
list of such stockholders will be available for review at the principal
executive offices of KKR listed above during normal business hours for a
period of ten days prior to the Special Meeting.
STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN PERSON.
HOWEVER, WHETHER OR NOT YOU EXPECT TO ATTEND, YOU ARE URGED TO READ THE
ACCOMPANYING DOCUMENT AND THEN COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD
AND MAIL IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. IT IS IMPORTANT
THAT YOUR SHARES BE REPRESENTED AT THE MEETING. IF YOU RECEIVE MORE THAN ONE
PROXY CARD BECAUSE YOU OWN SHARES REGISTERED IN DIFFERENT NAMES OR AT
DIFFERENT ADDRESSES, EACH CARD SHOULD BE SIGNED AND RETURNED.
By Order of the Board of Directors,
RONALD D. GARBER
Corporate Secretary
August , 1998
Los Angeles, California
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER..................................... 1
WHO CAN HELP ANSWER YOUR QUESTIONS......................................... 2
SUMMARY.................................................................... 3
The Companies............................................................ 3
Recommendations to Stockholders.......................................... 3
Record Date; Voting Power................................................ 3
The Merger............................................................... 4
No Appraisal Rights...................................................... 4
Current Relationships and Transactions; Interests of Certain Persons..... 4
Recommendation of the Board of Directors of Koo Koo Roo.................. 4
Opinion of Sutro & Co. Incorporated...................................... 4
Conditions to the Merger................................................. 4
Termination of the Merger Agreement...................................... 5
Payment of Fees upon Termination......................................... 5
Amending or Waiving Terms of the Merger Agreement........................ 5
Regulatory Approvals..................................................... 5
Certain Federal Income Tax Consequences.................................. 5
Koo Koo Roo Common Stock Information..................................... 6
Listing of Koo Koo Roo Enterprises Common Stock.......................... 6
Dividends After the Merger............................................... 6
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL INFORMATION........... 7
INTRODUCTION............................................................... 9
RISK FACTORS............................................................... 10
THE COMPANIES.............................................................. 15
THE COMBINED COMPANY....................................................... 16
THE MERGER................................................................. 18
Background of the Merger................................................. 18
Recommendation of the KKR Board; Reasons for the Merger.................. 21
Accounting Treatment..................................................... 22
Certain United States Federal Income Tax Consequences.................... 22
Regulatory and Third-Party Approvals..................................... 23
No Appraisal Rights...................................................... 24
Interests of Certain Persons in the Merger............................... 24
Restrictions on Resales by Affiliates.................................... 24
Litigation............................................................... 25
Cautionary Statement Concerning Forward-Looking Statements............... 25
OPINION OF SUTRO & CO. INCORPORATED........................................ 26
PRICE RANGE OF KKR COMMON STOCK............................................ 29
DIVIDEND POLICY............................................................ 29
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION............... 30
THE MERGER AGREEMENT....................................................... 36
The Merger............................................................... 36
Consideration to be Received in the Merger............................... 36
Exchange of Stock Certificates........................................... 37
</TABLE>
i
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Representations and Warranties.......................................... 37
Covenants of FRI........................................................ 38
Covenants of KKR........................................................ 40
Mutual Covenants........................................................ 42
Conditions.............................................................. 44
Termination............................................................. 45
Amendment and Waiver.................................................... 45
RELATED AGREEMENTS AND OTHER MATTERS...................................... 46
Bridge Loan Agreement................................................... 46
Hamlet Stock Purchase Agreement......................................... 46
New Indebtedness........................................................ 47
1998 Stock Incentive Plan............................................... 47
Shares to be Outstanding at Closing; FRI Stock Dividend................. 48
Apollo Warrant.......................................................... 48
THE SPECIAL MEETING....................................................... 49
Times and Places; Purposes.............................................. 49
Voting Rights; Votes Required for Approval.............................. 49
Accountants............................................................. 50
Proxies................................................................. 50
DIRECTORS AND MANAGEMENT OF THE COMPANY FOLLOWING THE MERGER.............. 51
Directors............................................................... 51
Committees of the Board of Directors.................................... 51
Compensation of Directors............................................... 51
Termination of VCU Plan................................................. 51
COMPARISON OF STOCKHOLDERS' RIGHTS........................................ 52
Authorized Capital...................................................... 52
Board of Directors...................................................... 52
Committees of the Board of Directors.................................... 53
Newly Created Directorships and Vacancies............................... 53
Removal of Directors.................................................... 53
Officers................................................................ 53
Special Meetings of Stockholders........................................ 53
Quorum at Stockholder Meetings.......................................... 54
Stockholder Action by Written Consent................................... 54
Advance Notice of Stockholder-Proposed Business or Director Nominations
at Annual Meetings..................................................... 54
Amendment of Governing Documents........................................ 56
DESCRIPTION OF COMPANY CAPITAL STOCK FOLLOWING THE MERGER................. 57
Authorized Capital Stock................................................ 57
Common Stock............................................................ 57
Preferred Stock......................................................... 57
Preemptive Rights....................................................... 58
Delaware Antitakeover Statute........................................... 58
Transfer Agent and Registrar............................................ 58
Nasdaq National Market Listing; Delisting and Deregistration of KKR
Common Stock........................................................... 58
EXPERTS................................................................... 59
LEGAL MATTERS............................................................. 59
SUBMISSION OF FUTURE STOCKHOLDER PROPOSALS................................ 59
WHERE YOU CAN FIND MORE INFORMATION....................................... 59
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DELIVERY OF FRI REPORTS WITH PROXY STATEMENT/PROSPECTUS................... 61
LIST OF ANNEXES
Annex A: Agreement and Plan of Merger by and among Family Restaurants,
Inc., FRI-Sub, Inc. and Koo Koo Roo, Inc. dated June 9, 1998...... A-1
Annex B: Opinion of Sutro & Co. Incorporated.............................. B-1
LIST OF EXHIBITS
Exhibit K: Family Restaurants, Inc. 1997 Form 10-K........................ K-1
Exhibit Q: Family Restaurants, Inc. March 29, 1998 Form 10-Q.............. Q-1
</TABLE>
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY IS KOO KOO ROO PROPOSING TO MERGE?
A: The Board of Directors of Koo Koo Roo believes that the merger presents an
opportunity for stockholders to participate in a combined company with
greater financial resources, diversification and ability to compete in the
restaurant industry. The Koo Koo Roo Board has also concluded that the
proposed combination with Family Restaurants is a more viable alternative
than continuing Koo Koo Roo as a stand alone public entity because the
combination will provide greater access to capital and a management structure
sufficient to implement its strategy and better leverage its overhead
requirements.
Q: DOES THE BOARD OF DIRECTORS RECOMMEND VOTING IN FAVOR OF THE MERGER?
A: The Board of Directors of Koo Koo Roo has unanimously determined that the
merger is in the best interests of KKR and its stockholders and unanimously
recommends that stockholders vote FOR the approval and adoption of the merger
agreement and the transactions contemplated thereby.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: If the merger is completed, you will have the right to receive one share of
the newly named Koo Koo Roo Enterprises common stock (symbol: ) for each
share of Koo Koo Roo common stock you own.
Q: WHAT ARE THE CONSEQUENCES TO KOO KOO ROO STOCKHOLDERS IF THE MERGER IS NOT
CONSUMMATED?
A: Koo Koo Roo has recently curtailed its growth plans in light of the
difficulties involved in raising capital on a cost effective basis. The KKR
Board believes that raising the significant capital required to continue its
historical growth strategy would be very dilutive to its common stockholders.
Consequently, if the merger is not consummated it is likely that Koo Koo Roo
will be forced to operate under significant capital constraints, maintaining
a limited growth plan.
Q: WHAT ABOUT FUTURE DIVIDENDS?
A: Historically, neither Koo Koo Roo nor Family Restaurants has paid dividends
to the holders of their common stock. Koo Koo Roo and Family Restaurants have
had, and the newly named Koo Koo Roo Enterprises will continue to have, a
substantial commitment to maintain and expand their businesses, and such
maintenance and expansion will require the use of the cash that otherwise
might be available for dividends. In addition, Koo Koo Roo Enterprises will
be subject to certain debt instruments that will restrict the payment of
dividends.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working towards completing the merger as quickly as possible. In
addition to stockholder approvals, we must also obtain certain regulatory and
third-party approvals. Although we cannot predict exactly when such
regulatory approvals will be received, we hope to complete the merger during
September 1998.
Q: WILL I OWE ANY UNITED STATES FEDERAL INCOME TAX AS A RESULT OF THE MERGER?
A: In general, you will not recognize any gain or loss for United States
federal income tax purposes as a result of the merger. TAX MATTERS ARE VERY
COMPLICATED AND THE TAX CONSEQUENCES OF THE MERGER TO YOU MAY DEPEND ON THE
FACTS OF YOUR SITUATION. YOU SHOULD CONSULT YOUR TAX ADVISOR TO UNDERSTAND
FULLY THE TAX CONSEQUENCES OF THE MERGER TO YOU.
Q: WHEN AND WHERE IS THE SPECIAL STOCKHOLDER MEETING?
A: The special meeting of Koo Koo Roo's stockholders will be held on September
, 1998 at at a.m. local time.
Q: WHO CAN VOTE ON THE MERGER?
A: Holders of Koo Koo Roo common stock at the close of business on August ,
1998, the record date relating to the stockholder meeting, may vote on the
merger at the stockholder meeting.
1
<PAGE>
Q: WHAT VOTE IS REQUIRED TO APPROVE THE MERGER?
A: Approval of the merger requires the affirmative vote of the holders of at
least a majority of the outstanding shares of Koo Koo Roo common stock.
Q: WHAT DO I NEED TO DO NOW?
A: After you have carefully reviewed this document, please indicate how you
want to vote on your proxy card and sign and mail it in the enclosed return
envelope as soon as possible, so that your shares will be represented at the
stockholder meeting. If you sign and send in the proxy card and do not
indicate how you want to vote, your proxy will be voted FOR the approval and
adoption of the merger agreement and the transactions contemplated thereby.
If you do not vote by either sending in your proxy card or voting in person
at the stockholder meeting, it will have the same effect as a vote AGAINST
the approval and adoption of the merger agreement and the transactions
contemplated thereby.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares of Koo Koo Roo common stock only if you
provide instructions as to how to vote your shares. You should instruct your
broker to vote your shares. Without instructions, your shares will not be
voted by that broker and the failure to vote will have the same effect as a
vote AGAINST the approval and adoption of the merger agreement and the
transactions contemplated thereby.
Q: MAY I CHANGE MY VOTE AFTER I MAIL MY PROXY CARD?
A: Yes. You may change your vote at any time before the vote is taken at the
stockholder meeting. You can do this in one of three ways. First, you can
send a written notice dated later than your proxy card stating that you
would like to revoke your proxy. Second, you can complete and submit a new
proxy card dated later than your original proxy card. If you choose either
of these two methods, you must submit your notice of revocation or new proxy
card to the Corporate Secretary of Koo Koo Roo. Third, you can attend the
stockholder meeting and vote in person. However, your attendance alone will
not revoke your proxy. If you instructed a broker to vote your shares, you
must follow your broker's directions for changing those instructions.
Q: DO COMMON STOCKHOLDERS HAVE APPRAISAL RIGHTS?
A: Under applicable state law, Koo Koo Roo common stockholders are not
entitled to dissenters' appraisal rights.
Q: SHOULD I SEND IN MY COMMON STOCK CERTIFICATES NOW?
A: NO. After the merger is completed you will receive written instructions for
sending in your Koo Koo Roo common stock certificates and receiving the Koo
Koo Roo Enterprises common stock certificates.
WHO CAN HELP ANSWER YOUR QUESTIONS
If you have more questions about the merger you should contact:
Koo Koo Roo, Inc.
11705 Santa Monica Boulevard
Suite 225
Los Angeles, California 90025
Attention: Corporate Secretary
Phone Number: (310) 479-2080
If you would like additional copies of this Proxy Statement/Prospectus, or
if you have questions about how to complete and return your proxy card, you
should contact:
[PROXY SOLICITOR]
Attention:
Phone Number: (800)
2
<PAGE>
SUMMARY
This summary only highlights selected information from this Proxy
Statement/Prospectus and may not contain all the information that is important
to you. For a more complete understanding of the merger and the other
information contained in this document, you should read this entire document
carefully, as well as the additional documents to which it refers. See "Where
You Can Find More Information" on page 59.
THE COMPANIES
(SEE PAGES 15 THROUGH 17)
KOO KOO ROO, INC.
11075 Santa Monica Boulevard
Suite 225
Los Angeles, California 90025
(310) 479-2080
Koo Koo Roo, Inc. was organized in February 1987 and opened its first
restaurant in August 1988. The first Koo Koo Roo California Kitchen(TM)
prototype restaurant was opened in 1993. The principal business of Koo Koo Roo
is the operation of restaurants in the emerging food category of fresh,
convenient meals--meals with the convenience and value associated with quick
service, but the quality, freshness and variety associated with upscale, casual
full-service restaurants. As of June 30, 1998, Koo Koo Roo operated 52
restaurants, including 14 Hamburger Hamlet restaurants.
FAMILY RESTAURANTS, INC.
18831 Von Karman Avenue
Irvine, California 92612
(949) 757-7900
Family Restaurants, Inc. was incorporated in Delaware in 1986 and is
primarily engaged in the operation of full-service Mexican restaurants through
its subsidiaries. As of June 28, 1998, Family Restaurants and its subsidiaries
operated 273 restaurants in 30 states, with approximately 65% of its
restaurants located in California, Ohio, Pennsylvania, Michigan, Illinois and
Indiana. Additionally, as of June 28, 1998, Family Restaurants was the
franchisor and licensor of 21 restaurants outside the United States.
FRI-SUB, INC.
c/o Family Restaurants, Inc.
18831 Von Karman Avenue
Irvine, California 92612
FRI-Sub, Inc. is an indirect wholly owned subsidiary of Family Restaurants,
Inc., organized solely for the purposes of consummating the merger, and has not
carried on any activities other than activities incident to its formation and
as contemplated by the merger agreement.
RECOMMENDATIONS TO STOCKHOLDERS
(SEE PAGES 21 AND 22)
The Board of Directors of Koo Koo Roo has unanimously determined that the
merger is in the best interest of Koo Koo Roo and its stockholders and
unanimously recommends that you vote FOR the approval and adoption of the
merger agreement and the transactions contemplated thereby.
RECORD DATE; VOTING POWER
(SEE PAGES 49 AND 50)
At the stockholder meeting, you are entitled to one vote for each share of
Koo Koo Roo common stock you hold of record as of the record date. As of the
record date, there were shares of Koo Koo Roo common stock
entitled to vote at the stockholder meeting.
The merger agreement must be approved by the affirmative vote of the holders
of at least a majority of the outstanding shares of Koo Koo Roo common stock.
We do not expect to ask stockholders to vote on any other matters at the
stockholder meeting. However, if any other matters are properly presented at
the stockholder meeting for consideration, the persons named by the
stockholders to be their proxies will have the discretion to vote on such
matters in accordance with their best judgment.
3
<PAGE>
THE MERGER
(SEE PAGES 18 THROUGH 25)
The merger agreement is described on pages 34 through 44 and attached as
Annex A to this Proxy Statement/Prospectus. We encourage you to read carefully
the merger agreement in its entirety as it is the legal document that governs
the merger.
NO APPRAISAL RIGHTS
(SEE PAGE 24)
Under Delaware law, Koo Koo Roo common stockholders will not have any right
to dissent from the merger and receive the appraised value of their shares in
cash in connection with the merger.
CURRENT RELATIONSHIPS AND TRANSACTIONS; INTERESTS OF CERTAIN PERSONS
(SEE PAGE 24)
YOU SHOULD NOTE THAT A NUMBER OF DIRECTORS AND EXECUTIVE OFFICERS OF KOO KOO
ROO HAVE INTERESTS IN APPROVING THE MERGER AS EMPLOYEES AND/OR DIRECTORS THAT
ARE DIFFERENT FROM, OR IN ADDITION TO, THE INTERESTS OF KOO KOO ROO'S
STOCKHOLDERS GENERALLY. For example, two directors of Koo Koo Roo, Lee A.
Iacocca and A. William Allen III, will be designated as members of the Board
of Directors of Koo Koo Roo Enterprises upon completion of the merger and will
receive compensation for acting as such.
Additionally, certain officers of Koo Koo Roo have employment agreements
that entitle them to compensation if their employment with Koo Koo Roo is
terminated in the event of a change of control transaction. The merger
constitutes such a transaction. Koo Koo Roo estimates that the maximum
aggregate payments under such agreements would be approximately $1 million,
assuming such officers' employment with Koo Koo Roo is terminated in the event
of the merger.
As of the record date, all executive officers and directors of Koo Koo Roo,
as a group, owned approximately 105,000 shares of Koo Koo Roo common stock,
representing less than 1% of the outstanding shares of Koo Koo Roo common
stock as of such date. In addition, such directors and executive officers
owned options to purchase an additional 1,974,400 shares of Koo Koo Roo common
stock as of such date. Any options held by such persons will be converted into
options to purchase shares of Koo Koo Roo Enterprises common stock. Such
directors and executive officers have indicated their intention to vote their
shares of Koo Koo Roo common stock FOR the merger.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF KOO KOO ROO
(SEE PAGES 21 AND 22)
The unanimous decision of the Board of Directors of Koo Koo Roo to approve
the merger agreement and the transactions contemplated thereby was based upon
a number of factors which are described in "The Merger--Recommendation of the
Board of Directors of Koo Koo Roo; Reasons for the Merger."
OPINION OF SUTRO & CO. INCORPORATED
(SEE PAGE 26 THROUGH 28)
The Board of Directors of Koo Koo Roo has received an opinion from Sutro &
Co. Incorporated that, based upon and subject to various considerations set
forth in the opinion, the financial terms of the merger are fair to the
holders of Koo Koo Roo stock. Sutro & Co. Incorporated will receive a fee in
connection with the rendering of its opinion. The full text of this opinion is
attached as Annex B to this document. WE URGE YOU TO READ THIS OPINION
CAREFULLY.
CONDITIONS TO THE MERGER
(SEE PAGES 44 AND 45)
The merger will be completed only if a number of conditions are met or
waived, including the following:
. the waiting period imposed by the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, has expired or been terminated;
4
<PAGE>
. no statute, rule, regulation, executive order, decree or injunction
prohibits the consummation of the merger;
. the required approval of Koo Koo Roo common stockholders has been obtained;
. all necessary consents, approvals, authorizations and permits have been
obtained and remain in effect;
. the shares of common stock of Koo Koo Roo Enterprises to be issued in
exchange for the shares of common stock of Koo Koo Roo have been approved
for quotation on the Nasdaq Stock Market's National Market System; and
. legal counsel to Koo Koo Roo has delivered an opinion confirming that the
merger will be treated as a reorganization for federal income tax purposes,
which opinion shall have been received and confirmed. The legal opinion will
not bind the Internal Revenue Service, which could take a contrary position.
TERMINATION OF THE MERGER AGREEMENT
(SEE PAGE 45)
Koo Koo Roo and Family Restaurants may mutually agree to terminate the merger
agreement at any time. In addition, either party may terminate the merger
agreement if:
. the merger is not completed by December 18, 1998 (other than because the
terminating party breached the merger agreement);
. a court or other competent authority issues a final and nonappealable order
or permanent injunction preventing the consummation of the merger;
. Koo Koo Roo common stockholders do not approve the merger agreement and the
transactions contemplated thereby; or
. The Board of Directors of Koo Koo Roo withdraws, modifies or changes
(including by amendment of this document) in a manner adverse to Family
Restaurants, its approval and recommendation of the merger agreement and the
transactions contemplated thereby.
PAYMENT OF FEES UPON TERMINATION
(SEE PAGE 43)
Koo Koo Roo must pay Family Restaurants certain fees or reimburse Family
Restaurants for certain expenses if the merger agreement is terminated under
certain circumstances.
AMENDING OR WAIVING TERMS OF THE MERGER AGREEMENT
(SEE PAGE 45)
Koo Koo Roo and Family Restaurants may amend the merger agreement by mutual
consent before Koo Koo Roo common stockholders approve the merger. Also, either
Koo Koo Roo or Family Restaurants may waive conditions that, under the merger
agreement, would allow it to terminate the merger agreement. Once Koo Koo Roo
common stockholders approve the merger, however, applicable law may require
that certain subsequent amendments or waivers also be approved by the common
stockholders, in which case Koo Koo Roo will resolicit proxies from such
stockholders.
REGULATORY APPROVALS
(SEE PAGE 23)
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
requires Family Restaurants and Koo Koo Roo to give information to the
Antitrust Division of the United States Department of Justice and the United
States Federal Trade Commission. A waiting period must expire or be terminated
before the merger may be completed. On July , 1998, Family Restaurants and
Koo Koo Roo made the required filings with the Department of Justice and the
Federal Trade Commission. The waiting period will expire on 1998.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
(SEE PAGES 22 AND 23)
Family Restaurants and Koo Koo Roo have structured the merger so that the
merger will qualify as a reorganization for United States federal income tax
purposes. Assuming that the merger qualifies as a
5
<PAGE>
reorganization, Family Restaurants, FRI-Sub, Koo Koo Roo, and the Koo Koo Roo
stockholders will not recognize gain or loss for United States federal income
tax purposes in the merger. Latham & Watkins, counsel to Koo Koo Roo, has
delivered to Koo Koo Roo an opinion, dated on or about the date hereof (which
will be confirmed at the time the merger is consummated), to the effect that
the merger will constitute a "reorganization" for United States federal income
tax purposes. No ruling has been (or will be) sought from the Internal Revenue
Service as to the United States federal income tax consequences of the merger.
TAX MATTERS ARE VERY COMPLICATED AND THE TAX CONSEQUENCES OF THE MERGER TO
YOU MAY DEPEND ON THE FACTS OF YOUR SITUATION. YOU SHOULD CONSULT YOUR TAX
ADVISOR TO UNDERSTAND FULLY THE TAX CONSEQUENCES OF THE MERGER TO YOU.
KOO KOO ROO COMMON STOCK INFORMATION
(SEE PAGE 29)
Shares of Koo Koo Roo common stock are listed on the Nasdaq Stock Market's
National Market System. On June 9, 1998, the last full trading day on the
National Market prior to the public announcement of the merger, Koo Koo Roo
common stock closed at $2 7/8 per share. On August , 1998, Koo Koo Roo common
stock closed at $ per share.
LISTING OF KOO KOO ROO ENTERPRISES COMMON STOCK
(SEE PAGE 39)
The shares of common stock of Koo Koo Roo Enterprises to be issued in
connection with the merger will be listed on the Nasdaq Stock Market's National
Market System under the symbol: . Family Restaurants common stock is not
currently listed or traded on any public exchange.
DIVIDENDS AFTER THE MERGER
(SEE PAGE 29)
Historically neither Koo Koo Roo nor Family Restaurants has paid dividends to
the holders of their common stock. Koo Koo Roo and Family Restaurants have had,
and Koo Koo Roo Enterprises will have, a substantial commitment to maintain and
expand their businesses, and such maintenance and expansion will require the
use of the cash that otherwise might be available for dividends. In addition,
upon consummation of the merger, Koo Koo Roo Enterprises will be subject to
certain debt instruments that will restrict the payment of dividends.
6
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables present certain summary historical and unaudited pro
forma financial information with respect to Family Restaurants, Inc. ("Family
Restaurants" or "FRI") and Koo Koo Roo, Inc. ("Koo Koo Roo" or "KKR"). Fiscal
year end historical financial information is derived from audited financial
statements and interim historical financial information is derived from
unaudited financial statements. The unaudited pro forma combined financial
information does not reflect certain cost savings that management believes may
be realized following the Merger (defined below). See "The Combined Company."
The unaudited pro forma combined financial information is provided for
comparative purposes only and is not indicative of the results of operations or
financial position of the combined companies that would have occurred had the
Merger occurred at the beginning of the periods presented or on the date
indicated, nor is it indicative of future operating results or financial
position. The unaudited pro forma adjustments are based upon currently
available information and certain assumptions that management of FRI and KKR
believe are reasonable under the circumstances. The following summary financial
information should be read in conjunction with the information contained herein
under the caption "Unaudited Pro Forma Combined Condensed Financial
Information," and the consolidated financial statements and related notes of
FRI and KKR incorporated by reference herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
--------------------------------------------------- ----------------------------------
HISTORICAL HISTORICAL
-------------------------------------- PRO FORMA(1) -------------------- PRO FORMA(1)
DECEMBER 31, DECEMBER 29, DECEMBER 28, DECEMBER 28, MARCH 30, MARCH 29, MARCH 29,
1995 1996 1997 1997 1997 1998 1998
------------ ------------ ------------ ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS
INFORMATION--FRI:
Sales................... $1,134,359 $724,229 $463,724 $532,062 $114,978 $113,306 $135,642
Operating loss(2)....... (57,224) (22,779) (11,608) (33,088) (3,519) (2,256) (16,457)
Interest expense, net... (65,277) (36,725) (19,476) (21,778) (4,406) (5,827) (6,580)
Net income (loss)(2)(3). (123,709) 137,040 (31,593) (55,936) (8,101) (8,210) (23,071)
Pro forma basic and
diluted income (loss)
per common
share(2)(3)(4)......... $ (1.03) $ 1.14 $ (0.26) $ (0.32) $ (0.07) $ (0.07) $ (0.13)
Pro forma weighted
average number of
common shares
outstanding(4)......... 119,818 119,818 119,818 174,299 119,818 119,818 174,299
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
--------------------------- -----------------
HISTORICAL HISTORICAL
--------------------------- -----------------
1995 1996 1997 1997 1998
------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS INFORMATION--KKR:
Sales......................... $19,221 $ 36,608 $ 68,338 $11,223 $ 22,336
Operating loss(5)............. (7,696) (10,094) (19,272) (2,652) (13,649)
Interest income (expense),
net.......................... 126 1,145 197 170 (323)
Net loss before dividends on
preferred stock(5)(6)........ (6,911) (9,285) (29,422) (3,495) (15,156)
Net loss applicable to common
stockholders(5)(6)........... (6,911) (12,333) (32,806) (4,218) (15,188)
Basic and diluted loss per
common share(5)(6)........... $ (0.57) $ (0.83) $ (1.55) $ (0.26) $ (0.40)
Weighted average number of
common shares outstanding.... 12,094 14,878 21,210 16,156 38,175
</TABLE>
<TABLE>
<CAPTION>
FRI KKR
MARCH 29, MARCH 31, MARCH 29,
1998 1998 1998
HISTORICAL HISTORICAL PRO FORMA(7)
---------- ---------- ------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET INFORMATION:
Total assets................................ $287,566 $59,059 $439,076
Total long-term debt and capital lease
obligations................................ 215,205 13,109 238,514
Stockholders' equity (deficit).............. (34,404) 29,249 74,596
</TABLE>
7
<PAGE>
- --------
(1) Adjusted to give pro forma effect to the Merger and certain related
transactions, as if the transactions had been completed on December 30,
1996. See "Unaudited Pro Forma Combined Condensed Financial Information."
(2) Includes provision for divestitures and write-down of long-lived assets of
$44,500 and $2,640 in fiscal years ended December 31, 1995 and December 28,
1997, respectively. See Note 1 of Notes to FRI's Consolidated Financial
Statements as of December 28, 1997 and for the years ended December 31,
1995, December 29, 1996 and December 28, 1997 ("FRI's Consolidated
Financial Statements"), incorporated by reference herein.
(3) Includes gain on sale of division of $62,601 and extraordinary gain on
extinguishment of debt of $134,833 in fiscal year ended December 29, 1996.
See Notes 3 and 6, respectively, to FRI's Consolidated Financial
Statements.
(4) The pro forma FRI weighted average number of common shares outstanding for
the historical fiscal years ended December 31, 1995, December 29, 1996 and
December 28, 1997 and the historical three months ended March 30, 1997 and
March 29, 1998 give effect to the FRI Stock Dividend (defined below) and
the conversion of the Apollo Warrant (defined below) into shares of FRI
Common Stock. See "Related Agreements and Other Matters."
(5) Includes restructuring and other charges, including store closings, of
$11,757 in the three months ended March 31, 1998. See Note 5 of Notes to
KKR's Condensed Consolidated Financial Statements as of, and for the three
months ended, March 31, 1998, incorporated by reference herein.
(6) Includes loss from discontinued operations of $9,786 in fiscal year ended
December 31, 1997, consisting of $2,786 loss from operations of Color Me
Mine, Inc. ("Color Me Mine"), a subsidiary of KKR, and $7,000 estimated
loss on disposal of net assets of Color Me Mine. See Note 2 of Notes to
KKR's Consolidated Financial Statements as of, and for the year ended,
December 31, 1997, incorporated by reference herein.
(7) Adjusted to give pro forma effect to the Merger and certain related
transactions, as if the transactions had occurred on the date presented.
See "Unaudited Pro Forma Combined Condensed Financial Information."
8
<PAGE>
INTRODUCTION
Throughout this document, unless the context otherwise requires, (i)"Family
Restaurants" or "FRI" refers to Family Restaurants, Inc., a Delaware
corporation, and if the context requires, its subsidiaries and their
consolidated operations on a historical basis, (ii) "Koo Koo Roo" or "KKR"
refers to Koo Koo Roo, Inc., a Delaware corporation, and if the context
requires, its subsidiaries and their consolidated operations on a historical
basis; (iii) "Merger" refers to the merger of FRI-Sub, Inc. ("Merger-Sub"), a
Delaware corporation, and indirect wholly owned subsidiary of FRI, with and
into KKR, with KKR being the surviving corporation and becoming an indirect
wholly owned subsidiary of FRI, after which FRI will be renamed Koo Koo Roo
Enterprises, Inc., (iv) "Merger Agreement" refers to the Agreement and Plan of
Merger by and among FRI, Merger-Sub and KKR, dated as of June 9, 1998, a copy
of which is included at the back of this Proxy Statement/Prospectus as Annex
A, and (v) "Koo Koo Roo Enterprises" or the "Company" refers to FRI and KKR on
a combined pro forma basis assuming the Merger is consummated as currently set
forth in the Merger Agreement. All share amounts for the Company on a combined
basis used in this Proxy Statement/Prospectus are based on estimates of the
number of shares of Koo Koo Roo Common Stock to be outstanding at the
Effective Date. See "Related Agreements and Other Matters -- Shares to be
Outstanding at Closing; FRI Stock Dividend."
KKR is furnishing this Proxy Statement/Prospectus to holders of shares of
the common stock, par value $.01 per share ("KKR Common Stock"), of KKR in
connection with the solicitation of proxies by the Board of Directors of KKR
(the "KKR Board") for use at KKR's special meeting of stockholders to be held
on September , 1998 (the "Special Meeting"), and at any postponement or
adjournment thereof. At the Special Meeting, the common stockholders of KKR
will be asked to vote upon a proposal to approve and adopt the Merger
Agreement and the Merger (the "Merger Proposal"). The Merger Agreement
provides for, among other things, the merger of Merger-Sub with and into KKR,
with KKR continuing as the surviving corporation and becoming an indirect
wholly owned subsidiary of FRI, which will be renamed Koo Koo Roo Enterprises,
Inc.
This Proxy Statement/Prospectus also constitutes a prospectus of FRI, which
is a part of the Registration Statement on Form S-4 (the "Registration
Statement") filed by FRI with the Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933, as amended (the "Securities Act"), in
order to register the shares of common stock, par value $.01 per share
("Company Common Stock"), of Koo Koo Roo Enterprises, Inc. (Family
Restaurants, Inc., as renamed) to be issued in the Merger.
9
<PAGE>
RISK FACTORS
In addition to the other information in this Proxy Statement/Prospectus, the
following material factors should be considered carefully in evaluating the
Merger Proposal to be voted upon at the Special Meeting and the acquisition of
the securities offered hereby.
DEBT SERVICE OBLIGATIONS RELATED TO LEVERAGED STRUCTURE
The Company will be highly leveraged following consummation of the Merger.
As of March 29, 1998, on a combined pro forma basis, the Company's total
indebtedness would have been approximately $238.5 million (net of discount),
its total equity would have been approximately $74.6 million and its total
capitalization would have been approximately $313.1 million. The Company's
level of indebtedness following the Merger may have the following important
consequences: (i) significant interest expense and principal repayment
obligations resulting in substantial annual fixed charges, (ii) significant
limitations on the Company's ability to obtain additional debt financing and
(iii) increased vulnerability to adverse general economic and industry
conditions. In addition, the Company's debt instruments contain covenants that
will restrict, among other things, the Company's ability to conduct affiliate
transactions, incur additional debt, lend or otherwise advance money to non-
subsidiaries and receive dividends or advances in excess of amounts necessary
to service indebtedness and make certain other payments. Under the Company's
credit facility (the "Foothill Credit Facility"), the Company will also be
required to maintain specified financial ratios. Although management believes
that the Merger will result in improvements to revenues and reductions in
costs (see "The Combined Company"), there can be no assurance that the
Company's cash flow from operations will be sufficient to meet its debt
service requirements or that it will be able to continue to satisfy the
applicable financial covenants. See "Unaudited Pro Forma Combined Condensed
Financial Information."
OPERATING LOSSES
On a combined pro forma basis the Company would have had operating losses of
approximately $16.5 and $33.1 million for the three months ended March 29,
1998 and for fiscal year ended December 28, 1997, respectively, which losses
include the items discussed in Notes 2 and 5 under the caption "Summary
Historical and Unaudited Pro Forma Financial Information." Although management
believes that the Merger will result in improvements to revenues and
reductions in costs (see "The Combined Company"), there can be no assurance
that the Company will achieve profitable operations in the future.
POTENTIAL DIFFICULTIES IN COMBINING THE OPERATIONS OF KKR AND FRI
KKR and FRI have previously operated separately. The success of the Company
is dependant on its ability to integrate the operations of KKR and FRI without
a loss of key employees or suppliers, loss of customer patronage, increases in
operating or other costs or other difficulties. In addition, the Company may
not be able to realize the cost savings and other benefits that are sought
from the Merger. See "The Merger--Recommendation of the Board of Directors of
KKR; Reasons for the Merger" and "The Combined Company."
GEOGRAPHIC CONCENTRATION OF RESTAURANTS
After the Merger, approximately 37% of the Company's restaurants will be
located in California. The Company's revenues are dependent on discretionary
spending by consumers, particularly by consumers living in the communities in
which the restaurants are located. A significant weakening in any of the local
economies in which the Company operates (particularly California) may cause
the residents of such communities to curtail discretionary spending which, in
turn, could have a material adverse effect on the results of operations and
financial position of the entire Company. In addition, the results achieved to
date by the Koo Koo Roo California Kitchen restaurants in the core Southern
California market may not be indicative of the prospects or market acceptance
of a larger number of restaurants, particularly in wider and more
geographically dispersed areas with varied demographic characteristics. The
Company's geographic concentration of restaurants could have a material
adverse effect on its financial condition and results of operations.
10
<PAGE>
POTENTIAL INCREASED COMPETITION
The restaurant business is highly competitive and is affected by changes in
the public's eating habits and preferences, population trends and traffic
patterns, and local and national economic conditions affecting consumer
spending habits. Key competitive factors in the industry are the quality and
value of the food products offered, quality and speed of service,
attractiveness of facilities, advertising, name identification and restaurant
location. Each of the Company's restaurants will compete directly or
indirectly with locally-owned restaurants, as well as with restaurants with
national or regional images, many of which have greater financial, marketing,
personnel and other resources than the Company. The Company will be required
to respond to various factors affecting the restaurant industry, including
changes in consumer preferences, tastes and eating habits, demographic trends
and traffic patterns, increases in food and labor costs, competitive pricing
and national, regional and local economic conditions. The Company's failure to
compete successfully could have a material adverse effect on its financial
condition and results of operations.
FRI's Mexican restaurants have encountered increased competition in recent
years, both from new Mexican full-service restaurants and from restaurants
offering Mexican food products as part of an overall casual dining concept.
KKR's California Kitchen restaurants participate in the quick-service
segment which is highly competitive with respect to price, service and
location. In addition, the quick-service segment is characterized by the
frequent introduction of new products, accompanied by substantial promotional
campaigns. In recent years numerous competitors, including those in the casual
dining and quick-service segment have introduced products, including chicken,
that were developed to capitalize on growing consumer preference for food
products that are, or are perceived to be, more healthful, nutritious, lower
in calories and lower in fat content. The Company believes it will be subject
to increasing competition from companies whose products or marketing
strategies address these consumer preferences. There can be no assurance that
consumers will regard the Company's Koo Koo Roo California Kitchen products as
sufficiently distinguishable from competitive products (such as, for example,
those offered by El Pollo Loco and Boston Market) or that substantially
equivalent products will not be introduced by existing or new competitors.
FUTURE GROWTH AND FINANCING
The Company's growth strategy includes remodeling its existing restaurants
and developing new restaurants, which may include future development,
construction and renovation projects. The extent and timing of any such
projects will depend upon various factors, including available cash flow, the
ability to obtain additional financing (including landlord contributions) and
the availability of suitable locations, many of which are beyond the control
of the Company. In addition, the Company will be subject to the risks inherent
in any development activity, including, but not limited to, disruption of
existing operations, delays in receipt of permits, licenses or other
regulatory approvals, shortages of materials or skilled labor, work stoppages,
and weather interferences, any of which could delay development or result in
substantial cost increases to the Company.
GOVERNMENT REGULATION
The Company's restaurants are subject to federal, state and local laws and
regulations governing health, sanitation, environmental matters, safety, the
sale of alcoholic beverages and regulations regarding hiring and employment
practices.
The Company is subject to Federal and state laws governing matters such as
minimum wages, overtime and other working conditions. Upon completion of the
Merger, approximately half of the Company's employees will be paid at rates
related to the minimum wage. Therefore, increases in the minimum wage or
decreases in the allowable tip credit (tip credits reduce the minimum wage
that must be paid to tipped employees in certain states) increase the
Company's labor costs. This is especially true in California, where there is
no tip credit. Effective October 1, 1996, the Federal minimum wage was
increased from $4.25 to 4.75, and effective September 1, 1997,
11
<PAGE>
it was further increased to $5.15. However, a provision of the new measure
effectively froze the minimum wage for tipped employees at current levels by
increasing the allowable tip credit in those states which allow for a tip
credit. Furthermore, in California, where 37% of the Company's restaurants are
located, voters approved a proposition on November 5, 1996 that increased the
state's minimum wage to $5.00 on March 1, 1997 and further increased the
state's minimum wage to $5.75 on March 1, 1998. In response to the minimum
wage increases on October 1, 1996, March 1, 1997 and March 1, 1998, FRI raised
menu prices at its El Torito(R) restaurants in an effort to recover the higher
payroll costs. Menu prices were not increased at Chi-Chi's(R) during the first
nine months of 1997 due to marketing strategies and the fact that Chi-Chi's
experienced a lesser impact from the Federal minimum wage increases due to the
increased allowable tip credit in certain states. However, Chi-Chi's did raise
menu prices in October and December 1997 as a result of the cumulative impact
of these minimum wage increases. Similarly, in March 1998, KKR also raised
menu prices. At the request of President Clinton, the Congress is considering
further increases in the Federal minimum wage over the next two years. In
addition, the California Legislature is considering a further minimum wage
increase, which would be effective in 1999. Further increases in the federal
or applicable state minimum wage would increase the Company's operating costs
at the affected restaurants and could have a material adverse effect on the
Company's financial condition and results of operations.
The Company will also be subject to both Federal and state regulations
governing disabled persons' access to its restaurant facilities, including the
Americans with Disabilities Act ("ADA"). If the ADA were interpreted to
require a higher degree of accessibility for disabled persons than presently
established at the Company's restaurants, the Company could be required to
make substantial modifications to its restaurant facilities which could have a
material adverse effect on the Company's financial condition and results of
operations.
CONTINGENT LIABILITY FOR COSTS RELATED TO DIVESTED RESTAURANT LEASES
In the past three years, FRI has divested more than 90 restaurants and
currently has a substantial portfolio of closed, subleased and assigned
properties. Because the ability of any particular acquiror to satisfy its
obligations under any subleased or assigned lease depends on its ability to
generate sufficient revenues in the acquired restaurant, there can be no
assurance that the Company will not incur significant and unplanned costs in
connection with such leases. It is expected that divestment activities of the
Company will add to this portfolio of closed, subleased and assigned
properties. From time to time, FRI has been required to reassume leases
associated with these properties, but has generally been able to relet them in
a reasonable period of time. As of June 1998, FRI was attempting to lease nine
closed properties with an annual carrying cost of $1.4 million. The Company's
failure to relet such leases on favorable economic terms, or at all, or
increases in the carrying costs associated with such leases, could have
material adverse effect on the Company's financial condition and results of
operations.
POSSIBLE EFFECT ON SHARE PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
The Company Common Stock offered hereby will be freely tradeable (other than
by an "affiliate" of the Company as such term is defined in the Securities
Act) without restriction or registration under the Securities Act. Immediately
after the Merger, Apollo FRI Partners, L.P. ("Apollo") and Green Equity
Investors, L.P. ("GEI" and, together with Apollo, the "Principal
Stockholders") will beneficially own approximately 56% and 11%, respectively
of the outstanding Company Common Stock. The Principal Stockholders and
certain holders of the Company's outstanding options and warrants have been
granted certain "piggyback" registration rights and certain "demand"
registration rights with respect to the shares of Company Common Stock owned
by them or to be issued to them. No predictions can be made as to the effect,
if any, that public sales of shares or the availability of shares for sale
will have on the market price prevailing from time to time. Nevertheless,
sales of substantial amounts of the Company Common Stock in the public market,
particularly by the directors and officers of the Company or their affiliates,
or the perception that such sales could occur, could have an adverse effect on
the market price of the Company Common Stock.
12
<PAGE>
CONTROL BY PRINCIPAL STOCKHOLDER
Upon consummation of the Merger, Apollo will have majority control of the
Company and the ability to control the election of directors and the results
of other matters submitted to a vote of stockholders. Such concentration of
ownership, together with the anti-takeover effects of certain provisions in
the Delaware General Corporate Law (the "DGCL") and in the Restated
Certificate of Incorporation and the Amended and Restated Bylaws of the
Company (the "Company Certificate" and the "Company Bylaws" respectively), may
have the effect of delaying or preventing a change of control of the Company.
See "Comparison of Stockholders' Rights" and "Description of Company Capital
Stock After the Merger."
RELIANCE ON KEY PERSONNEL
The Company will depend upon the services of its executive officers,
particularly Mr. Kevin Relyea, the Company's Chief Executive Officer and
Chairman of the Board. The loss of such services could have an adverse effect
on the Company's financial condition and results of operations. The Company
has entered into an employment agreement with Mr. Relyea that expires on
January 1, 2000.
POTENTIAL ADVERSE EFFECTS OF FUTURE OFFERINGS
The Company may in the future increase its capital resources by making
additional offerings of equity or debt securities, including classes of common
shares, preferred shares, and senior or subordinated debt instruments. All
debt securities and classes of preferred shares will be senior to the Company
Common Stock in a liquidation of the Company. The effect of additional equity
offerings may be the dilution of the equity of the stockholders of the Company
or the reduction of the price of the Company Common Stock, or both. FRI and
KKR are unable to estimate the amount, timing or nature of additional
offerings as the decision to make such offerings will depend on market
conditions and other factors. The inability of the Company to satisfy its
capital requirements through offerings on favorable terms, or at all, could
have a material adverse effect on the Company's financial condition and
results of operations.
POTENTIAL NEGATIVE IMPACT OF BLANK CHECK PREFERRED STOCK ISSUANCES
Assuming the Merger is consummated, the Company has authorized for issuance
up to 50 million shares of undesignated preferred stock. The Board of
Directors of the Company (the "Company Board") will have the authority,
without further vote or action by stockholders of the Company, to issue the
undesignated shares of Company preferred stock in one or more series and to
fix all rights, qualifications, preferences, privileges, limitations and
restrictions of each such series, including dividend rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series or the designation of such series. The
Company Board, without stockholder approval, can issue Company preferred stock
with voting and conversion rights which would adversely affect the voting
power of the holders of Company Common Stock. In addition, the issuance of
Company preferred stock may have the effect of delaying, deferring or
preventing a change in control of the Company and could therefore have a
negative impact on the trading price of the Company Common Stock. The Company
does not presently intend to issue preferred stock. See "Description of
Company Capital Stock After the Merger."
LACK OF DIVIDENDS; RESTRICTIONS ON PAYMENTS OF DIVIDENDS
FRI and KKR have not paid any dividends to their holders of common stock.
FRI and KKR have retained, and the Company will continue to retain, all
available earnings, if any, generated by its operations for the maintenance,
development and growth of its business and the Company does not anticipate
paying any dividends on Company Common Stock in the foreseeable future. In
addition, the payment of dividends on Company Common Stock will be restricted
or prohibited under certain of the Company's debt instruments. See "Dividend
Policy" and "Related Agreements and Other Matters."
13
<PAGE>
ABSENCE OF PRIOR MARKET FOR COMPANY COMMON STOCK; UNCERTAINTY REGARDING
TRADING PRICES OF COMPANY COMMON STOCK
There is currently no market for the Company Common Stock, and there can be
no assurance that an active trading market will develop or be sustained
following the Merger. Factors such as government regulatory action, tax laws,
interest rates and market conditions in general could have significant impact
on the future market price of the Company Common Stock and there can be no
assurance as to whether the market value of the shares of Company Common Stock
will be less than, equal to or greater than the market value of shares of KKR
Common Stock prior to the consummation of the Merger. In addition, the trading
volume of the Company Common Stock may be limited, which could also have a
significant effect on its future market price. Such conditions could have a
material adverse effect on the trading prices of Company Common Stock and the
ability of holders to sell shares of Company Common Stock. Also see "--
Possible Effect on Share Price of Shares Eligible for Future Sale."
SHARES ISSUED TO KKR STOCKHOLDERS WILL NOT BE ADJUSTED FOR CHANGES IN THE
PRICE OF KKR COMMON STOCK
Stockholders of KKR will receive one share of Company Common Stock for each
share of KKR Common Stock. This conversion ratio will not change even if the
price of KKR Common Stock changes.
YEAR 2000 ISSUES
KKR and FRI have developed plans, utilizing internal and external resources,
to ensure that each of their information systems are capable of properly
utilizing dates beyond December 31, 1999 (the "Year 2000 Issue"). Included in
FRI's 1998 capital spending are continuing expenditures to replace FRI's
mainframe computer software applications with new software to be run in a
client/server environment. In addition to improving processes and allowing
wider access to data, the new software will insure that FRI's computer systems
are Year 2000 compliant. FRI expects to spend approximately $1.6 million on
the new software and related hardware and installation costs in 1998. The
project is expected to be completed before year-end 1998. FRI is requesting
Year 2000 compliance reports from significant vendors and service providers.
KKR is in the process of determining what, if any, steps have to be taken to
cure any potential computer software problems associated with the year 2000.
Based on preliminary discussions with KKR's software vendors, KKR has
determined that it will not incur any material liability to upgrade computer
programs to address the Year 2000 Issue. If the computer systems of a
significant vendor or service provider of either FRI or KKR are not Year 2000
compliant, it could have a material adverse effect on the Company's financial
condition and results of operations.
FORWARD-LOOKING STATEMENTS
When used in this Proxy Statement/Prospectus and the documents incorporated
herein by reference, the words "believes," "expects," "anticipates,"
"intends," "plans," "estimates" or similar expressions are intended to
identify in certain circumstances, forward-looking statements. Such statements
are subject to a number of risks and uncertainties that could cause actual
results to differ materially from those projected, including the risks
described in this "Risk Factors" section and the risks described in the
documents incorporated herein by reference. Given these uncertainties, KKR
stockholders are cautioned not to place undue reliance on such statements.
None of FRI, KKR or the Company undertake any obligation to update these
forward looking statements. See "The Merger--Cautionary Statement Concerning
Forward-Looking Statements."
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THE COMPANIES
KOO KOO ROO, INC.
11075 Santa Monica Boulevard
Suite 225
Los Angeles, California 90025
(310) 479-2080
KKR was organized in February 1987 and opened its first restaurant in August
1988. The first Koo Koo Roo California Kitchen prototype restaurants were
opened in 1993. The principal business of KKR is the operation of restaurants
in the emerging food category of fresh, convenient meals--meals with the
convenience and value associated with quick service, but the quality,
freshness and variety associated with upscale, casual full-service
restaurants. KKR's signature concept, Koo Koo Roo California Kitchen, features
KKR's proprietary Original Skinless Flame-Broiled Chicken(TM), fresh oven-
roasted hand-carved turkey, country herb rotisserie chicken, made-to-order
tossed salads, specialty sandwiches on fresh baked rolls, a signature
vegetable soup and more than 23 fresh side dishes, including hand-mashed
potatoes, stuffing, steamed green beans and other vegetables, rices and
grains. With few exceptions, all are prepared fresh in small batches on-site
throughout the day.
As of June 30, 1998, KKR operated 38 Koo Koo Roo California Kitchen
restaurants, 33 of which are located in California. KKR also owns and operates
14 Hamburger Hamlet restaurants that it acquired in May 1997, ten of which are
located in Southern California.
FAMILY RESTAURANTS, INC.
18831 Von Karman Avenue
Irvine, California 92612
(949) 757-7900
FRI was incorporated in Delaware in 1986 and is primarily engaged in the
operation of full-service Mexican restaurants through its subsidiaries. As of
June 28, 1998, FRI operated 273 restaurants in 30 states, with approximately
65% of its restaurants located in California, Ohio, Pennsylvania, Michigan,
Illinois and Indiana. Additionally, as of June 28, 1998, FRI was the
franchisor and licensor of 21 restaurants outside the United States.
FRI operates its restaurants primarily under the Chi-Chi's, El Torito and
Casa Gallardo(R) names. The Chi-Chi's, El Torito and Casa Gallardo restaurants
serve moderately priced, high-quality Mexican food and a wide selection of
alcoholic beverages. FRI is the world's largest operator of full-service
Mexican restaurants, based upon both number of restaurants and annual
revenues. FRI's restaurants are generally located in densely populated
suburban areas, and FRI believes their festive atmosphere and moderate prices
are especially appealing to family clientele.
FRI-SUB, INC.
c/o Family Restaurants, Inc.
18831 Von Karman Avenue
Irvine, California 92612
Merger-Sub is an indirect wholly owned subsidiary of FRI, organized solely
for the purposes of consummating the Merger, and has not carried on any
activities other than activities incident to its formation and as contemplated
by the Merger Agreement.
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THE COMBINED COMPANY
As a result of the Merger, KKR will become an indirect wholly owned
subsidiary of FRI, after which FRI will be renamed Koo Koo Roo Enterprises,
Inc. The Company will initially operate approximately 325 restaurants in 30
states.
Management of FRI and KKR are jointly reviewing the two companies'
operations in order to finalize plans and proposals regarding the integration
and combination of all functional areas of the combined business. Management
believes that the Merger will strengthen the competitive position of the
Company through:
. increased capital availability for new site development and increased
market penetration of its restaurant concepts;
. economies of scale, which should reduce site development costs, improve
purchasing and distribution, improve leverage and provide other cost
reductions;
. the implementation of new management practices designed to improve
restaurant level customer service and operating costs; and
. the elimination of redundant general and administrative functions,
which should result in lower overhead expense.
Management believes that the foregoing factors should result in improvements
to revenues and earnings that would not otherwise be likely if FRI and KKR
were to remain separate entities.
The corporate headquarters of the Company will be in Irvine, California. The
executive management of the Company will be comprised mainly of members of the
existing executive management of FRI with Kevin Relyea serving as Chief
Executive Officer and Chairman of the Board. The Company Board will initially
consist of six persons, including Lee A. Iacocca and A. William Allen, III,
who currently serve on the KKR Board. See "Directors and Management of the
Company Following the Merger."
STRATEGIC OVERVIEW
Following the Merger, management of the Company initially intends to operate
three divisions: El Torito, Chi-Chi's and Koo Koo Roo (which will consist of
the Company's Koo Koo Roo California Kitchen and Hamburger Hamlet concepts).
Management expects initially to focus on aggressively growing its Koo Koo Roo
California Kitchen and El Torito Express Grill(TM) concepts. El Torito Express
Grill is a newly developed, quick-service casual-style restaurant serving
fresh Mexican food. The first El Torito Express Grill opened on July 6, 1998,
in Pasadena, California. It is currently contemplated that in many cases a Koo
Koo Roo California Kitchen and an El Torito Express Grill will be built side
by side in food courts or at "in-line" locations in order to reduce the
development costs of both. In addition, management expects to focus on
remodeling its existing Chi-Chi's and El Torito full service restaurants and
on modest new restaurant growth for these concepts. During the first year
following the Merger, however, much of the Company's strategic focus will be
on improving unit level costs, reducing development costs and integrating FRI
and KKR into one operating team as Koo Koo Roo Enterprises, Inc., which
management believes will allow the Company to reduce overhead and other
general and administrative expenses.
Finally, following KKR's recently completed sale of its Arrosto Coffee
operation, management of the Company intends to continue focusing on the
Company's core restaurant operations and to divest non-restaurant businesses.
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REVENUE AND COST IMPROVEMENTS
Management of the Company will seek to enhance revenue growth, primarily by
the development of new Company owned Koo Koo Roo California Kitchen and El
Torito Express Grill restaurants and by remodeling its existing Chi-Chi's and
El Torito full service restaurants. In addition, management will seek to
improve earnings through cost reductions, including:
. general and administrative costs, which are expected to decrease as the
Company eliminates redundant administrative functions that result from the
Merger and as these functions operate more efficiently due to improvements
in economies of scale;
. site development costs, which are expected to decrease as the Company
seeks to leverage its ability to negotiate for land and building space for
Koo Koo Roo California Kitchen and El Torito Express Grill restaurants at
the same time and location;
. food and paper costs, which are expected to decrease as the Company's
purchasing and distribution leverage increases due to the Company's larger
size; and
. labor costs, which are expected to decrease as the Company reengineers
its restaurant building layout and implements new management control
practices.
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THE MERGER
The Merger Agreement provides, among other things, that each share of KKR
Common Stock issued and outstanding as of the effective time of the Merger
(the "Effective Time") will be converted, without any action on the part of
the holder thereof, into the right to receive one share of Company Common
Stock.
BACKGROUND OF THE MERGER
Since the development of its Koo Koo Roo California Kitchen concept and the
deployment of the initial prototype stores in Los Angeles in 1993, KKR's
business plan has contemplated rapid growth. This business plan has required
increasing amounts of capital as the number of stores in development has
increased. KKR has generally incurred high overhead costs and net losses due,
in part, to the limited number of restaurants open and the decision to build
the infrastructure to support a large national chain. In 1996, management
began to consider strategies that would permit KKR to obtain a long-term
source of capital and to accelerate its growth in order to attain necessary
economies of scale and better leverage of its overhead structure. During 1996
and through mid-1997, KKR considered a number of opportunities to engage in
transactions with complementary restaurant and food companies, and to acquire
additional concepts. The only significant transactions completed were the
March 1996 acquisition of 90% of the common stock of Color Me Mine and the May
1997 acquisition of the Hamburger Hamlet restaurants.
In the fall of 1997, management and the KKR Board conducted a review of the
development of KKR's business and its strategic direction. Although most of
KKR's Southern California restaurants continued to perform well, large amounts
of capital had been consumed by Color Me Mine and the development of Koo Koo
Roo California Kitchen locations in new markets. During the third and fourth
quarters of 1997, KKR recorded significant adjustments, including a charge of
approximately $4.3 million relating to, among other things, closing certain
restaurant locations that were operating at a loss, and a charge of $7.0
million relating to the estimated cost of divesting Color Me Mine. The KKR
Board again concluded that KKR was required to obtain additional capital and
to leverage its overhead structure.
In November 1997, the Executive Committee of the KKR Board authorized the
investment banking firm of F.M. Roberts & Co., Inc. ("FMR") to approach
parties that might be interested in pursing a transaction with KKR that would
address one or both of these objectives, whether in the form of a merger,
acquisition, financing, area development arrangement, joint venture or other
strategic transaction. Since late 1996, FMR had been engaged from time to time
to provide various advisory services, including strategic analysis, investor
relations and structuring of transactions, such as financings, acquisitions
and mergers.
From November 1997 through March 1998, FMR held discussions with
approximately 37 parties who, jointly with KKR, had been identified as likely
to have an interest in pursuing a potential transaction with KKR. KKR provided
certain additional information to a number of these parties and discussed with
certain of such parties various transaction structures.
In December 1997, FMR contacted FRI regarding its interest in a potential
transaction with KKR. After an initial exchange of publicly-available
information, an exploratory meeting took place on January 16, 1998 at FRI's
offices in Irvine, California between Mr. A. William Allen, III,
representatives of FMR, and certain representatives of FRI, including
Mr. Kevin Relyea, President and Chief Executive Officer, and Mr. Robert
Trebing, Jr., Executive Vice President and Chief Financial Officer. The
parties agreed to exchange additional data. A confidentiality agreement was
executed on January 20, 1998.
During late 1997 and early 1998, KKR experienced a high rate of conversion
of its convertible preferred stock, which by its terms was convertible into
KKR Common Stock at a significant discount to the market price at the time of
conversion. During this time period, the number of shares of KKR Common Stock
outstanding increased significantly and the market price of such shares fell
significantly.
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<PAGE>
From January 1998 through March 1998, management of FRI and KKR exchanged
certain information with respect to their respective financial condition,
results of operations and other measurements of operating performance and held
preliminary meetings to discuss issues related to a possible transaction.
In March 1998, Mr. Allen and Mr. William M. McKay commenced their employment
on a full-time basis as Chief Executive Officer and Chief Financial Officer,
respectively, and new management immediately led a comprehensive review of
KKR's operations. This review resulted in a restructuring plan that included
the decision to divest certain business lines (including Color Me Mine and the
Arrosto coffee business) not closely related to the operation and development
of the Koo Koo Roo California Kitchen concept, and a reduction in corporate
staffing levels. In connection with this plan, KKR closed the three remaining
Koo Koo Roo California Kitchen stores located in the Washington D.C. area. Due
principally to capital constraints, the restructuring plan also contemplated
slower short-term growth, focusing on the California and Nevada markets. As a
result, during the first quarter of 1998, KKR recognized further restructuring
and other charges of approximately $11.8 million related to store closings,
reductions of corporate staffing levels, closing its Arrosto coffee plant and
various other charges.
At the same time as new management began to execute the restructuring plan,
they and the KKR Board concluded that a business combination that could
provide greater access to capital and better leverage KKR's overhead
requirements would likely be a more viable alternative to a stand-alone
scenario. This view was based in part on the belief that raising the
significant capital required in the near term to continue its historical
growth strategy would be very dilutive to KKR's common stockholders.
Consequently, the Board believed that KKR would likely be forced to continue
to operate under significant capital constraints if a strategic partner could
not be identified. These alternatives were reviewed at a meeting of the KKR
Board held on March 24, 1998. At that meeting the KKR Board determined that
the effort to identify a potential strategic partner should be continued at
the same time as KKR sought to obtain financing as a stand-alone entity.
On March 30, 1998, KKR announced that Mr. Lee A. Iacocca had been appointed
Acting Chairman of the KKR Board, replacing Mr. Kenneth Berg who resigned.
A meeting was held on March 31, 1998 at the offices of Apollo Advisors, L.P.
("Apollo Advisors") in Los Angeles and attended by representatives of FMR,
representatives of FRI and a representative of FRI's financial advisor, Libra
Investments, Inc. ("Libra"). At the meeting, the parties discussed a possible
transaction which involved the combination of FRI and KKR. In a letter to FMR
dated April 3, 1998, FRI expressed a willingness to discuss the possibility of
a reverse merger in which FRI would become a subsidiary of KKR and FRI's
stockholders would obtain 70 to 75 percent of the equity of KKR. The parties'
advisors discussed structuring issues throughout the month of April. On April
27, 1998, representatives of FRI and Libra made a presentation to the KKR
Board. The presentation involved a revised structure whereby FRI would be the
surviving public entity, but still involved a proposal that FRI's stockholders
would obtain 70 to 75 percent of the combined company's equity. At the request
of KKR, FRI also indicated a willingness to make a loan to KKR which would
permit KKR to avoid the need to seek additional financing in the near-term.
The KKR Board determined that it would be in the best interests of KKR to
pursue a possible transaction with FRI and delegated to the Executive
Committee the authority to supervise a due diligence investigation of FRI and
the negotiation of a possible transaction for presentation to the KKR Board.
The financial advisors exchanged telephone calls on April 28 and 29, 1998
regarding the terms under which KKR and FRI would permit each other access to
conduct further due diligence and attempt to arrive at the terms of a possible
transaction. In addition, Mr. Fredric M. Roberts of FMR wrote a letter to Mr.
Jess Ravich of Libra requesting, among other things, that FRI increase the
proposed equity share of KKR stockholders after completion of a transaction to
33 percent. On May 4, 1998, the contents of this letter and the related phone
calls were discussed at a meeting of representatives of FMR, Libra, FRI and
counsel for KKR and FRI at the offices of Apollo Advisors in Los Angeles.
Subsequent to the meeting, Mr. Ravich wrote to Mr. Roberts indicating that FRI
would be willing to provide 33 percent of the combined equity to KKR's
stockholders. The parties also discussed the possible terms of a loan from FRI
to KKR. After consulting with the Executive Committee, Mr. Roberts advised
Libra on May 5, 1998 that the KKR Board was prepared to provide further due
diligence access to its books and records provided that similar access was
provided to KKR and its advisors.
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<PAGE>
Mr. Roberts also indicated that counsel to KKR had been directed to commence
negotiations with counsel for FRI to attempt to arrive at proposed
documentation.
During the balance of May 1998, the parties and their representatives
conducted additional due diligence, including management presentations. On May
26, 1998, Messrs. Allen, McKay and Garber of KKR, Messrs. Trebing and Doyle of
FRI, and counsel for each of FRI and KKR met in Los Angeles at the offices of
counsel to FRI to discuss draft merger, bridge loan and related documentation
proposed by counsel to FRI. Subsequent to that meeting, there were a series of
telephone conversations involving Mr. Allen, Mr. Relyea, Mr. Roberts and Mr.
David Kaplan, a director of FRI affiliated with Apollo, to attempt to resolve
issues identified or otherwise not resolved at the May 26 meeting.
In light of the apparent progress made at the May 26 meeting, on May 28,
1998 KKR engaged the investment banking firm of Sutro & Co. Incorporated
("Sutro") as a financial advisor. The sole purpose of the engagement of Sutro
was for that firm to conduct an independent analysis of the proposed merger
transaction with FRI and, if requested by the KKR Board, to render a written
opinion as to the fairness to KKR's stockholders, from a financial point of
view, of the financial terms of any such transaction. The engagement of FMR
did not contemplate delivery of a fairness opinion and no such opinion was
sought from or rendered by FMR.
From May 26 through June 8, 1998, additional communications took place
between the parties and their representatives to attempt to arrive at
acceptable documentation, including conference calls held on June 3, 1998 and
June 7, 1998 in which Messrs. Allen, Garber, Relyea, Trebing and Doyle, a
representative of FMR and counsel to FRI and KKR participated.
The FRI Board held a special telephonic meeting on June 9, 1998 that was
attended by all members of the FRI Board. At such meeting, Mr. Relyea, Chief
Executive Officer, led a discussion regarding the proposed combination of KKR
and FRI and reported on the results of the negotiations to date. Mr. Ravich of
Libra summarized certain of the financial aspects of the transactions. A
representative of FRI's outside legal counsel for the transaction made a
presentation regarding the significant terms of the Merger Agreement, the
bridge loan and the related documentation, and explained the fiduciary duties
of the members of the FRI Board in deciding whether to approve such
agreements. Following such presentations and further discussion, the members
of the FRI Board voted unanimously to approve and authorize the execution of
the Merger Agreement, the Bridge Loan Agreement (as defined below) and other
related documentation and authorized the appropriate members of management to
take all such actions necessary to consummate the transactions contemplated
thereby.
The KKR Board held a special meeting in Los Angeles on June 9, 1998 that was
attended by all members of the KKR Board. At such meeting, Mr. Iacocca, Acting
Chairman of the KKR Board, and Mr. Allen, Chief Executive Officer, led a
discussion regarding the proposed combination of KKR and FRI and reported on
the results of the negotiations to date. Mr. Roberts of FMR summarized the
history of his firm's engagement and the process undertaken to identify an
acceptable strategic partner or financing source for KKR. Representatives of
Sutro presented their financial analyses regarding the fairness, from a
financial point of view, of the financial terms of the Merger to KKR
stockholders. See "--Opinion of Sutro & Co. Incorporated." A representative of
KKR's outside legal counsel for the transaction made a presentation regarding
the significant terms of the Merger Agreement, the bridge loan and the related
documentation, and explained the fiduciary duties of the members of the KKR
Board in deciding whether to approve such agreements. Following such
presentations and further discussion among the members of the KKR Board, the
members of the KKR Board voted unanimously to approve and authorize the
execution of the Merger Agreement, the Bridge Loan Agreement and other related
documentation and authorized Mr. Allen and the other appropriate members of
management to take all such actions necessary to consummate the transactions
contemplated thereby.
Following the board meetings, the Merger Agreement, the Bridge Loan
Agreement and the related agreements were finalized and executed by
representatives of KKR and FRI. In addition, Sutro delivered its written
opinion to the KKR Board to the effect that the financial terms of such
transaction were fair, from a financial point of view, to the KKR
stockholders. FRI and KKR announced the execution of the agreements in a joint
press release issued before the stock market opened on June 10, 1998.
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RECOMMENDATION OF THE KKR BOARD; REASONS FOR THE MERGER
The KKR Board believes that the terms of the Merger are in the best
interests of KKR and its stockholders. Accordingly, the KKR Board has
unanimously approved and adopted the Merger Agreement and the transactions
contemplated thereby and recommends its approval and adoption by the
stockholders of KKR at the Special Meeting.
The KKR Board believes that the Merger is a more viable alternative than
continuing KKR as a stand alone public entity because the combination will
provide greater access to capital and a management structure sufficient to
implement its strategy and allow KKR to better leverage its overhead
requirements. The KKR Board also believes that the Merger will provide
important critical mass and economies of scale that will allow the Company to
exploit business opportunities not available to either FRI or KKR on a stand-
alone basis. The KKR Board believes that by combining the growth potential of
the Koo Koo Roo California Kitchen concept with FRI's access to capital and
existing infrastructure, a well-financed, multi-concept restaurant company
will be created.
In reaching its determination to approve the Merger Agreement and recommend
approval of the Merger to the KKR stockholders, the KKR Board considered a
number of factors, including without limitation, the information presented to
it by KKR's management as well as by its professional advisors. These factors
included:
(i) KKR's Business. The KKR Board considered information concerning the
financial condition, results of operations and business of KKR. The KKR
Board reviewed the historical basis for KKR's growth since its formation,
the amount of capital raised to date and the amount of capital likely to be
required to continue to grow rapidly in the future. The KKR Board further
considered the significant difficulties involved in raising large amounts
of additional capital on a cost effective basis. KKR management and
professional advisors made presentations to the KKR Board providing it with
operational, financial and legal information concerning KKR. The KKR Board
considered the continuing efforts over the past several years to identify
strategic alternatives, including the proposed transaction with FRI,
maintaining the status quo and its other efforts to grow by seeking
alternative transactions. The KKR Board considered the consequences of not
consummating the Merger, and concluded that, in light of the fact that the
capital required to continue its historical growth strategy would be very
dilutive to its common stockholders, KKR would be forced to operate under
significant capital constraints, maintaining only a limited growth plan.
(ii) FRI's Business. The KKR Board considered the operational, financial
and legal due diligence provided to it by KKR's management and professional
advisors. Such due diligence included information regarding the results of
operations, financial condition and business of FRI and the current state
(and its perception of the future state) of FRI's business. Factors
included in evaluating FRI included, among other things, (a) the operating
performance of FRI's restaurants, (b) recent improvements in the cash flow
of FRI's El Torito and Chi Chi's restaurants, (c) the leading position of
the El Torito brand in the full-service Mexican segment of the restaurant
industry and its continued growth expectations given its size and market
share and the segment's competitive environment, (d) the prospect for
extending the El Torito brand to additional market segments, such as quick-
service, (e) comparing the existing and planned FRI brands and formats with
the existing Koo Koo Roo California Kitchen concept, (f) the number of
restaurants in the FRI portfolio and their broad geographic dispersion, (g)
FRI's corporate management, infrastructure and facilities, (h) FRI's recent
growth trends and its future prospects for growth and (i) the results of
KKR's legal due diligence.
(iii) Opinion of Sutro. The KKR Board considered the opinion of Sutro to
the effect that the financial terms of the Merger are fair, from a
financial point of view, to the stockholders of KKR. A copy of Sutro's
written opinion, which sets forth the assumptions made, matters considered
and limitations on the review undertaken is attached as Annex B to this
Proxy Statement/Prospectus and is incorporated herein by reference. See
"Opinion of Sutro & Co. Incorporated."
(iv) Strategic Merits of the Merger. The KKR Board considered that by
entering into the transaction, it could seek to capitalize on certain
strategic attributes. These elements included:
(a) the belief that the Merger will allow the combined Company to
improve operating efficiencies, reduce costs and achieve synergies,
particularly in the areas of purchasing (e.g., food and beverage
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costs), new store development and construction, information system
development and maintenance, physical plant, accounting and payroll;
and
(b) the belief that through FRI's cash on hand, available credit
facilities and other capital resources, the combined company would have
access to capital in order to finance the growth of the Koo Koo Roo
California Kitchen concept at a rate significantly higher than that
which could be accomplished by KKR on a stand-alone basis.
(v) Structure of Merger; Terms of Merger Agreement. The KKR Board
considered the terms of the Merger Agreement and its legal and tax
implications. The exchange ratio in the Merger is a fixed number and will
not be adjusted in the event that there are any increases or decreases in
the price of the KKR Common Stock.
The foregoing discussion of the information and factors considered and given
weight by the KKR Board is not intended to be exhaustive but is believed to
include all material factors considered by the KKR Board. In addition, in
reaching the determination to approve and recommend approval and adoption of
the Merger Agreement, in view of the wide variety of factors considered in
connection with its evaluation thereof, the KKR Board did not assign any
relative or specific weights to the foregoing factors, and individual
directors may have given differing weights to differing factors. The KKR Board
did not attempt to analyze the fairness of the exchange ratio in isolation
from the considerations as to the business of KKR and FRI, the strategic
merits of the Merger or the other considerations referred to above. The KKR
Board did, however, take into account, and placed reliance upon, the analyses
performed by, and the opinion rendered by, Sutro as to the fairness to holders
of KKR Common Stock, from a financial point of view, of the financial terms of
the Merger.
THE KKR BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED THEREBY AND BELIEVES THAT THE TERMS OF THE MERGER
ARE IN THE BEST INTERESTS OF KKR AND ITS STOCKHOLDERS. THE KKR BOARD
RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
ACCOUNTING TREATMENT
The merger will be accounted for as a "purchase" for accounting and
financial reporting purposes. Accordingly, FRI's costs in connection with the
Merger will be allocated to the assets of KKR acquired and the liabilities of
KKR assumed according to their estimated fair values at the Effective Time.
The excess of costs over estimated fair value of net assets acquired will be
amortized over 40 years.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the principal United States federal
income tax consequences of the Merger to holders of KKR Common Stock who hold
KKR stock as a capital asset (generally, property held for investment). This
discussion does not address the individual tax consequences of any holder of
KKR Common Stock in light of their individual circumstances, including
insurance companies, financial institutions, dealers in securities, holders
that are not citizens or residents of the United States, tax-exempt entities
and holders that acquired KKR Common Stock upon the exercise of employee stock
options or otherwise as compensation. The discussion, moreover, does not
address any consequences arising under any state, local or foreign laws.
Finally, the tax consequences to holders of stock options, deferred shares or
warrants are not discussed. The following discussion is based on the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury Regulations
promulgated thereunder, and administrative rulings and court decisions as of
the date hereof. All of the foregoing are subject to change, possibly with a
retroactive effect, and any such change could affect the accuracy of the
following discussion. No ruling has been or will be sought from the Internal
Revenue Service concerning the tax consequences of the Merger. Holders of KKR
Common Stock are urged to consult their tax advisors regarding the tax
consequences of the Merger to them, including the effects of United States
federal, state, local, foreign and other tax laws.
Latham & Watkins, counsel to KKR, has delivered to KKR an opinion, dated on
or about the date hereof to the effect that the Merger will constitute a
"reorganization" for United States federal income tax purposes within
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the meaning of section 368(a) of the Code. Such opinion assumes that the
Merger will take place as described in the Merger Agreement. In rendering such
opinion, Latham & Watkins will rely upon certain facts and customary
representations contained in certificates by officers of KKR, FRI and Merger-
Sub. It is a condition to the obligation of KKR to effect the Merger that such
opinion is confirmed as of the Effective Time. Based upon such opinion, for
United States federal income tax purposes:
(i) no gain or loss will be recognized by the stockholders of KKR upon
the exchange of their KKR Common Stock for shares of Company Common Stock
pursuant to the Merger;
(ii) the aggregate tax basis of the Company Common Stock received by the
stockholders of KKR pursuant to the Merger (including fractional shares, if
any, of Company Common Stock for which cash is received) will be the same
as the aggregate tax basis of such stockholders' KKR Common Stock exchanged
therefor; and
(iii) the holding period of the Company Common Stock in the hands of the
KKR stockholders will include the holding period of such stockholders' KKR
Common Stock exchanged therefor pursuant to the Merger.
Limitation on Use of Net Operating Losses
Generally, section 382 of the Code limits a corporation's use of its net
operating losses ("NOLs") and other tax attributes (the "Section 382
Limitation") if a corporation has a cumulative change in ownership of greater
than 50% within a three-year period (an "ownership change"). The Section 382
Limitation applies to the use of NOLs and other tax attributes in periods
after such an ownership change. KKR will undergo an ownership change as a
result of the Merger and, consequently, it will be subject to the Section 382
Limitation. FRI does not believe that, as a result of KKR's ownership change,
the Section 382 Limitation will have a material adverse effect on either KKR,
FRI or the Company. FRI does not believe that it will undergo an ownership
change as a result of the Merger. Nevertheless, no assurance can be given that
there will not be other transactions that could cause FRI to undergo an
ownership change. FRI does not believe that, in the event of such an ownership
change, the Section 382 Limitation would have a material adverse effect on
either KKR, FRI or the Company. In addition, as disclosed in the financial
statements included in the 1997 Annual Reports on Form 10-K incorporated by
reference herein of FRI and KKR, respectively, both FRI and KKR have recorded
a 100% valuation allowance on deferred tax assets generated by the NOLs to
reflect their estimated net realizable value.
REGULATORY AND THIRD-PARTY APPROVALS
U.S. Antitrust Filing.
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the rules and regulations promulgated thereunder (the "HSR Act") require that
FRI and KKR file with the Antitrust Division of the Department of Justice (the
"Antitrust Division") and the Federal Trade Commission (the "FTC")
Notification and Report Forms ("Forms") with respect to the Merger and the
related transactions. The parties thereafter are required to observe a waiting
period before consummating the reported transaction. In compliance with the
HSR Act, FRI and KKR filed Forms on July , 1998 with the Antitrust Division
and the FTC with respect to the Merger. The waiting period is expected to
expire on , 1998. The Antitrust Division, the FTC, state antitrust
authorities or a private person or entity could seek to enjoin the Merger
under the antitrust laws at any time prior to its consummation or to compel
recission or divestiture at any time subsequent to the Merger.
Third-Party Approvals.
Consummation of the Merger may require the consent of, or waiver from,
parties to certain agreements of FRI and KKR, and may constitute a default
resulting in termination, cancellation or acceleration thereunder if such
consents or waivers are not obtained. The Merger Agreement provides that,
subject to certain exceptions, each party's obligation to effect the Merger is
subject to its obtaining the necessary consents and waivers in order to
complete the transactions contemplated by the Merger Agreement. See "Recent
Developments--New Indebtedness."
23
<PAGE>
NO APPRAISAL RIGHTS
Under applicable state law, neither KKR common stockholders nor FRI common
stockholders are entitled to dissenters' appraisal rights.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the KKR Board with respect to the
Merger Proposal, the stockholders of KKR should be aware that certain members
of KKR's management and certain members of the KKR Board have certain
interests in the Merger that are different from, or in addition to, the
interests of the KKR stockholders generally. These separate interests are
summarized below:
Company Board Representation. Pursuant to the terms of the Merger Agreement,
immediately following the Effective Time, Lee A. Iacocca and A. William Allen,
III will be appointed to the Company Board. Messrs. Iacocca and Allen are
currently directors on the KKR Board. Each of Messrs. Iacocca and Allen will
be entitled to compensation as members of the Company Board and committees
thereof. See "Management--Compensation of Directors."
Stock Options. Certain of the options to purchase shares of KKR Common Stock
held by KKR's directors and officers will become immediately vested at the
Effective Time whether or not such options are vested by the terms of their
grant. As of June 22, 1998, the directors and officers of KKR held unvested
options to purchase an aggregate of 1,274,450 shares of KKR Common Stock, all
of which will immediately vest at the Effective Time. See "The Merger
Agreement--Treatment of KKR's Options and Warrants."
Change of Control. The Merger will constitute a change of control under the
employment agreements of each of the following KKR executive officers: A.
William Allen III, Chief Executive Officer; John S. Kaufman, President;
William M. McKay, Chief Financial Officer; and Ronald D. Garber, General
Counsel. Each executive officer's employment agreement provides that if the
executive officer's employment is terminated in the event of a change of
control, such executive officer will receive base compensation in an amount
equal to the greater of the amount due under the remaining term of the
executive officer's employment agreement and one year's base compensation,
plus all other additional compensation under the terms of the employment
agreement for a period of one year, including but not limited to medical and
dental benefits. In addition, as noted above, options to purchase shares of
KKR common stock granted to each such executive officer pursuant to his
respective employment agreement will vest. Finally, Mr. Allen will receive
forgiveness of a $50,000 loan payable to KKR, with KKR agreeing to pay Mr.
Allen's federal and state income tax liability attributable to the loan
forgiveness.
Directors' and Officers' Insurance. The Merger Agreement provides that the
Company will maintain directors' and officers' insurance covering acts or
omissions of KKR's directors and officers that predate the Effective Time.
This coverage will be maintained for six years after the Effective Time. See
"The Merger Agreement--Certain Covenants."
RESTRICTIONS ON RESALES BY AFFILIATES
The shares of Company Common Stock to be issued to KKR stockholders in the
Merger have been registered under the Securities Act. These shares may be
traded freely and without restriction by those stockholders not deemed to be
"affiliates" of KKR or FRI as that term is defined under the Securities Act.
An affiliate of KKR, as defined by the rules promulgated under the Securities
Act, is a person who directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with,
KKR. Any subsequent transfer by an affiliate of KKR must be permitted by the
resale provisions of Rule 145 promulgated under the Securities Act (or Rule
144 promulgated under the Securities Act, in the case of such persons who
become affiliates of the Company) or as otherwise permitted under the
Securities Act. These restrictions are expected to apply to the directors and
executive officers of KKR.
24
<PAGE>
In connection with its entering into the Merger Agreement, KKR has delivered
to FRI for each of its affiliates, an agreement that such person will not
dispose of any Company Common Stock in violation of the Securities Act or the
rules and regulations promulgated thereunder, except pursuant to an effective
registration statement under the Securities Act, in conformity with the volume
and other limitations of Rule 145 of the Securities Act or in a transaction
that is not required to be registered under the Securities Act.
LITIGATION
Each of KKR and FRI is involved in various litigation matters incidental to
its business. Neither KKR nor FRI believes that any of the claims or actions
filed against it will have a material adverse effect on the consolidated
financial position of the Company.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
FRI and KKR have each made forward-looking statements in this document (and
in certain documents that are incorporated by reference in this document) that
are subject to certain risks and uncertainties. These statements are based on
the beliefs and assumptions of the respective company's management, and on
information currently available to such management. Forward-looking statements
include the information concerning possible or assumed future results of
operations of the Company (including with respect to cost savings and
operational efficiencies expected to be realized from the Merger) set forth
under "Summary Historical and Pro Forma Financial Information," "Risk
Factors," "The Merger--Background of the Merger," and "--Recommendation of the
KKR Board; Reasons for the Merger" and "Unaudited Pro Forma Combined Condensed
Financial Information," and statements preceded by, followed by or that
include the words "believes," "expects," "anticipates," "intends," "plans,"
"estimates" or similar expressions.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and stockholder
values of the common stock of the Company may differ materially from those
expressed in these forward-looking statements. Many of the factors that will
determine these results and values are beyond FRI's and KKR's ability to
control or predict. Stockholders are cautioned not to put undue reliance on
any forward-looking statements. In addition, none of FRI, KKR or the Company
have any intention or obligation to update forward-looking statements after
they distribute this Proxy Statement/Prospectus, even if new information,
future events or other circumstances have made them incorrect or misleading.
For those statements, FRI, KKR and the Company claim the protection of the
safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
Stockholders of KKR should understand that the following important factors,
in addition to those discussed elsewhere in the documents that are
incorporated by reference into this Proxy Statement/ Prospectus, could affect
the future results of the combined companies following the Merger, and could
cause results to differ materially from those expressed in such forward-
looking statements: (i) the effect of economic conditions and interest rates
on a national, regional or international basis; (ii) the ability of the
Company to successfully integrate operations, the compatibility of the
operating systems of the combining companies, the degree to which existing
administrative and back-office functions and costs are complementary or
redundant and the timing of implementation of changes in operations to effect
cost savings; (iii) the financial resources of, and products available to,
competitors; (iv) changes in laws and regulations, including changes in
accounting standards; (v) changes in the securities markets; (vi) the
determination of the number, job classification and location of employee
positions to be eliminated as a result of the Merger; and (vii) opportunities
that may be presented to and pursued by the Company following the Merger.
25
<PAGE>
OPINION OF SUTRO & CO. INCORPORATED
KKR engaged Sutro to act as its financial advisor and render its opinion to
KKR stockholders as to the fairness, from a financial point of view, of the
financial terms of the Merger. Sutro was retained based on its experience,
expertise in the restaurant industry, and reputation. On June 9, 1998, Sutro
delivered its opinion to the KKR Board that, as of such date and subject to
the assumptions described in such opinion, the financial terms of the proposed
Merger were, from a financial point of view, fair to the stockholders of KKR.
A COPY OF THE WRITTEN OPINION OF SUTRO IS ATTACHED HERETO AS ANNEX B.
STOCKHOLDERS OF KKR ARE URGED TO READ SUCH OPINION IN ITS ENTIRETY FOR A
DISCUSSION OF THE ASSUMPTIONS MADE, THE MATTERS CONSIDERED AND THE SCOPE OF
THE REVIEW UNDERTAKEN IN RENDERING SUCH OPINION. SUTRO DID NOT RECOMMEND TO
KKR THAT ANY SPECIFIC FINANCIAL TERMS CONSTITUTED THE ONLY APPROPRIATE TERMS
FOR THE MERGER. SUTRO'S OPINION ADDRESSES ONLY THE FAIRNESS OF THE FINANCIAL
TERMS FROM A FINANCIAL POINT OF VIEW TO KKR STOCKHOLDERS AS OF THE DATE OF THE
OPINION AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER OF KKR AS
TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE KKR STOCKHOLDER MEETING OR AS TO
ANY OTHER ACTION SUCH STOCKHOLDER SHOULD TAKE WITH RESPECT TO THE MERGER. THE
OPINION DOES NOT ADDRESS THE RELATIVE MERITS OF THE MERGER OR THE DECISION OF
THE KKR BOARD TO PROCEED WITH THE MERGER. THE SUMMARY OF THE OPINION OF SUTRO
SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinion, Sutro, among other things, (i) reviewed the
Merger Agreement; (ii) reviewed KKR's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 and Quarterly Report on Form 10-Q for the
period ended March 31, 1998; (iii) reviewed FRI's Annual Report on Form 10-K
for the fiscal year ended December 28, 1997 and Quarterly Report on Form 10-Q
for the period ended March 29, 1998; (iv) reviewed certain operating and
financial information, including financial projections provided to Sutro by
the managements of KKR and FRI; (v) reviewed the historical prices and trading
volumes of KKR Common Stock; (vi) reviewed publicly available financial data
and stock market performance of companies which Sutro deemed comparable to KKR
and FRI; and (vii) conducted other studies and analyses as Sutro deemed
appropriate. In addition, Sutro discussed with the management of each of KKR
and FRI the historical financial statements and financial projections for each
company. Sutro also relied upon the view of KKR's management and FRI's
management concerning the benefits and implications of the Merger for their
businesses.
In connection with its review, Sutro did not independently verify any of the
foregoing information and relied on such information being complete and
accurate in all material aspects. With respect to the financial projections,
Sutro assumed that they had been reasonably prepared on a basis reflecting the
best currently available estimates and judgment of the managements of KKR and
FRI as to the future financial performance of each company independently and
as a merged entity pursuant to the Merger. Neither KKR nor FRI publicly
discloses internal management projections of the type provided to Sutro by
their respective managements in connection with Sutro's review of the Merger.
Such projections were not prepared with a view toward public disclosure. In
addition, such projections were based upon numerous variables and assumptions
that are inherently uncertain, including, without limitation, factors related
to general economic and competitive conditions. Accordingly, actual results
could vary significantly from those set forth in such projections. Sutro has
assumed no liability for such projections. Sutro did not and does not assume
any responsibility for the information or projections provided to it, and
Sutro has further relied upon the assurances of the management of both KKR and
FRI that they are unaware of any facts that would make the information or
projections provided to Sutro incomplete or misleading in any material
respect. Sutro did not make an independent evaluation and appraisal of the
assets of KKR or FRI. Sutro was not requested to, and did not, solicit third
party indications of interest in acquiring KKR and Sutro was not asked to
consider, and its opinion does not address, the relative merits of the Merger
as compared to any alternative business strategies that might exist for KKR or
the effect of any other transaction in which KKR may engage in. In addition,
although Sutro evaluated the financial terms of the transaction from a
financial point of view, Sutro was not asked to and did not recommend the
specific consideration payable in the Merger. Sutro's opinion was necessarily
based on economic, market and other conditions, and the information made
available to it, as of the date of the opinion.
26
<PAGE>
In connection with rendering its opinion, Sutro performed a variety of
financial analyses, which are summarized below:
Selected Comparable Public Company Analysis. Sutro reviewed certain publicly
available historical financial information and stock market performance of
selected publicly-traded restaurant companies. The comparable company
universes were, in Sutro's judgment, reasonably comparable to KKR and FRI on
an operational and financial basis.
The comparable public companies for KKR included: Au Bon Pain Co., Inc.,
Boston Chicken, Inc., Fresh Choice, Inc., Garden Fresh Restaurant Corp.,
Schlotzsky's Inc., Quiznos, Inc., and Taco Cabana, Inc.
The comparable public companies for FRI included: Advantica Restaurant
Group, Inc., Applebee's International, Inc., Brinker International, Inc., Casa
Ole Restaurants, Inc., Darden Restaurants, Inc., O'Charley's, Inc., Unique
Casual Restaurants, Inc., and Uno Restaurant Corp.
Financial and market information for the comparable companies included,
among other things, market capitalization, earnings per share, price to
earnings ratio and aggregate enterprise value (defined as equity value plus
long-term debt less cash and cash equivalents) as a multiple of revenue,
operating income and EBITDA (earnings before interest, income tax,
depreciation and amortization expenses). The analysis indicated that, based on
the closing stock prices on June 5, 1998, the KKR comparables, at the median,
traded at 7.5x EBITDA and 64.6x earnings per share for the latest twelve
months ("LTM EBITDA" and "LTM EPS", respectively). Based on the closing stock
prices on June 5, 1998, the FRI comparables, at the median, traded at 7.6x LTM
EBITDA and 16.6x LTM EPS. KKR's trading multiples of EBITDA and earnings per
share were not meaningful because of reported negative EBITDA and negative EPS
for the latest twelve months ended March 31, 1998.
Selected Comparable Industry Transaction Analysis. Sutro reviewed the public
information available regarding the consideration paid in the following
acquisitions of restaurant companies that have been announced since 1996 with
aggregate purchase prices of greater than $15 million (Target/Acquiror):
Bayport Restaurant Group/Landry's Seafood Restaurants, Hometown Buffet
Inc./Buffets Inc., Bugaboo Creek Steak House Inc./Longhorn Steaks Inc., Sybra
Inc./ICH Corp., DAKA International Inc./Compass Group PLC, Krystal Co./Port
Royal Holdings Inc., Rudy's Restaurant Group/Benihana Inc., Perkins Family
Restaurant L.P./Perkins Family Restaurant Co., Ground Round Restaurants/GRR
Holdings LLC, DavCo Restaurants Inc./Investor Group, El Chico Restaurants
Inc./Investor Group, Sagebrush Inc./WSMP Inc., Skyline Chili Inc./Investor
Group, Timber Lodge Steakhouse Inc./GB Foods Corp., Sbarro Inc./Investor
Group, Miami Subs Corp./Arthur Treacher's Inc., Spaghetti Warehouse/ConQuest
Partners, Bertucci's Inc./NE Restaurant Co. Inc., Morrison Restaurants
Inc./Piccadilly Cafeterias Inc., Denamerica Corp./Tech Electro Industries
Inc., Pollo Tropical Inc./Carrols Corp. Sutro analyzed the consideration paid
in such transactions as a multiple of the target companies' LTM Net Sales and
LTM Cash Flow, which is defined as LTM EBITDA. Such analysis yielded mean and
median multiples of 0.9x and 0.9x LTM Net Sales and 11.2x and 9.1x LTM EBITDA,
respectively. KKR's estimated implied transaction multiple was 2.2x LTM Net
Sales.
No other company or transaction used in the comparable transactions analysis
as a comparison is identical to KKR or the Merger. Accordingly, an analysis of
the results of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that could affect the
public trading value of the companies to which KKR and the Merger are being
compared.
Discounted Cash Flow Valuation Analysis. The discounted cash flow valuation
analysis (the "DCF") derives theoretical equity values based on the present
value of future net cash flows, less current net debt. Sutro analyzed the
financial projections provided by the management of KKR. This analysis
excluded any positive impact of synergies of the Merger. The projected cash
flows through 2002 were discounted to present value using a range of discount
rates based on the risk associated with such cash flows and the Company's
weighted average cost of capital as derived by the capital asset pricing
model. The terminal value was determined by applying an
27
<PAGE>
exit multiple of 8.8x EBITDA, derived from EBITDA multiples of comparable
transactions. This analysis calculated an implied theoretical net present
value of free cash flows ranging from $1.30 per fully diluted share to $1.55
per fully diluted share at discount rates ranging from 19% to 15%.
Contribution Analysis. Sutro reviewed KKR and FRI's historical financial
information for the fiscal year ended December 1997 and the financial
projections for the years 1998 through 2000. This analysis excluded any
positive impact of synergies of the Merger. For these periods, Sutro analyzed
the relative contributions to revenue, EBITDA, EBIT and net income of KKR and
FRI to the combined company and compared these contribution figures to the
post-Merger ownership percentage of KKR's current stockholders of 33%. The
positive contribution of KKR to the combined company's revenue, EBITDA, EBIT,
and net income ranged from approximately 2% to 20%.
Pro Forma Combination Analysis. Sutro reviewed the pro forma financial
projections of KKR and FRI assuming the consummation of the Merger in August
1998. This analysis was based on financial projections provided by KKR and FRI
and included estimates and assumptions regarding potential merger synergies.
These projections are inherently subject to significant business, economic and
competitive uncertainty and contingencies, many of which are beyond the
control of the companies and are subject to change. The pro forma combination
analysis compared KKR's revenues, EBITDA, EBIT and net income per fully
diluted share on a stand-alone basis to the Company's revenues, EBITDA, EBIT
and net income per fully diluted share. Changes ranged from ($0.05) to $1.55
per fully diluted share.
The above summary of the analyses prepared by Sutro does not purport to be a
complete description of Sutro's analyses. Sutro has indicated to KKR that its
analyses must be considered as a whole and selecting portions of the factors
considered and analyses performed by it, without considering all factors and
analyses, could create an incomplete view of the processes underlying Sutro's
analyses and fairness opinion. The preparation of a fairness opinion is a
complex process which is not necessarily susceptible to partial analyses or
summary description. In its analyses, Sutro made numerous assumptions which
Sutro considered reasonable with respect to the restaurant industry, general
business and economic conditions and other matters, many of which are beyond
the control of KKR. Any estimates contained therein are not necessarily
indicative of actual value, which may be significantly more or less favorable
than as set forth herein. Estimates of value of companies do not purport to be
appraisals and do not necessarily reflect the prices at which companies may
actually be sold. As a result of the inherent uncertainty of such estimates,
Sutro assumes no responsibility for their accuracy. The analyses performed
were prepared solely as part of Sutro's analysis of the fairness of the
financial terms, from a financial point of view, to KKR stockholders and was
provided to the KKR Board in connection with the delivery of Sutro's opinion.
Sutro, as part of its investment banking business, is regularly engaged in
the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and valuations. Sutro acted as a financial
advisor to the KKR Board in connection with the opinion described above and
received a fee for rendering its opinion. In the ordinary course of its
business, Sutro may actively trade the securities of KKR for its own account
or the account of its customers and, accordingly, may at any time hold a long
or short position in such securities.
For its services, Sutro has received a fee of $450,000 for rendering its
opinion in connection with the Merger. Sutro's fee was not conditioned upon
the conclusion reached by Sutro as to the fairness, from a financial point of
view, of the financial terms of the proposed Merger, or upon the ultimate
consummation of the Merger. KKR has also agreed to reimburse Sutro for its
reasonable out-of-pocket expenses, including the fees and disbursements of its
counsel, and to indemnify Sutro and certain related parties against certain
liabilities in connection with its engagement, including certain liabilities
under the federal securities law.
28
<PAGE>
PRICE RANGE OF KKR COMMON STOCK
Since KKR's initial public offering in October 1991, KKR's Common Stock has
traded in the over-the-counter market and has been listed for quotation
through the National Association of Securities Dealers Automated Quotation
System ("Nasdaq"). Prior to such date, there was no public market for the KKR
Common Stock. On August 14, 1995, KKR was accepted for quotation on the Nasdaq
Stock Market's National Market System (the "Nasdaq National Market").
Prior to the Merger, there has not been a public market for the Company
Common Stock. The Company will apply to the Nasdaq National Market to approve
the shares of Company Common Stock to be issued in connection with the Merger
to trade on the Nasdaq National Market, subject to official notice of
issuance.
The following table sets forth the high and low closing price of the KKR
Common Stock for the periods indicated, as reported by Nasdaq.
<TABLE>
<CAPTION>
PRICE PER
SHARE OF KKR
COMMON STOCK
-------------
YEAR ENDED DECEMBER 31: HIGH LOW
----------------------- ------ ------
<S> <C> <C>
1996
First Quarter............................................... $9.125 $6.125
Second Quarter.............................................. 10.000 7.750
Third Quarter............................................... 9.250 6.250
Fourth Quarter.............................................. 8.812 6.000
1997
First Quarter............................................... 7.690 6.000
Second Quarter.............................................. 7.250 3.625
Third Quarter............................................... 7.000 4.563
Fourth Quarter.............................................. 4.969 2.156
1998
First Quarter............................................... 3.438 1.250
Second Quarter.............................................. 3.281 1.688
Third Quarter (through July , 1998).......................
</TABLE>
On June 30, 1998, there were 1,283 holders of record of KKR's Common Stock.
DIVIDEND POLICY
FRI and KKR have not paid any dividends to their holders of common stock.
FRI and KKR have retained, and the Company will continue to retain, all
available earnings, if any, generated by its operations for the maintenance,
development and growth of its business and the Company does not anticipate
paying any dividends on Company Common Stock in the foreseeable future. In
addition, the payment of dividends on the Company Common Stock will be
restricted or prohibited under certain debt instruments of the Company. See
"Risk Factors--Lack of Dividends; Restrictions on Payment of Dividends."
29
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial information
is based upon the historical consolidated financial statements of FRI and KKR
and has been prepared to illustrate the effects of the Merger and certain
related transactions (together with the Merger, the "Transactions"), including
(i) the purchase by FRI of all of the outstanding capital stock of The Hamlet
Group, Inc. ("Hamlet") from KKR (the "Hamlet Acquisition") immediately prior
to the consummation of the Merger, (ii) the issuance of the New MRD Notes (as
defined below) to finance such acquisition, and (iii) the retirement of KKR's
outstanding 13% Senior Notes (the "KKR Notes"). See "The Merger Agreement" and
"Related Agreements and Other Matters."
The unaudited pro forma combined condensed balance sheet as of March 29,
1998 was prepared based upon the unaudited consolidated balance sheet of FRI
as of March 29, 1998 and the unaudited consolidated balance sheet of KKR as of
March 31, 1998 and gives effect to the Transactions as if they had been
completed on March 29, 1998.
The unaudited pro forma combined condensed statement of operations for the
fiscal year ended December 28, 1997 was prepared based upon the consolidated
statement of operations of FRI for the fiscal year ended December 28, 1997 and
the consolidated statement of operations of KKR for the fiscal year ended
December 31, 1997. The unaudited pro forma combined condensed statement of
operations for the three months ended March 29, 1998 was prepared based upon
the unaudited consolidated statement of operations of FRI for the three months
ended March 29, 1998 and the unaudited consolidated statement of operations of
KKR for the three months ended March 31, 1998. The unaudited pro forma
combined condensed statements of operations for the fiscal year ended
December 28, 1997 and for the three months ended March 29, 1998 give effect to
the Transactions as if they had been completed on December 30, 1996.
The unaudited pro forma combined condensed financial information is provided
for comparative purposes only and is not indicative of the results of
operations or financial position of the combined companies that would have
occurred had the Transactions occurred at the beginning of the periods
presented or on the date indicated, nor is it indicative of future operating
results or financial position. The unaudited pro forma adjustments are based
upon currently available information and upon certain assumptions that
management of FRI and KKR believe are reasonable under the circumstances. The
unaudited pro forma combined condensed financial information and the related
notes thereto should be read in conjunction with FRI's consolidated financial
statements and KKR's consolidated financial statements that are incorporated
by reference herein.
The unaudited pro forma combined condensed financial information does not
reflect (i) certain cost savings that management believes may be realized
following the Merger (See "The Combined Company") or (ii) compensation expense
of approximately $10.2 to $12.2 million expected to be recorded in connection
with the termination of the Value Creation Units Plan of FRI (the "VCU Plan").
See "Directors and Management of the Company Following the Merger--Termination
of VCU Plan." Such expense consists of a $3.0 to $5.0 million cash payment and
approximately $7.2 million for the intrinsic value of the stock options to be
granted in connection with such termination.
The Merger will be accounted for using the purchase method of accounting.
The pro forma consideration is estimated to be $109 million, based on the
average closing price of KKR Common Stock for the 10 trading days ending on
June 26, 1998. The actual consideration will be based on the value of Company
Common Stock issued in the Merger. FRI's costs in connection with the Merger
will be allocated to the assets of KKR acquired and liabilities of KKR assumed
according to their estimated fair values as of the date of the Merger. The
allocation is dependent upon certain valuations and other studies that have
not progressed to a stage where there is sufficient information to make a
definitive allocation. Accordingly, the Merger cost allocation made in
connection with the preparation of the unaudited pro forma combined condensed
financial information is preliminary, and has been made solely for the purpose
of preparing such unaudited pro forma combined condensed financial
information.
30
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 29, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------
FRI KKR PRO
MARCH 29 MARCH 31, PRO FORMA FORMA
1998 1998 NOTES ADJUSTMENTS COMBINED
-------- --------- ----- ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash, cash equivalents and
marketable securities........ $ 33,861 $ 8,723 A $ 3,700 $ 46,284
Other current assets.......... 12,004 2,600 14,604
-------- ------- ------- --------
Total current assets........ 45,865 11,323 3,700 60,888
Property and equipment, net..... 181,262 38,164 219,426
Reorganization value in excess
of amount allocable to
identifiable assets, net....... 36,179 -- 36,179
Costs in excess of net assets of
business acquired, net......... -- -- B 88,301 88,301
Other assets.................... 24,260 9,572 C,D 450 34,282
-------- ------- ------- --------
$287,566 $59,059 $92,451 $439,076
======== ======= ======= ========
LIABILITIES & STOCKHOLDERS'
EQUITY (DEFICIT)
---------------------------
Current Liabilities:
Current portion of long-term
debt and capital lease
obligations.................. $ 2,609 $ 2,792 E $(2,500) $ 2,901
Accounts payable.............. 15,633 3,392 19,025
Self-insurance reserves....... 30,560 -- 30,560
Other accrued liabilities..... 52,323 12,613 F 2,500 67,436
Income taxes payable.......... 3,789 -- 3,789
-------- ------- ------- --------
Total current liabilities... 104,914 18,797 -- 123,711
Other long-term liabilities..... 4,460 696 5,156
Long-term debt and capital lease
obligations, less current
portion........................ 212,596 10,317 E,G 12,700 235,613
Stockholders' equity (deficit).. (34,404) 29,249 G,H 79,751 74,596
-------- ------- ------- --------
$287,566 $59,059 $92,451 $439,076
======== ======= ======= ========
</TABLE>
31
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL FISCAL
YEAR ENDED
-------------------------
FRI KKR PRO
DECEMBER 28, DECEMBER 31, PRO FORMA FORMA
1997 1997 NOTES ADJUSTMENTS COMBINED
------------ ------------ ------- ----------- --------
<S> <C> <C> <C> <C> <C>
Sales................... $463,724 $ 68,338 $ $532,062
-------- -------- ------- --------
Food, labor and related
costs.................. 286,610 47,437 334,047
Occupancy and other
operating expenses..... 129,428 14,759 144,187
Depreciation and
amortization........... 22,395 6,853 B 2,208 31,456
General and
administrative
expenses............... 30,186 13,069 43,255
Opening costs........... 188 1,218 1,406
Loss on store closings
and disposition of
properties, net........ 3,885 4,274 8,159
Provision for
divestitures and write-
down of long lived
assets................. 2,640 -- 2,640
-------- -------- ------- --------
Total costs and
expenses........... 475,332 87,610 2,208 565,150
-------- -------- ------- --------
Operating loss.......... (11,608) (19,272) (2,208) (33,088)
Other expense (income)
Interest expense
(income), net........ 19,476 (197) C,D,E,I 2,499 21,778
Equity in net loss of
joint ventures....... -- 981 981
Minority interest in
net loss of joint
venture.............. -- (321) (321)
Other................. -- (99) (99)
-------- -------- ------- --------
Loss from continuing
operations............. (31,084) (19,636) (4,707) (55,427)
Income tax provision.... 509 -- 509
-------- -------- ------- --------
Net loss................ $(31,593) $(19,636) $(4,707) $(55,936)
======== ======== ======= ========
(J)(K)
Pro forma basic and
diluted loss per common
share.................. $ (0.26) $ (0.32)
======== ========
Pro forma weighted
average number of
common shares
outstanding............ 119,818 174,299
======== ========
(L)
</TABLE>
32
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 29, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL THREE
MONTHS ENDED
--------------------
FRI KKR PRO
MARCH 29, MARCH 31, PRO FORMA FORMA
1998 1998 NOTES ADJUSTMENTS COMBINED
--------- --------- ------- ----------- --------
<S> <C> <C> <C> <C> <C>
Sales........................ $113,306 $ 22,336 $ $135,642
-------- -------- ----- --------
Food, labor and related
costs....................... 70,969 15,343 86,312
Occupancy and other operating
expenses.................... 30,848 4,967 35,815
Depreciation and
amortization................ 5,339 1,218 B 552 7,109
General and administrative
expenses.................... 7,118 2,454 9,572
Opening costs................ 620 246 866
Loss on disposition of
properties, net............. 668 -- 668
Restructuring and other
charges, including store
closings.................... -- 11,757 11,757
-------- -------- ----- --------
Total costs and expenses. 115,562 35,985 552 152,099
-------- -------- ----- --------
Operating loss............... (2,256) (13,649) (552) (16,457)
Other expense (income):
Interest, net.............. 5,827 323 C,D,E,I 430 6,580
Minority interest in net
loss of joint venture..... -- (93) (93)
-------- -------- ----- --------
Loss from continuing
operations.................. (8,083) (13,879) (982) (22,944)
Income tax provision......... 127 -- 127
-------- -------- ----- --------
Net loss..................... $ (8,210) $(13,879) $(982) $(23,071)
======== ======== ===== ========
(J)(M)
Pro forma basic and diluted
loss per common share....... $ (0.07) $ (0.13)
======== ========
Pro forma weighted average
number of common shares
outstanding................. 119,818 174,299
======== ========
(L)
</TABLE>
33
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
A. To record net cash proceeds resulting from the Transactions, which are
calculated as follows:
<TABLE>
<S> <C>
Gross proceeds from New MRD Notes*............................... $ 22,200
Retirement of KKR Notes.......................................... (12,000)
Payment of FRI Merger and Debt Issuance Costs.................... (3,500)
Payment of KKR Merger Costs...................................... (3,000)
--------
Net Proceeds..................................................... $ 3,700
========
</TABLE>
* Assumes completion of the Transactions on December 18, 1998.
B. To record (i) $88,301 for the excess of the consideration paid over the
preliminary estimate of the fair value of net assets acquired, including
$2,430 of estimated merger costs to be amortized over 40 years and
(ii) amortization of $2,208 and $552 for the fiscal year ended December 28,
1997 and the three months ended March 29, 1998, respectively.
C. To record (i) debt issuance costs of $1,070 to be amortized over the term
of the New MRD Notes and (ii) amortization of debt issuance costs for the
fiscal year ended December 28, 1997 and for the three months ended
March 29, 1998 of $313 and $78, respectively.
D. To eliminate unamortized debt issuance costs of $620 and related
amortization of debt issuance costs associated with the retirement of the
KKR Notes of $84 and $63 for the fiscal year ended December 31, 1997 and
the three months ended March 31, 1998, respectively.
E. To record the $12,000 retirement of the KKR Notes, including $2,500
classified as current, and to eliminate related interest expense of $650
and $425 for the fiscal year ended December 31, 1997 and the three months
ended March 31, 1998, respectively.
F. To record estimated KKR severance liability of $2,500.
G. To give effect to (i) the completion of the Merger for estimated
consideration of $109,000, based on the average closing price of KKR Common
Stock for the 10 trading days ending on June 26, 1998 and (ii) the
completion of the Hamlet Acquisition pursuant to which KKR will receive
proceeds of $22,200 from FRI, which amount will be financed by the issuance
of the New MRD Notes.
H. To eliminate the stockholders' equity of KKR of $29,249.
I. To record interest expense of $2,920 and $840 on the New MRD Notes for the
fiscal year ended December 28, 1997 and the three months ended March 29,
1998, respectively.
J. For the fiscal year ended December 31, 1997 and the three months ended
March 31, 1998, KKR reported dividends on preferred stock of $3,384 and
$32, respectively. Such amounts have not been included as the related
preferred stock will be eliminated in connection with the Merger.
K. For the fiscal year ended December 31, 1997, KKR reported loss from
discontinued operations of $9,786, consisting of a $2,786 loss from
operations of Color Me Mine and a $7,000 estimated loss on disposal of net
assets of Color Me Mine. Such amounts have been excluded from amounts
presented.
L. The pro forma FRI weighted average number of common shares outstanding for
the historical fiscal year ended December 28, 1997 and the historical three
months ended March 29, 1998 give effect to the FRI Stock Dividend and the
conversion of the Apollo Warrant into shares of FRI Common Stock. See
"Related Agreements and Other Matters."
M. For the three months ended March 31, 1998, KKR reported a charge of $1,277
for the cumulative effect of change in accounting method in connection with
the adoption of the American Institute of Certified Public Accountants'
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities."
Such amount has been excluded from amounts presented.
34
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION--
(CONTINUED)
(DOLLARS IN THOUSANDS)
RECONCILIATION OF CERTAIN ADJUSTMENTS TO UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL INFORMATION
BALANCE SHEET:
(1) Costs in excess of net assets of business acquired,
net: estimated consideration of (G) $109,000 plus
estimated FRI merger costs of (B) $2,430 less net
assets of KKR acquired of (H) ($23,129), which
includes estimated KKR severance liability of (F)
$2,500, estimated KKR merger costs of (A) $3,000 and
the elimination of unamortized debt issuances of (D)
$620 = $88,301
(2) Other Assets: (C) $1,070; (D) ($620) = $450
(3) Long-term debt and capital lease obligations, less current portion:
(E) ($9,500); (G) $22,200 = $12,700
(4) Stockholders' equity (deficit) (G) $109,000; (H) ($29,249) =
$79,751
STATEMENT OF OPERATIONS (fiscal year ended December 28, 1997):
(1) Interest, net: (C) $313; (D) ($84); (E) ($650); (I) $2,920 = $2,499
STATEMENT OF OPERATIONS (three months ended March 29, 1998):
(1) Interest, net: (C) $78; (D) ($63); (E) ($425); (I) $840 = $430
35
<PAGE>
THE MERGER AGREEMENT
The following is a summary of the material terms of the Merger Agreement, a
copy of which is attached as Annex A to this Proxy Statement/Prospectus and is
incorporated herein by reference. Such summary is qualified in its entirety by
reference to the Merger Agreement. Stockholders are urged to read the Merger
Agreement in its entirety for a more complete description of the terms and
conditions of the Merger. Capitalized terms used herein and not otherwise
defined have the same meaning as in the Merger Agreement.
THE MERGER
Following the approval of the Merger by the KKR stockholders and the
satisfaction or waiver of the other conditions to the Merger Agreement,
Merger-Sub will be merged with and into KKR, with KKR surviving the Merger as
an indirect wholly owned subsidiary of FRI and the KKR stockholders receiving
the Merger Consideration. Pursuant to the Merger Agreement: (a) the
Certificate of Incorporation and Bylaws of Merger-Sub in effect at the
Effective Time will be the certificate of incorporation and bylaws of KKR
after the Merger until they are amended in accordance with their respective
terms and applicable law; (b) the directors of KKR after the Merger will be
Kevin S. Relyea, Robert T. Trebing, Jr. and an individual to be determined
until their respective successors are elected or appointed and qualified; and
(c) the officers of KKR after the Merger will be Kevin S. Relyea as Chief
Executive Officer, Michael E. Malanga and Robert T. Trebing, Jr. as Vice
Presidents, Robert D. Gonda as Treasurer, Todd E. Doyle as Secretary and
Kathleen D. Sorensen and Michael A. Rule as Assistant Secretaries until their
respective successors are duly elected or appointed and qualified.
If the Merger Agreement is approved by the KKR stockholders, and the other
conditions to the Merger Agreement are satisfied or waived, the Merger will be
consummated by, and effective at the time of, filing of a certificate of
merger (the "Certificate of Merger") with the Secretary of State of the State
of Delaware as provided by provisions of the DGCL.
CONSIDERATION TO BE RECEIVED IN THE MERGER
Consideration. At the Effective Time: (a) each share of KKR Common Stock
issued and outstanding at the Effective Time (other than treasury shares) will
be converted into and become the right to receive, by virtue of the Merger,
one share of Company Common Stock (the "Common Merger Consideration"); and (b)
each share of KKR Preferred Stock issued and outstanding at the Effective Time
(other than treasury shares) will be converted into and become the right to
receive, by virtue of the Merger, the number of shares of Company Common Stock
that the holder of such share of KKR Preferred Stock would have been entitled
to receive if such holder had converted such share into KKR Common Stock
immediately prior to the Effective Time in accordance with the terms of the
Certificate of Designation of KKR relating to such KKR Preferred Stock (the
"Preferred Merger Consideration" and together with the Common Merger
Consideration the "Merger Consideration").
Treatment of Options and Warrants. Prior to the Effective Time, the KKR
Board and the FRI Board will take all actions necessary, including, without
limitation, amending the KKR Stock Plans, to provide that at the Effective
Time the KKR Stock Awards Plan, as amended, The Koo Koo Roo, Inc. Directors'
Stock Option Plan, as amended, the 1997 Stock Option Plan for Restaurant
Employees and Management and other stock-based compensatory arrangements, if
any, and all outstanding, unexercised stock options (the "KKR Options")
granted as of the date of the Merger Agreement pursuant to the KKR Stock
Plans, will be assumed by FRI and, upon the occurrence of the Effective Time,
such KKR Options will be converted automatically into options (the "Roll-over
Options") to purchase Company Common Stock, on the same terms and conditions
as were applicable under the KKR Stock Plans, in an amount and at an exercise
price as follows (a) the number of shares of Company Common Stock to be the
subject of the Roll-over Option will equal the number of shares of KKR Common
Stock remaining (as of immediately prior to the Effective Time) subject to the
original KKR Option; and (b) the exercise price per share of Company Common
Stock under the Roll-over Option will equal the exercise price per share of
KKR Common Stock under the original KKR Option. After the Effective Time, each
36
<PAGE>
Roll-over Option will be exercisable and will, if not accelerated, vest upon
the same terms and conditions as were applicable to the related KKR Option
immediately prior to the Effective Time (except that, (i) with regard to such
Roll-over Option, any references to KKR will be deemed, as appropriate, to
include the Company and (ii) the vesting of certain options may be accelerated
at the Effective Time). As soon as practicable after the Effective Time, the
Company will file and use commercially reasonable efforts to obtain the
effectiveness of a registration statement on Form S-8 (or appropriate
successor form) (the "Form S-8") with respect to the shares of Company Common
Stock subject to Roll-over Options and maintain the current status of shares
of Company Common Stock covered by such registration statement and the related
prospectus(es) for so long as such assumed options remain outstanding.
Prior to the Effective Time, the KKR Board and the FRI Board will take all
actions necessary, including, without limitation, amending any applicable
warrant agreements, to provide that at the Effective Time, all warrants to
purchase KKR Common Stock issued pursuant to identified warrant agreements and
arrangements (the "KKR Warrants"), will be assumed by FRI and upon the
occurrence of the Effective Time, such KKR Warrants will be converted
automatically into warrants (the "Roll-over Warrants") to purchase shares of
Company Common Stock, on the same terms and conditions as were applicable
under the KKR Warrants, in an amount and at an exercise price as follows: (a)
the number of shares of Company Common Stock to be the subject of the Roll-
over Warrant will equal the number of shares of KKR Common Stock remaining (as
of immediately prior to the Effective Time) subject to the original KKR
Warrant; and (b) the exercise price per share of Company Common Stock under
the Roll-over Warrant will equal the exercise price per share of KKR Common
Stock under the original KKR Warrant. After the Effective Time, each Roll-over
Warrant will be exercisable and will, if not accelerated, vest upon the same
terms and conditions (if any) as were applicable to the related KKR Warrant
immediately prior to the Effective Time (except that, with regard to such
Roll-over Warrant, any references to KKR shall be deemed, as appropriate, to
include the Company).
EXCHANGE OF STOCK CERTIFICATES
At the Effective Time, FRI will provide to the Exchange Agent, in trust for
the benefit of the holders of KKR Common Stock, certificates representing the
aggregate number of shares of Company Common Stock issuable pursuant to the
Merger Agreement. As soon as practicable after the Effective Time, FRI will
cause to be mailed, by first class mail, to each holder of record of KKR
Common Stock immediately prior to the Effective Time, a form letter of
transmittal for return to the Exchange Agent and instructions for use in
effecting the surrender of Certificates in exchange for certificates
representing shares of Company Common Stock. Upon surrender of a Certificate
to the Exchange Agent, together with such letter of transmittal, duly
completed and executed, the holder of KKR Common Stock formerly represented by
such Certificate will be entitled to receive and will receive in exchange
therefor the Merger Consideration for each KKR Share formerly represented by
such Certificate, and the Certificate so surrendered shall be canceled. FRI is
entitled to deduct and withhold from the consideration otherwise payable
pursuant to the Merger Agreement to any holder of Certificates such amounts,
if any, as it is required to deduct and withhold with respect to the making of
such payment under the Code, or any applicable provision of state, local or
foreign law.
REPRESENTATIONS AND WARRANTIES
KKR has made to FRI and Merger-Sub, and FRI and Merger-Sub have made to KKR
various customary representations and warranties, subject to identified
exceptions, with respect to, among other things: (a) due organization, valid
existence and good standing of the applicable company and its subsidiaries and
certain similar corporate matters; (b) the capital structure of the applicable
company and its subsidiaries; (c) the authorization, execution, delivery and
enforceability of the Merger Agreement and other Documents; (d) conflicts
under the applicable company's charter documents, required consents or
approvals and violations of instruments or law; (e) the absence of certain
material adverse events or changes; (f) insurance; (g) documents filed by the
applicable company with the SEC and financial statements and the accuracy of
information contained therein; (h) suppliers and franchisees; (i) intellectual
property; (j) litigation; (k) labor matters; (l) taxes and tax returns; (m)
employee
37
<PAGE>
benefit plans; (n) change of control provisions in agreements it is a party
to; (o) governmental consents; (p) title to its properties; (q) environmental
matters; (r) the accuracy of books and the records of the company; (s) the
company's material agreements and compliance thereunder; and (t) the accuracy
of the information it has supplied in this Proxy Statement/Prospectus. The
representations and warranties expire at the Effective Time.
COVENANTS OF FRI
Conduct of Business Pending the Merger. FRI has agreed that, except as
otherwise specifically provided in the Merger Agreement or in the other
Documents or as otherwise consented to in writing by KKR, which consent may
not be unreasonably withheld, from the date of the Merger Agreement to the
Effective Time, FRI will, and will cause each of the FRI Subsidiaries to,
conduct its operations only in the ordinary and usual course of business and
consistent with past practices and will, and will cause each of the FRI
Subsidiaries to, preserve intact its present business organization, take
commercially reasonable efforts to keep available the services of its present
officers, employees and consultants and preserve its present relationships
with licensors, licensees, customers, suppliers, employees, labor
organizations and others with whom they have a significant business
relationship. In addition, except as provided in the Merger Agreement or in
the other Documents, neither FRI nor any FRI Subsidiary will, from the date of
the Merger Agreement to the Effective Time: (a) adopt any amendment to or
otherwise change the Charter Documents of FRI or Merger-Sub; (b) authorize for
issuance, sale, pledge, disposition or encumbrance, or issue, sell, pledge,
dispose of or encumber (whether through the issuance or granting of options,
warrants, commitments, subscriptions, rights to purchase, convertible
securities or otherwise), any capital stock of any class or any other
securities of, or any other ownership interest in, FRI or any FRI Subsidiary
(other than the shares of Company Common Stock to be issued in the Merger), or
amend any of the terms of any such securities or agreements outstanding on the
date of the Merger Agreement; (c) reclassify, combine, split or subdivide any
shares of its capital stock, declare, set aside or pay any dividend or other
distribution (whether in cash, securities or property or any combination
thereof) in respect of any class or series of its capital stock; (d) redeem,
purchase or otherwise acquire, or propose or offer to redeem, purchase or
otherwise acquire, any outstanding shares of Company Common Stock or other
securities of FRI or any of the FRI Subsidiaries; (e) organize any new
Subsidiary (other than Merger-Sub), acquire any capital stock or equity
securities of any Person or acquire any equity or ownership interest
(financial or otherwise) in any business, other than de minimus investments in
public corporations whose principal business includes the operation of
restaurants; (f) either (i) incur, assume or prepay any material liability,
including, without limitation, any indebtedness for borrowed money except in
the ordinary course of business and consistent with past practice, and in no
event in excess of $50,000, (ii) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise) for
obligations of any third party, (iii) make any loans, advances or capital
contributions to, or investments in, any third party, (iv) mortgage or pledge
any of its material properties or assets, tangible or intangible, or create
any material Lien thereupon other than Permitted Liens, or (v) authorize any
capital expenditures not in FRI's capital budget on the date of the Merger
Agreement which, individually or in the aggregate, are in excess of
$1,000,000; (g) license or otherwise transfer, dispose of, permit to lapse or
otherwise fail to preserve any Intellectual Property of FRI or any FRI
Subsidiary, or dispose of or disclose to any person any trade secret, formula,
process or know-how not theretofore a matter of public knowledge, except where
such disposal or disclosure would not, individually or in the aggregate, be
reasonably expected to have a Material Adverse Effect on FRI; (h) enter into
any material agreement, contract, commitment or transaction other than in the
ordinary course of business, consistent with past practices; (i) cancel any
debts or waive, release or relinquish any material contract rights or other
rights of substantial value other than in the ordinary course of business,
consistent with past practices; (j) authorize, recommend, propose or enter
into or announce an intention to authorize, recommend, propose or enter into
an agreement in principle or a definitive agreement with respect to any
merger, consolidation, liquidation, dissolution, or business combination, any
acquisition of a material amount of property or assets or securities, or any
disposition of a material amount of property or assets or securities, except
as contemplated by the Merger Agreement; (k) make any material change with
respect to accounting policies or procedures in effect as of December 28, 1997
except as may be required by generally accepted accounting principles; (l)
pay, discharge or satisfy any material claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise) other
than the payment, discharge
38
<PAGE>
or satisfaction in the ordinary course of business, consistent with past
practices, of liabilities reflected or reserved against in the FRI Financial
Statements or incurred in the ordinary course of business consistent with past
practices since the date of the Merger Agreement; (m) effectuate (i) a "plant
closing" (as defined in the WARN Act) affecting any site of employment or one
or more facilities or operating units within any site of employment of FRI or
any FRI Subsidiary, or (ii) a "mass layoff" (as defined in the WARN Act)
affecting any site of employment of FRI or any FRI Subsidiary, without
complying fully with any and all notice obligations (and/or pay and benefits
in lieu of notice) under the WARN Act or any similar obligation under
applicable state or local law requiring notice (and/or pay and benefits in
lieu of notice) to employees in the event of a plant closing or layoff; (n)
commit or agree to take any of the foregoing actions or any action that would
make any representation or warranty in the Merger Agreement untrue or
incorrect in any material respect, including as of the date of the Merger
Agreement and as of the Effective Time, as if made as of such time; (o) take
any action with the knowledge that such action would prevent the Merger from
qualifying as a reorganization within the meaning of sections 368(a) of the
Code; or (p) amend any Tax return, settle any Audit or make any election with
respect to Taxes which would materially adversely affect the Tax liability of
FRI or any FRI Subsidiary.
No Solicitation. FRI will not, and will cause the FRI Subsidiaries and each
of their respective, officers, directors, employees, agents and controlled
Affiliates (collectively "Representatives") not to, directly or indirectly
initiate, solicit, engage in discussions or negotiations concerning, or
provide any information to any Person (other than KKR and its Representatives)
relating to any Acquisition Proposal. FRI will immediately cease and cause to
be terminated any existing activities, discussions and negotiations with
respect to any Acquisition Proposal. FRI will immediately notify KKR if,
subsequent to the date of the Merger agreement, any such negotiations,
provision of information or data or discussions are entered into or made or
any such inquiries are received in respect thereof, and shall provide details
with respect thereto, including the identity of any other party and the price
and terms of any Acquisition Proposal.
Amendment of Certificate and Bylaws; Recapitalization. Prior to the
Effective Time, FRI will (a) amend and restate its Certificate of
Incorporation and Bylaws in the forms of the Company Certificate and Company
Bylaws, (b) issue to the holder of each FRI Share the FRI Dividend and (c)
duly adopt a further amendment to the Company Certificate, renaming FRI as Koo
Koo Roo Enterprises, Inc., such amendment to be filed with the Delaware
Secretary of State and effective substantially contemporaneous with the
occurrence of the Effective Time.
Nasdaq National Market Quotation. FRI will use commercially reasonable
efforts to (a) cause the shares of Company Common Stock to be designated by
Nasdaq as a national market system security in the manner contemplated by
Section 262(b)(2) of the DGCL no later than the Effective Time and (b)
maintain such quotation on the Nasdaq National Market (or any successor
system) or list the shares of Company Common Stock on the New York Stock
Exchange or the American Stock Exchange for a period of five years from the
Effective Time unless in the good faith determination of the Company Board,
the maintenance of such quotation or listing is not in the best interests of
the stockholders of the Company.
Indemnification and Insurance. After the consummation of the Merger, the
Surviving Corporation will remain responsible for the officers' and directors'
right to indemnification and exculpation provided for in the Charter Documents
of KKR as in effect on the date of the Merger Agreement, with respect to acts
and omissions occurring prior to the Effective Time. For six years after the
Effective Time, the Company will maintain, or cause the Surviving Corporation
to maintain, officers' and directors' liability insurance covering the persons
who are presently covered by KKR's officers' and directors' liability
insurance policies with respect to actions and omissions occurring or alleged
to have occurred prior to the Effective Time, on terms that are not materially
less favorable than the terms of such current insurance in effect on the date
of the Merger Agreement; provided, however, that FRI and the Surviving
Corporation are not obligated to make annual premium payments for such
insurance to the extent such premiums exceed $225,050 (the "Maximum Amount").
If the amount of the annual premiums necessary to maintain or procure such
insurance coverage exceeds the Maximum Amount, FRI and the Surviving
Corporation must maintain the most advantageous policies of directors and
officers liability insurance obtainable for an annual premium equal to the
Maximum Amount.
39
<PAGE>
From and after the occurrence of the Effective Time, (a) FRI and the
Surviving Corporation will, to the fullest extent permitted under applicable
law, indemnify, defend and hold harmless each present and former director and
officer of KKR (collectively, the "Indemnified Parties") against any costs or
expenses (including reasonable attorneys' fees), judgments, fines, losses,
claims, damages, liabilities and amounts paid in settlement in connection with
any pending, threatened or completed claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative,
arising out of or pertaining to any action or omission occurring prior to the
Effective Time (including, without limitation, any claim, action, suit,
proceeding or investigation arising out of or pertaining to the transactions
contemplated by the Merger Agreement); (b) in the event of any such claim,
action, suit, proceeding or investigation (whether arising before or after the
Effective Time), FRI and the Surviving Corporation will advance expenses to
each such Indemnified Party, including the payment of the reasonable fees and
expenses of counsel selected by such Indemnified Party, which counsel shall be
reasonably satisfactory to the Surviving Corporation, promptly after
statements therefor are received; provided that (1) FRI and the Surviving
Corporation may require such Indemnified Party to undertake to repay such
amount if it is ultimately determined in a judicial proceeding that is final
and unappealable that such Indemnified Party is not entitled to be indemnified
by FRI and the Surviving Corporation in accordance with Section 145 of the
DGCL, (2) in any single action or series of related actions, FRI and the
Surviving Corporation will only be obligated to pay for the fees and expenses
of one such counsel (together with appropriate local counsel) for all of the
Indemnified Parties unless such counsel would have a conflict of interest in
such representation under applicable rules of professional conduct, (3) FRI
and the Surviving Corporation will cooperate fully in the defense of any such
matter and (4) if it is ultimately determined in a judicial proceeding that is
final and unappealable that FRI and the Surviving Corporation wrongly denied
their obligation to indemnify the Indemnified Parties pursuant to the Merger
Agreement, the losses to be indemnified shall include the Indemnified Parties'
reasonable attorneys' fees in seeking indemnification. Neither FRI nor the
Surviving Corporation will be liable for any settlement effected without its
written consent (which consent may not be unreasonably withheld). The
provisions of the Merger Agreement dealing with indemnification are intended
to be in addition to the rights otherwise available to the directors and
officers of KKR by law, charter, statute, bylaw or agreement.
Employee Benefits; Severance. For purposes of determining eligibility to
participate, entitlement to benefits and in all other respects where length of
service is relevant under any of Benefit Plans of FRI and the FRI
Subsidiaries, following the Effective Time, FRI will cause the Benefit Plans
of FRI and the FRI Subsidiaries (including vesting, other than vesting under
any defined contribution or defined Benefit Plan of FRI and the FRI
Subsidiaries) to credit an applicable employee for such employee's service
with KKR and any of the KKR Subsidiaries to the same extent such service was
credited under the applicable Benefit Plans of KKR and the KKR Subsidiaries
immediately prior to the Effective Time. At the Effective Time, FRI will
assume and honor, or cause the Surviving Corporation to honor, in accordance
with their terms, the employment contracts, severance agreements and severance
pay policies identified by KKR. FRI and KKR may enter into retention and
transition bonus arrangements with their employees after the date of the
Merger Agreement and prior to the Effective Time, with the terms and amounts
of such payments to be determined and agreed to jointly by the Chief Executive
Officers of FRI and KKR.
COVENANTS OF KKR
Conduct of Business Pending Merger. KKR has agreed that, except as otherwise
specifically provided in the Merger Agreement or in the other Documents or as
otherwise consented to in writing by FRI, which consent may not be
unreasonably withheld, from the date of the Merger Agreement to the Effective
Time, KKR will, and will cause each of the KKR Subsidiaries to, conduct its
operations only in the ordinary and usual course of business and consistent
with past practices and will, and will cause each of the KKR Subsidiaries to,
preserve intact its present business organization, take commercially
reasonable efforts to keep available the services of its present officers,
employees and consultants and preserve its present relationships with
licensors, licensees, customers, suppliers, employees, labor organizations and
others with whom they have a significant business relationship. Without
limiting the generality of the foregoing, and except in certain specific
circumstances, neither KKR not any KKR Subsidiary will, from the date of the
Merger Agreement to the Effective Time: (a) adopt any amendment to or
otherwise change the Charter Documents of KKR or any KKR Subsidiary;
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(b) authorize for issuance, sale, pledge, disposition or encumbrance, or
issue, sell, pledge, dispose of or encumber (whether through the issuance or
granting of options, warrants, commitments, subscriptions, rights to purchase,
convertible securities or otherwise), any capital stock of any class or any
other securities of, or any other ownership interest in, KKR or any KKR
Subsidiary (except for (1) the issuance of KKR Common Stock (i) upon the
exercise of options and warrants outstanding on the date of the Merger
Agreement, (ii) upon conversion or exchange of the KKR Preferred Stock
outstanding on the date of the Merger Agreement or issuable upon the exercise
of warrants outstanding as of the date of the Merger Agreement, or (iii) the
issuance of KKR Common Stock in payment of accrued and unpaid dividends on the
KKR Preferred Stock in accordance with the terms thereof and (2) as
contemplated by the Merger Agreement), or amend any of the terms of any such
securities or agreements outstanding on the date of the Merger Agreement; (c)
reclassify, combine, split or subdivide any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in cash,
securities or property or any combination thereof) in respect of any class or
series of its capital stock (other than regularly scheduled dividends on the
KKR Preferred Stock paid in cash in accordance with the terms thereof); (d)
redeem, purchase or otherwise acquire, or propose or offer to redeem, purchase
or otherwise acquire, any outstanding KKR Common Stock or other securities of
KKR or the KKR Subsidiaries; (e) organize any new Subsidiary, acquire any
capital stock or equity securities of any Person or acquire any equity or
ownership interest (financial or otherwise) in any business; (f) either (i)
incur, assume or prepay any material liability, including, without limitation,
any indebtedness for borrowed money except in the ordinary course of business
and consistent with past practice, and in no event in excess of $50,000, (ii)
assume, guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for obligations of any third party, (iii)
make any loans, advances or capital contributions to, or investments in, any
third party, (iv) mortgage or pledge any of its material properties or assets,
tangible or intangible, or create any material Lien thereupon other than
Permitted Liens, or (v) authorize any capital expenditures not in KKR's
capital budget on the date of the Merger Agreement which, individually or in
the aggregate, are in excess of $50,000; (g) license or otherwise transfer,
dispose of, permit to lapse or otherwise fail to preserve any Intellectual
Property of KKR or any KKR Subsidiary, or dispose of or disclose to any person
any trade secret, formula, process or know-how not theretofore a matter of
public knowledge, except where such disposal or disclosure would not,
individually or in the aggregate, be reasonably expected to have a Material
Adverse Effect on KKR; (h) enter into or amend any material agreement,
contract, lease, commitment or transaction other than in the ordinary course
of business, consistent with past practices; (i) cancel any debts or waive,
release or relinquish any material contract rights or other rights of
substantial value other than in the ordinary course of business, consistent
with past practices; (j) except in accordance with the Merger Agreement,
authorize, recommend, propose or enter into or announce an intention to
authorize, recommend, propose or enter into an agreement in principle or a
definitive agreement with respect to any merger, consolidation, liquidation,
acquisition of a material amount of property or assets or securities, or any
disposition of a material amount of property or assets or securities; (k) make
any material change with respect to accounting policies or procedures in
effect as of December 31, 1997 except as may be required by generally accepted
accounting principles; (l) pay, discharge or satisfy any material claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise) other than the payment, discharge or satisfaction in
the ordinary course of business, consistent with past practices, of
liabilities reflected or reserved against in the Financial Statements of KKR
or incurred in the ordinary course of business, consistent with past practices
since the date of the Merger Agreement; (m) effectuate (i) a "plant closing"
(as defined in the WARN Act) affecting any site of employment or one or more
facilities or operating units within any site of employment of KKR or any KKR
Subsidiary, or (ii) a "mass layoff" (as defined in the WARN Act) affecting any
site of employment of KKR or any KKR Subsidiary, without complying fully with
any and all notice obligations (and/or pay and benefits in lieu of notice)
under the WARN Act or any similar obligation under applicable state or local
law requiring notice (and/or pay and benefits in lieu of notice) to employees
in the event of a plant closing or layoff; (n) commit or agree (in writing or
otherwise) to take any of the foregoing actions or any action that would make
any representation or warranty in the Merger Agreement untrue or incorrect in
any material respect, including as of the date of the Merger Agreement and as
of the Effective Time, as if made as of such time; (o) take any action with
knowledge that such action would prevent the Merger from qualifying as a
reorganization within the meaning of sections 368(a) of the Code; or (p) amend
any Tax Return, settle any Audit or make any election with respect to Taxes
which would materially adversely affect the Tax liability of KKR or any KKR
Subsidiary.
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No Solicitation. KKR will not, and will cause the KKR Subsidiaries and each
of their respective Representatives not to, directly or indirectly initiate,
solicit or, except to the extent the Board of Directors of KKR determines in
good faith, after consultation with its outside counsel, that such action is
required for the Board of Directors of KKR to comply with its duties under
Applicable Law, engage in discussions or negotiations concerning, or provide
any information to any Person (other than FRI and its Representatives)
relating to any Acquisition Proposal. KKR will immediately cease and cause to
be terminated any existing activities, discussions and negotiations with any
Persons conducted heretofore with respect to any Acquisition Proposal. KKR
shall notify FRI immediately if KKR, any of the KKR Subsidiaries or any of
their respective Representatives receives any unsolicited proposal concerning
an Acquisition Proposal, the identity of the Person making any such proposal
and all of the terms and conditions thereof, and shall keep FRI promptly
advised of all developments relating thereto.
KKR Stockholder Approval. KKR, acting through its Board of Directors, will
in accordance with its Charter Documents and all Applicable Laws cause a
meeting of its stockholders to be duly called and held as soon as reasonably
practicable for purposes of voting on the approval and adoption of the Merger
Agreement and the Merger. The exact time period from the date of mailing of
this Proxy Statement/Prospectus to the date of the Special Meeting was
determined by the KKR Board, in consultation with FRI, and such period is
designed to allow an adequate period for all KKR stockholders to receive such
material and vote by proxy. The KKR Board will, subject to their fiduciary
duties, recommend approval and adoption of the Merger Agreement and the Merger
by KKR's stockholders. In connection with such meeting, KKR will, subject to
the foregoing, use commercially reasonable efforts to obtain the necessary
approvals by its stockholders of the Merger and the Merger Agreement in
accordance with the DGCL.
Employee Benefit Matters. KKR and the KKR Subsidiaries will terminate each
Benefit Plan of KKR and the KKR Subsidiaries which is a "defined contribution
plan" or "defined benefit plan," as such terms are defined in Sections 3(34)
and 3(35) of ERISA, respectively, effective prior to the Effective Time, and
shall appoint FRI as plan administrator under each such plan for the sole
purpose of completing the termination thereof, filing all appropriate
documents with government agencies and distributing participant accounts in
accordance with the applicable provisions of each such terminated Benefit
Plan. FRI will offer participation in each Benefit Plan of FRI and the FRI
Subsidiaries which is a defined contribution plan or defined benefit plan to
participants in such terminated Benefit Plans of KKR and the KKR Subsidiaries
as soon as practicable after the Effective Time, and will permit such
participants to elect direct rollovers of their accounts in such terminated
Benefit Plans to such FRI Benefit Plans.
MUTUAL COVENANTS
Access to Information. Upon reasonable notice and subject to restrictions
contained in confidentiality agreements with third parties to which such party
is subject (from which such party shall use commercially reasonable efforts to
be released), each of KKR and FRI shall afford to the other reasonable access,
during normal business hours during the period prior to the Effective Time, to
all its properties, books, contracts, commitments and records and, during such
period, each of KKR and FRI shall (and shall cause each of their respective
Subsidiaries to) furnish promptly to the other all information concerning its
business, properties and personnel as such other party may reasonably request.
Each party shall keep such information confidential in accordance with an
agreement entered into between the two parties.
Reasonable Efforts. Subject to the terms and conditions of the Merger
Agreement, each of FRI and KKR agreed to use commercially reasonable efforts
to take, or cause to be taken, all actions, and to do, or cause to be done,
all things necessary, proper or advisable consistent with Applicable Law to
assure that all conditions to consummating the Merger are satisfied as
expeditiously as possible.
Notification of Certain Matters. Between the date of the Merger Agreement
and the Effective Time, KKR will give prompt written notice to FRI and FRI
will give prompt written notice to KKR, of the occurrence (or non-occurrence)
of any event of which any executive officer or director of KKR or FRI,
respectively, has
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knowledge, the occurrence (or non-occurrence) of which would be likely to
cause any representation or warranty contained in the Merger Agreement or any
other Document to be untrue or inaccurate in any material respect and of any
material failure of either party to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it under the Merger
Agreement and shall use commercially reasonable efforts to cure any such
defect.
Further Information. As soon as practicable after such information becomes
available, and in any event not later than thirty (30) days after the end of
each fiscal month, KKR will provide to FRI and FRI will provide to KKR an
unaudited consolidated balance sheet as of the end of such month and the
related consolidated statements of results of operations and statements of
cash flows for such period.
Fees and Expenses. Except as set forth below, whether or not the Merger is
consummated, all costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby will be the exclusive
obligation of, and paid by, the party incurring such expenses. However, if
(a) the Merger Agreement is terminated due to the withdrawal or adverse
modification of the recommendation of the Merger by the KKR Board and at
the time of such termination neither FRI nor Merger-Sub is in material
breach of the Merger Agreement or
(b) following the making by any Person (the "referrent Person") of an
Acquisition Proposal with respect to KKR, which Acquisition Proposal is
publicly disclosed and not withdrawn, the Merger Agreement is terminated
because the KKR stockholders do not approve the Merger, and at the time of
termination neither FRI nor Merger-Sub is in material breach of the Merger
Agreement and KKR or any of its Affiliates enters into an agreement setting
forth any substantive terms of, or consummates, any Acquisition Proposal
with respect to KKR with the referrent Person or any of its Affiliates
within six months of the date of such termination,
then KKR shall be obligated to pay to FRI, by wire transfer of immediately
available funds, a fee of $6.0 million (the "Fee") (i) in the case of clause
(a) above, within three business days of delivery of written notice of such
termination or (ii) in the case of clause (b) above, concurrently with
consummation by such referrent Person or any of its Affiliates of any
Acquisition Proposal with respect to KKR. KKR shall in no event be obligated
to pay more than one such Fee with respect to all such occurrences and such
termination. An agreement relating solely to the treatment of confidential
information shall not be deemed to relate to the substantive terms of an
Acquisition Proposal.
If (a) the Merger Agreement is terminated (i) because the Merger has not
been consummated before December 18, 1998 (unless at the time of termination
certain of the conditions to be achieved by FRI remain unsatisfied or FRI has
failed to obtain certain consents) or (ii) because the KKR Stockholders do not
approve the Merger and (b) at the time of either such termination neither FRI
nor Merger-Sub is in breach in any material respect of the Merger Agreement
and KKR or any of its Affiliates enters into an agreement setting forth any
substantive terms of, or consummates, any Acquisition Proposal with respect to
KKR within six months of the date of such termination, concurrently with
consummation of such Acquisition Proposal, KKR shall pay to FRI, by wire
transfer of immediately available funds, an amount equal to all of the
Expenses incurred by FRI; provided, that no Expenses shall be payable pursuant
to this paragraph if KKR has paid the Fee discussed in the preceding
paragraph.
In any suit or action brought by FRI or KKR to enforce the Merger Agreement,
the prevailing party shall be entitled to reasonable attorneys' fees and costs
incurred by the prevailing party in connection therewith, including costs and
expenses associated with any and all appeals.
Public Announcements. FRI and KKR will consult with each other before
issuing any press release or otherwise making any public statements with
respect to the Merger and will not, and shall cause each of their
Representatives not to, issue any such press release or make any such public
statement prior to such consultation, except as may be required by law or any
listing agreement with its securities exchange.
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CONDITIONS
The respective obligations of KKR, FRI and Merger-Sub to effect the Merger
are subject to the satisfaction of the following conditions: (a) the
applicable waiting period with respect to the Merger under the HSR Act shall
have expired or been terminated; (b) the Registration Statement and any
required post-effective amendment (if any) shall have become effective under
the Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order; (c) no statute, rule, regulation, executive
order, decree or injunction shall have been enacted, entered, promulgated or
enforced by any United States court or Governmental Authority of competent
jurisdiction which prohibits the consummation of the Merger and shall be in
effect; (d) the Merger Agreement shall have been approved and adopted by the
affirmative vote of the holders of the required percentage(s) of each of the
outstanding classes of KKR capital stock, in each case, in accordance with the
DGCL; (e) KKR, FRI and Merger-Sub shall have obtained all consents, approvals,
authorizations and permits required from third parties and any Governmental
Authority necessary for the consummation of the transactions contemplated by
the Merger Agreement, except for those consents, approvals, authorizations and
permits which the failure to obtain would not reasonably be expected to result
in a Material Adverse Effect on FRI or KKR, as the case may be; and (f) KKR
shall have received from Sutro a bring-down opinion dated within two business
days of the date of this Proxy Statement/Prospectus confirming their financial
fairness opinion.
The obligation of FRI to effect the Merger is further subject to the
satisfaction at or prior to the Effective Time of the following conditions,
unless waived by FRI: (a) the representations and warranties of KKR set forth
in the Merger Agreement shall be true and correct in all material respects
(except for representations and warranties that contemplate a Material Adverse
Effect or Material Adverse Change, which shall be true and correct as written)
as of the date of the Merger Agreement and (except to the extent such
representations speak as of an earlier date) as of the Effective Time as
though made on and as of the Effective Time, except for changes contemplated
by the Merger Agreement; (b) KKR shall have performed and complied, in all
material respects, with all obligations and covenants required to be performed
or complied with by it under the Merger Agreement at or prior to the Effective
Time; (c) FRI shall have received an officer's certificate substantially in
the form contemplated by the Merger Agreement; (d) FRI shall have received
from Latham & Watkins or other counsel to KKR acceptable to FRI, an opinion
substantially in the form contemplated by the Merger Agreement; (e) from the
date of the Merger Agreement through the Effective Time, KKR shall not have
suffered a Material Adverse Change; (f) the sale of the Hamlet Shares to FRI-
MRD shall have been completed, and such shares shall be owned by FRI-MRD free
and clear of any and all Liens imposed by any action or inaction of KKR or any
KKR Subsidiary; (g) the KKR Notes shall have been repaid in full; and (h) the
aggregate liquidation preference of the outstanding shares of Series B
Convertible Preferred Stock shall not exceed $100,000, and the holders of such
outstanding shares of Series B Convertible Preferred Stock shall only be
entitled to the certain limited rights contemplated by the Merger Agreement.
The obligation of KKR to effect the Merger is further subject to the
satisfaction at or prior to the Effective Time of the following conditions,
unless waived by KKR: (a) the representations and warranties of FRI set forth
in the Merger Agreement shall be true and correct in all material respects
(except for representations and warranties that contemplate a Material Adverse
Effect or Material Adverse Change, which shall be true and correct as written)
already specified as of the date of the Merger Agreement and (except to the
extent such representations speak as of an earlier date) as of the Effective
Time as though made on and as of the Effective Time, except for changes
contemplated by the Merger Agreement; (b) FRI shall have performed and
complied, in all material respects, with all obligations and covenants
required to be performed or complied with by it under the Merger Agreement at
or prior to the Effective Time; (c) the Board of Directors of FRI shall have
been reconstituted as of the Effective Time as contemplated by the Merger
Agreement; (d) KKR shall have received from Skadden, Arps, Slate, Meagher &
Flom LLP, or other counsel to FRI acceptable to KKR, an opinion substantially
in the form contemplated by the Merger Agreement; (e) from the date of the
Merger Agreement through the Effective Time, FRI shall not have suffered a
Material Adverse Change; (f) the opinion from Latham & Watkins, dated ,
1998, to the effect that the Merger will constitute a reorganization within
the meaning of section 368(a) of the Code shall not have been withdrawn or
modified in any material respect as a result of a change in Applicable Law or
a change in the underlying facts; (g) the FRI Shares shall be approved
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for quotation on the Nasdaq National Market; and (h) the sale of the Hamlet
Shares to FRI-MRD shall have been completed resulting in the receipt by KKR of
cash in an amount not less than $20 million.
TERMINATION
The Merger Agreement provides that it may be terminated at any time prior to
the Effective Time, whether before or after approval of the matters presented
in connection with the Merger by the stockholders of KKR: (a) by mutual
written consent of KKR and FRI; (b) by either KKR or FRI, if the Merger shall
not have been consummated before December 18, 1998 (unless the failure to
consummate the Merger by such date shall be due to the action or failure to
act of the party seeking to terminate); (c) by either KKR or FRI, if any
permanent injunction or other order of a court or other competent authority
preventing the consummation of the Merger shall have become final and
nonappealable; (d) by either FRI or KKR if, at the meeting of KKR stockholders
called to act on the Merger Agreement (including any adjournment or
postponement thereof), the requisite vote of the KKR stockholders shall not
have been obtained; or (e) by either KKR or FRI, if KKR's Board of Directors
shall have withdrawn or modified or changed (including by amendment to this
Proxy Statement/Prospectus) in a manner adverse to FRI or Merger-Sub its
approval or recommendation of the Merger Agreement or the Merger.
AMENDMENT AND WAIVER
The Merger Agreement may be amended by FRI or KKR at any time before or
after approval of the matters presented in connection with the Merger to the
stockholders of KKR but, after any such approvals, no amendment shall be made
that by law requires further approvals by such stockholders without such
further approvals. The Merger Agreement may not be amended except by an
instrument in writing signed on behalf of each of FRI and KKR thereto.
At any time prior to the Effective Time, FRI and KKR may, to the extent
legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of the other parties to the Merger Agreement,
(b) waive any inaccuracies in the representations and warranties of the other
parties hereto contained in the Merger Agreement, or in any document delivered
pursuant thereto and (c) waive compliance with any of the agreements or
conditions contained therein by the other parties thereto. Any agreement on
the part of FRI or KKR to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.
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RELATED AGREEMENTS AND OTHER MATTERS
The following is a summary of the material terms of agreements related to
the Merger Agreement, to the extent they are not already summarized above.
SUCH SUMMARIES ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO SUCH
AGREEMENTS.
BRIDGE LOAN AGREEMENT
Pursuant to the Merger Agreement, FRI-MRD Corporation ("FRI-MRD"), a wholly
owned subsidiary of FRI, entered into a Bridge Loan Agreement (the "Bridge
Loan Agreement") with KKR and certain of its subsidiaries. On June 22, 1998,
pursuant to the Bridge Loan Agreement, FRI-MRD made a secured loan of
$3,000,000 (the "Loan") to Hamlet, a wholly owned subsidiary of KKR.
The unpaid principal amount of the Loan, all accrued and unpaid interest
thereon, and all other obligations thereunder are due on the Maturity Date.
"Maturity Date" means the Effective Time; provided, that if the Merger
Agreement is terminated
(a) due to a material breach by FRI-MRD, Maturity Date means the earlier
of (i) June 9, 2000 and (ii) the date on which KKR enters into certain
agreements with respect to an Acquisition Proposal (as defined in the
Bridge Loan Agreement),
(b) because the Merger has not been consummated before December 18, 1998
and certain consents to be obtained by FRI have not been obtained, Maturity
Date means June 9, 2000,
(c) because the requisite vote of KKR's stockholders is not obtained,
Maturity Date means June 9, 1999,
(d) because KKR's Board of Directors withdraws, modifies or changes its
approval or recommendation of the Merger Agreement or the Merger, Maturity
Date means 30 days after such termination, and
(e) for any other reason, Maturity Date means 60 days after such
termination.
If the Maturity Date is determined pursuant to clause (e) above, Hamlet must
repay $1.0 million principal amount of the Loan and all accrued and unpaid
interest thereon on the thirtieth day after the date on which the Merger
Agreement is terminated. If the Maturity Date is determined pursuant to clause
(b) above, the principal amount of the Loan shall be reduced by $2.0 million
on the date on which the Merger Agreement is terminated (with the reduction
constituting a forgiveness of such principal).
Hamlet may at any time and from time to time to prepay, without penalty, the
Loan in whole or in part, subject to prior notice.
The Loan bears interest at an annual rate equal to the Prime Rate (as
defined in the Bridge Loan Agreement); provided, however, that if the Maturity
Date is extended pursuant to clauses (c) or (d) above, the Loan shall, from
and after the date on which the Merger Agreement is terminated, bear interest
at an annual rate of interest equal to the Prime Rate plus 3%.
The Bridge Loan Agreement contains certain covenants that restrict the
ability of Hamlet and its subsidiaries to, among other things, (i) incur debt,
(ii) permit liens to exist, (iii) make any fundamental changes, (iv) make
restricted payments and investments, (v) enter into transactions with
affiliates and (vi) enter into certain restrictive agreements. All of these
limitations are subject to various qualifications.
HAMLET STOCK PURCHASE AGREEMENT
On June 9, 1998, KKR entered into the Hamlet Stock Purchase Agreement (the
"Hamlet Purchase Agreement") with FRI-MRD providing for the sale of all of the
outstanding capital stock of Hamlet (the "Hamlet Shares") to FRI-MRD
immediately prior to the consummation of the Merger for a cash purchase price
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of $22.2 million (the "Hamlet Acquisition"). The purchase price for the Hamlet
Shares will be financed by the issuance of the New MRD Notes. See "--New
Indebtedness--New Senior 14% Secured Discount Notes due 2002." KKR will use a
portion of the proceeds from such sale to repay the KKR Notes. The closing of
the Hamlet Acquisition is subject to customary closing conditions, including
the satisfaction of the conditions set forth in the Merger Agreement. In
addition, if the Effective Time of the Merger does not occur within twenty-
four hours of the closing of the Hamlet Acquisition, FRI-MRD shall have the
right to terminate and rescind the Hamlet Acquisition. In such event, KKR
shall pay to FRI-MRD the purchase price received by KKR in the Hamlet
Acquisition and the Hamlet Shares shall be sold back to KKR.
NEW INDEBTEDNESS
New 14% Senior Secured Discount Notes due 2002. On June 9, 1998, FRI-MRD
entered into a Note Agreement pursuant to which FRI-MRD agreed to issue $24.0
million of its 14% Senior Secured Discount Notes (the "New MRD Notes") for
cash in an amount that provides a yield to July 31, 1999 of 14% per annum. The
New MRD Notes are due on January 24, 2002, and accrete at a rate of 14% per
annum until July 31, 1999. After July 31, 1999, interest will be payable in
cash semi-annually at the rate of 14% per annum with the first cash interest
payment due on January 31, 2000. The New MRD Notes are redeemable by FRI-MRD,
in whole or in part, on or before January 23, 2001, at a price of 105% of the
accreted value thereof, or after January 23, 2001, at a price of 102.5% of the
accreted value thereof. The New MRD Notes contain restrictive covenants,
including limitations on (i) the incurrence of certain indebtedness and liens,
(ii) the ability to make certain restricted payments, (iii) certain mergers,
consolidations and asset sales, (iv) certain transactions with affiliates and
(v) the issuance of any equity securities of Hamlet. Proceeds from the sale of
the New MRD Notes will be used exclusively to purchase, and thereafter will be
secured by, all of the outstanding Hamlet Shares. The closing of the sale of
the New MRD Notes is subject to customary closing conditions, including the
consummation of the Hamlet Acquisition.
Amendment to 15% Senior Discount Notes. On June 9, 1998, FRI-MRD and the
holders of its existing 15% Senior Discount Notes (the "Existing MRD Notes")
entered into a First Amendment to the Note Agreement governing the Existing
MRD Notes (the "First Amendment"). Pursuant to the First Amendment, upon the
closing of the Merger, the Existing MRD Notes will be amended to, among other
things, permit (i) the issuance of the New MRD Notes, (ii) the consummation of
the Hamlet Acquisition and the Merger and (iii) an increase in the amount of
borrowings available under the five-year, $35 million Credit Facility with
Foothill Capital Corporation ("Foothill") by up to $20.0 million.
Amendment to Foothill Credit Facility. On June 9, 1998, FRI-MRD, El Torito
Restaurants, Inc., Chi-Chi's, Inc. and Foothill entered into Amendment Number
Four to Loan and Security Agreement (the "Foothill Amendment"). The Foothill
Amendment permits, among other things, (i) an increase in the amount of
borrowings available under the Foothill Credit Facility from $35.0 million to
$55.0 million, (ii) the consummation of the transactions under the Bridge Loan
Agreement, (iii) the issuance of the New MRD Notes and (iv) the consummation
of the Hamlet Acquisition and the Merger. Although the amendments set forth in
clauses (i) and (ii) above became effective upon execution of the Foothill
Amendment, the additional borrowings under the Foothill Credit Facility only
will become available after the consummation of the Hamlet Acquisition and the
Merger and then only on a pro rata basis as each mortgage on the real property
securing the Foothill Facility is amended to reflect the increase in the
maximum amount. The amendments set forth in clauses (iii) and (iv) above are
subject to customary closing conditions, including consummation of the Merger
and the payment of a consent fee in the amount of $100,000. In connection with
the execution of the Foothill Amendment, Foothill earned a line increase fee
of $500,000, of which $150,000 was paid upon execution of the Foothill
Amendment and $350,000 is due upon consummation of the Hamlet Acquisition and
the Merger.
1998 STOCK INCENTIVE PLAN
On , 1998, the FRI Board of Directors adopted, and the FRI
stockholders approved, the Koo Koo Roo Enterprises, Inc. 1998 Stock Incentive
Plan (the "1998 Stock Incentive Plan"). The 1998 Stock
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Incentive Plan will be administered by the Compensation Committee of the Board
of Directors of the Company (the "Committee") upon establishment thereof, and
by the Board of Directors of FRI or the Company, as applicable, prior to such
time. The 1998 Stock Incentive Plan provides for the grant of incentive stock
options intended to qualify as such under section 422 of the Code, non-
qualified stock options, stock appreciation rights, performance shares,
deferred stock and restricted stock to officers, employees, directors,
consultants and advisors of the Company and its subsidiaries. The 1998 Stock
Incentive Plan permits the Board of Directors of the Company or FRI, as
applicable, or the Committee, as the case may be, to select eligible persons
to receive awards and to determine certain terms and conditions of such
awards, including the vesting schedule and exercise price of each award, and
whether such award shall accelerate upon the occurrence of a change in control
of the Company or FRI, as applicable. Under the 1998 Stock Incentive Plan,
Options to purchase common stock may be granted with an option exercise price
that is less than the then current market value of such stock. Under the 1998
Stock Incentive Plan, awards covering no more than 100% of the shares reserved
for issuance under the 1998 Stock Incentive Plan may be granted to any
participant in any one year. A total of shares of common stock
are reserved for issuance under the 1998 Stock Incentive Plan.
The 1998 Stock Incentive Plan may be amended, suspended or terminated at any
time. However, the maximum number of shares that may be sold or issued under
the 1998 Stock Incentive Plan may not be increased, nor may the class of
persons eligible to participate in the 1998 Stock Incentive Plan may not be
altered, nor may the maximum option period be extended without the approval of
the Company's stockholders; provided, however, that adjustments to the number
of shares subject to the 1998 Stock Incentive Plan and to individual awards
thereunder and/or to the exercise price of awards previously granted are
permitted without stockholder approval upon the occurrence of certain events
affecting the capital structure of the Company. With respect to any other
amendments to the 1998 Stock Incentive Plan, the Board of Directors of the
Company or FRI, as applicable, or the Committee may, in its discretion,
determine that any such amendment shall become effective only upon the
approval by the stockholders of the Company or FRI, as applicable, if the
Board of Directors of the Company or FRI, as applicable, or the Committee
determines that such approval may be advisable, such as for the purpose of
obtaining or retaining any statutory or regulatory benefits under federal or
state securities law, federal or state tax laws or any other laws or for the
purpose of satisfying applicable stock exchange listing requirements.
SHARES TO BE OUTSTANDING AT CLOSING; FRI STOCK DIVIDEND
Prior to the consummation of the Merger, FRI will declare and pay a stock
dividend (the "FRI Stock Dividend") to the holders of the existing shares of
FRI Common Stock, which will be calculated to provide that the holders of FRI
Common Stock and options will hold 67% of the shares of Company Common Stock
to be outstanding (on a fully diluted basis, but excluding shares reserved for
issuance pursuant to the 1998 Stock Incentive Plan and all outstanding options
and warrants to purchase KKR Common Stock at or above $5.00 per share)
immediately following the Merger. Immediately following the FRI Stock
Dividend, there will be approximately 120.8 million shares of FRI Common Stock
issued and outstanding on a fully diluted basis.
APOLLO WARRANT
It is presently anticipated that immediately prior to the record date for
the FRI Stock Dividend, Apollo will contribute its Warrant (the "Apollo
Warrant") to purchase 111,111 shares of FRI's Common Stock, exercisable at
$240 per share, in exchange for 15,000 additional shares of FRI Common Stock.
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THE SPECIAL MEETING
TIMES AND PLACES; PURPOSES
This Proxy Statement/Prospectus is being furnished to stockholders of KKR in
connection with the solicitation of proxies by the KKR Board from holders of
KKR Common Stock for use at the Special Meeting to be held on September ,
1998, at at a.m., local time, and at any
postponement or adjournment thereof. At the Special Meeting, holders of KKR
Common Stock will be asked to consider and vote upon (i) the Merger Proposal
and (ii) such other matters, if any, as may properly come before the Special
Meeting.
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
The KKR Board has fixed the close of business on August , 1998 as the
record date for determining the holders of KKR Common Stock entitled to notice
of, and to vote at, the Special Meeting (the "Record Date"). Only holders of
record of KKR Common Stock at the close of business on the Record Date will be
entitled to notice of, and to vote at, the Special Meeting.
At the close of business on the Record Date, shares of KKR Common
Stock were issued and outstanding and were held by approximately
holders of record. Holders of record of KKR Common Stock are entitled to one
vote per share on any matter that may properly come before the
Special Meeting. Votes may be cast at the Special Meeting in person or by
proxy. See "--Proxies."
The presence at the Special Meeting, either in person or by proxy, of the
holders of a majority of the outstanding KKR Common Stock entitled to vote is
necessary to constitute a quorum of the KKR Common Stock in order to transact
business at the Special Meeting. Abstentions of shares that are present at the
Special Meeting and broker non-votes (i.e., shares held by brokers in street
name that are not entitled to a vote at the Special Meeting due to the absence
of specific instructions from the beneficial owners thereof) are counted for
the purpose of determining the presence of a quorum for the transaction of
business. In the event that sufficient shares of KKR Common Stock are not
present at the Special Meeting, such meeting may be adjourned in order to
solicit additional proxies.
The affirmative vote of the holders of a majority of the outstanding shares
of KKR Common Stock is required to approve and adopt the Merger Agreement.
Under applicable Delaware law, in determining whether the proposal to approve
and adopt the Merger Agreement has received the requisite number of
affirmative votes, abstentions and broker non-votes will have the same effect
as a vote AGAINST the proposal.
As of the close of business on the Record Date, KKR's directors and
executive officers may be deemed to be the beneficial owners of approximately
105,000 outstanding shares (excluding shares underlying stock options) of KKR
Common Stock (representing approximately less than 1% of the voting power of
the KKR Common Stock). It is expected that such executive officers and
directors of KKR will vote for approval of the Merger Agreement.
KKR knows of no matters to be presented at the Special Meeting, other than
those included in the notice to the KKR stockholders. Should any other matter
requiring a vote of stockholders arise, including a question of adjourning the
meeting, the persons named in the respective proxies will vote thereon
according to their best judgment in what they consider the best interests of
KKR and its stockholders. The enclosed proxies confer discretionary authority
to take action with respect to any additional matters which may come before
the meeting.
THE KKR BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, HAS DETERMINED THAT
THE MERGER IS IN THE BEST INTERESTS OF KKR AND ITS STOCKHOLDERS AND RECOMMENDS
THAT KKR STOCKHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT
AND THE MERGER.
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ACCOUNTANTS
Representatives of BDO Seidman LLP will be present at the Special Meeting,
will have the opportunity to make a statement if they desire to do so, and
will be available to respond to appropriate questions from stockholders.
PROXIES
Shares of KKR Common Stock represented by properly executed proxies received
in time for the Special Meeting will be voted at the Special Meeting in the
manner specified on such proxies. Proxies that are properly executed but that
do not contain voting instructions will be voted FOR approval of the Merger
Agreement. It is not expected that any matter other than approval of the
Merger Agreement will be brought before the Special Meeting; however, if other
matters are properly presented, the persons named in such proxy will have
authority to vote in accordance with their judgment on any other such matter,
including without limitation, any proposal to adjourn the meeting or otherwise
concerning the conduct of the meeting.
The grant of a proxy on the enclosed KKR proxy card does not preclude a
stockholder from voting in person at the Special Meeting. A common stockholder
may revoke a proxy at any time prior to its exercise by: (i) delivering, prior
to the Special Meeting, to the Corporate Secretary of KKR a written notice of
revocation bearing a later date or time than the proxy; (ii) delivering to the
Corporate Secretary of KKR a duly executed proxy bearing a later date or time
than the revoked proxy; or (iii) attending the Special Meeting and voting in
person. Attendance at the Special Meeting will not by itself constitute
revocation of a proxy. KKR will not adjourn the Special Meeting for a period
of time long enough to require the setting of a new record date for such
meeting. If an adjournment occurs, it will have no effect on the ability of
KKR common stockholders of record as of the Record Date to exercise their
voting rights or to revoke any previously delivered proxies. Stockholders who
hold their shares of KKR Common Stock in street name must follow their
broker's directions to vote their shares.
KKR will bear the cost of solicitation of proxies from its common
stockholders. In addition to solicitation by mail, the directors, officers and
employees of KKR and its subsidiaries may solicit proxies from common
stockholders of KKR by telephone, other electronic means or in person.
Arrangements will also be made with brokerage houses and other custodians,
nominees and fiduciaries for the forwarding of solicitation material to the
beneficial owners of stock held of record by such persons, and KKR will
reimburse such custodians, nominees and fiduciaries for their reasonable out-
of-pocket expenses in connection therewith.
In addition, KKR has retained to assist KKR in the solicitation of
proxies from common stockholders in connection with the Special Meeting.
will receive a base fee of $ as compensation for its services and
reimbursement of its reasonable out-of-pocket expenses in connection
therewith. KKR has agreed to indemnify against certain liabilities
arising out of or in connection with its engagement.
KKR common stockholders should not send in any common stock certificates
with their proxy cards. A transmittal form with instructions for the surrender
of common stock certificates will be mailed by the Company to former KKR
common stockholders as soon as practicable after the consummation of the
Merger.
WHETHER OR NOT YOU ARE ABLE TO ATTEND THE SPECIAL MEETING YOUR VOTE BY PROXY
IS VERY IMPORTANT. KKR STOCKHOLDERS ARE ENCOURAGED TO MARK, SIGN AND DATE THE
ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE
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DIRECTORS AND MANAGEMENT OF THE COMPANY FOLLOWING THE MERGER
DIRECTORS
The Company Board will consist of: Kevin S. Relyea (Chairman of the Board),
Peter P. Copses, David B. Kaplan, Antony P. Ressler, Lee A. Iacocca and A.
William Allen, III. In addition, after the Effective Time, the Company will
seek to identify one or more additional directors to be added to the Board.
COMMITTEES OF THE BOARD OF DIRECTORS
After the Effective Time, the Company Board will form an Audit Committee and
a Compensation Committee.
COMPENSATION OF DIRECTORS
It is currently contemplated that, as compensation for their services,
outside directors, including Messrs. , will receive options
to purchase up to 50,000 shares of Company Common Stock and an annual fee of
$25,000. In addition, it is currently anticipated that Mr. Iacocca will be
granted options to purchase an additional shares of Company Common
Stock in connection with his agreement to serve on the Company Board.
TERMINATION OF VCU PLAN
It is currently anticipated that shortly following the Effective Time, the
VCU Plan will be terminated and in connection therewith participants therein
will receive, in the aggregate, (i) approximately $3.0 to $5.0 million in cash
and (ii) fully vested options (under the 1998 Stock Incentive Plan) to
purchase up to 3% of the fully diluted Company Common Stock immediately
following the Effective Time (including shares to be reserved for issuance
under the 1998 Stock Incentive Plan), in each case based on the application of
certain formulae contained in the VCU Plan. Such options will have a per share
strike price not less than the greater of $.50 and 25% of the fair market
value of a share of Company Common Stock on the date of issuance. Such options
will not be exercisable for a period of 90 days after issuance, or if later,
January 2, 1999. The Company expects to record compensation expense of
approximately $10.2 to $12.2 million in connection with the termination of the
VCU Plan. Such expense consists of the $3.0 to $5.0 million cash payment and
approximately $7.2 million for the intrinsic value of the stock options to be
granted in connection with such termination.
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COMPARISON OF STOCKHOLDERS' RIGHTS
The rights of KKR stockholders are currently governed by the DGCL, the
Restated Certificate of Incorporation, as amended, and the Amended and
Restated Bylaws of KKR (the "KKR Certificate" and the "KKR Bylaws,"
respectively). The rights of Company stockholders after the Merger will be
governed by the DGCL, the Company Certificate and the Company Bylaws. In
accordance with the Merger Agreement, at the Effective Time, each issued and
outstanding share of KKR Common Stock (other than treasury shares) will be
converted into the right to receive one share of Company Common Stock.
Accordingly, upon consummation of the Merger, the rights of all stockholders
of the Company (including former KKR stockholders who become stockholders of
the Company in the Merger) will be governed by the DGCL, the Company
Certificate and the Company Bylaws. The following are summaries of the
material differences between the current rights of KKR stockholders and the
rights of stockholders of the Company after the Merger.
The following discussion is not intended to be complete and is qualified by
reference to the KKR Certificate, the KKR Bylaws, the Company Certificate and
the Company Bylaws. Copies of these documents are incorporated by reference
herein and will be sent to stockholders of KKR upon request. See "Where You
Can Find More Information."
Unless otherwise set forth herein, the material rights of KKR stockholders
and stockholders of the Company after the Merger are identical.
AUTHORIZED CAPITAL
KKR. The authorized capital stock of KKR consists of 75 million shares of
common stock, $.01 par value per share, and 5 million shares of preferred
stock, par value $.01 per share, of which 1,350,000 shares have been
designated as Series A Convertible Preferred Stock and 400,000 shares have
been designated as Series B Convertible Preferred Stock. As of the Record Date
there were shares of KKR Common Stock outstanding, no shares of
Series A Convertible Preferred Stock outstanding and shares of
Series B Convertible Preferred Stock outstanding.
The Company. After the Merger, the total authorized capital stock of the
Company will consist of 300 million shares of common stock, par value $.01 per
share, of which it is projected there will be approximately 174 million shares
outstanding and 50 million shares of preferred stock, par value $.01 per
share, of which there will be none outstanding.
BOARD OF DIRECTORS
KKR. Pursuant to the KKR Bylaws, the number of directors of KKR may not be
less than 4 nor more than 10, with the precise number to be fixed from time to
time exclusively pursuant to a resolution adopted by a majority of the total
number of directors if there were no vacancies (the "Whole Board"). Currently
the KKR Board consists of five directors. A whole number of directors equal to
at least a majority of the Whole Board constitutes a quorum for the
transaction of business. The act of the majority of the directors present at a
meeting at which a quorum is present is the act of the KKR Board. Special
meetings of the KKR Board are called at the request of the Chairman of the KKR
Board, the President or a majority of the KKR Board.
The Company. Pursuant to the Company Bylaws, the number of directors of the
Company will not be less than 3 nor more than 9 directors, the exact number of
which shall be determined from time to time by resolution adopted by the
Company Board. Initially after the Merger, the Company Board will consist of
7 directors. A majority of the entire board shall constitute a quorum for the
transaction of business. The act of the majority of the directors present at a
meeting at which a quorum is present shall be the act of the Company Board.
Special meetings of the Company Board shall be called at the request of the
Chairman of the Board, the Vice Chairman, if there be one, or a majority of
the Company Board.
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COMMITTEES OF THE BOARD OF DIRECTORS
KKR. Pursuant to the KKR Bylaws, the KKR Board may, by a majority vote of
all of the KKR directors, designate committees of the KKR Board. The KKR Board
currently has an Executive Committee, an Audit Committee and a Stock Awards
and Compensation Committee.
The Company. Pursuant to the Company Bylaws, the Company Board may designate
one or more committees, each committee to consist of one or more members of
the Company Board. After the Effective Time, the Company Board will form an
Audit Committee and a Compensation Committee.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
KKR. Pursuant to the KKR Bylaws, newly created directorships and vacancies
on the KKR Board may be filled by a majority of the remaining KKR directors,
though less than a quorum, and directors so chosen shall hold office for a
term expiring at the next annual meeting of stockholders and until such
director's successor shall have been duly elected and qualified.
The Company. The Company Bylaws provide that vacancies may be filled only by
a majority of the directors then in office, though less than a quorum, or by a
sole remaining director, and the directors so chosen shall hold office until
the next annual election and until their successors are duly elected and
qualified, or until their earlier death, resignation or removal.
REMOVAL OF DIRECTORS
KKR. The KKR Bylaws provide that any director, or the entire KKR Board, may
be removed from office at any time, with or without cause by the affirmative
vote of the holders of at least 75% of the outstanding voting stock, voting
together as a single class.
The Company. The Company Certificate and Company Bylaws are silent on the
removal of directors. As it applies to the Company, section 141(k) of the DGCL
provides that any director or the entire board of directors may be removed,
with or without cause, by the holders of a majority of the shares then
entitled to vote in the election of directors.
OFFICERS
KKR. Pursuant to the KKR Bylaws, the KKR Board shall elect a Chairman of the
Board (to be chosen from the KKR directors), a President, a Secretary, a
Treasurer, and such other officers as may be appointed by the KKR Board. Under
the KKR Bylaws, an officer may be removed at any time by the affirmative vote
of a majority of the KKR Whole Board whenever in their judgment, the best
interests of KKR would be served thereby.
The Company. Pursuant to the Company Bylaws, the officers of the Company
shall be chosen by the Company Board and shall consist of at least a
President, a Secretary and a Treasurer. The Board of Directors, in its
discretion, may also choose a Chairman of the Board of Directors (who must be
a director) and one or more Vice Presidents, Assistant Secretaries, Assistant
Treasurers and other officers. Any officer elected by the Company Board may be
removed at any time by the affirmative vote of a majority of the Company
Board.
SPECIAL MEETINGS OF STOCKHOLDERS
KKR. Pursuant to the KKR Bylaws, a special meeting of KKR stockholders may
be called by a majority of the KKR Whole Board or by the Chairman of the
Board.
The Company. Pursuant to the Company Bylaws, special meetings of Company
stockholders may be called by either (i) the Chairman of the Board of
Directors, (ii) the President, (iii) any Vice President, (iv) the
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Secretary or (v) any Assistant Secretary, and shall be called by any such
officer at the request in writing of (i) the Company Board, (ii) a committee
of the Company Board that has been duly designated by the Company Board and
whose powers and authority include the power to call such meetings or (iii)
stockholders owning a majority of the capital stock of the Company issued and
outstanding and entitled to vote.
QUORUM AT STOCKHOLDER MEETINGS
KKR. Pursuant to the KKR Bylaws, the holders of a majority of the issued and
outstanding stock entitled to vote thereat, present in person or by proxy,
shall constitute a quorum at all KKR stockholder meetings.
The Company. Pursuant to the Company Bylaws, the holders of a majority of
the capital stock issued and outstanding and entitled to vote thereat, present
in person or represented by proxy, shall constitute a quorum at all meetings
of the stockholders for the transaction of business. A quorum, once
established, shall not be broken by the withdrawal of enough votes to leave
less than a quorum.
STOCKHOLDER ACTION BY WRITTEN CONSENT
KKR. The KKR Bylaws provide stockholder action by written consent must
follow the DGCL. Pursuant to Section 228 of the DGCL stockholders may take any
action without a meeting, without prior notice and without a vote, upon the
written consent of stockholders having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted.
The Company. Pursuant to the Company Bylaws, any action required or
permitted to be taken at any annual or special meeting of stockholders of the
Company may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted.
ADVANCE NOTICE OF STOCKHOLDER-PROPOSED BUSINESS OR DIRECTOR NOMINATIONS AT
ANNUAL MEETINGS
KKR. Pursuant to the KKR Bylaws, nominations of persons for election to the
KKR Board and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (a) pursuant to KKR's notice
of meeting delivered pursuant to the KKR Bylaws (as described below), (b) by
or at the direction of the KKR Board or (c) by any stockholder of KKR who is
entitled to vote at the meeting, who complied with the notice procedures set
forth below and who was a stockholder of record at the time such notice was
delivered to the Secretary of KKR.
For nominations or other business to be properly brought before an annual
meeting by a stockholder pursuant to clause (c) above, the stockholder must
have given timely notice thereof in writing to the secretary of KKR at the
principal executive offices of KKR not less than sixty days nor more than
ninety days prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than thirty days or delayed by more than sixty
days from such anniversary date, notice by the stockholder, to be timely, must
be so delivered not earlier than the ninetieth day prior to such annual
meeting and not later than the close of business on the later of the sixtieth
day prior to such annual meeting or the tenth day following the day on which
public announcement of the date of such meeting is first made. Such
stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (the "Exchange Act") (including such person's written consent
to being named in the proxy statement as a nominee and to serving as a
director if elected); (b) as to any other business that the stockholder
proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any
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material interest in such business of such stockholder and the beneficial
owner, if any, on whose behalf the proposal is made; (c) as to the stockholder
giving the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made (i) the name and address of such stockholder,
as they appear on KKR's books, and of such beneficial owner and (ii) the class
and number of shares of KKR Common Stock which are owned beneficially and of
record by such stockholder and such beneficial owner.
Notwithstanding anything in the second sentence of the prior paragraph to
the contrary, in the event that the number of directors to be elected to the
KKR Board is increased and there is no public announcement naming all of the
nominees for director or specifying the size of the increased KKR Board made
by KKR at least seventy days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice required by the Bylaws shall
also be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to the Secretary
of KKR at the principal executive offices of KKR not later than the close of
business on the tenth day following the day on which such public announcement
is made by KKR.
The Company. Pursuant to the Company Bylaws, no business may be transacted
at an annual meeting of stockholders, other than business that is either (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Company Board (or any duly authorized committee thereof),
(b) otherwise properly brought before the annual meeting by or at the
direction of the Company Board (or any duly authorized committee thereof) or
(c) otherwise properly brought before the annual meeting by any stockholder of
the Company (i) who is a stockholder of record on the date of the giving of
the notice and on the record date for the determination of stockholders
entitled to vote at such annual meeting and (ii) who complies with the notice
procedures set forth below. Nominations of persons for election to the Company
Board may be made at any annual meeting of stockholders, or at any special
meeting of stockholders called for the purpose of electing directors, (a) by
or at the direction of the Company Board (or any duly authorized committee
thereof) or (b) by any Company stockholder (i) who is a stockholder of record
on the date of the giving of the notice and on the record date for the
determination of stockholders entitled to vote at such meeting and (ii) who
complies with the notice procedures set forth herein.
For business to be properly brought before an annual meeting by a
stockholder or for a stockholder to nominate a person for the Company Board,
such stockholder must have given timely notice thereof in proper written form
to the Secretary of the Company. To be timely, a stockholder's notice to the
Secretary must be delivered to or mailed and received at the principal
executive offices of the Company not less than sixty (60) days nor more than
ninety (90) days prior to the anniversary date of the immediately preceding
annual meeting of stockholders; provided, however, that in the event that the
annual meeting is called for a date that is not within thirty (30) days before
or after such anniversary date, notice by the stockholder in order to be
timely must be so received not later than the close of business on the tenth
(10th) day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure of the date of the annual meeting
was made, whichever first occurs.
For proposed business to be in proper written form, a stockholder's notice
to the Secretary of the Company must set forth as to each matter such
stockholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the annual meeting
and the reasons for conducting such business at the annual meeting, (ii) the
name and record address of such stockholder, (iii) the class or series and
number of shares of capital stock of the Company which are owned beneficially
or of record by such stockholder, (iv) a description of all arrangements or
understandings between such stockholder and any other person or persons
(including their names) in connection with the proposal of such business by
such stockholder and any material interest of such stockholder in such
business and (v) a representation that such stockholder intends to appear in
person or by proxy at the annual meeting to bring such business before the
meeting.
For director nominations to be in proper written form, a stockholder's
notice to the secretary of the Company must set forth (a) as to each person
whom the stockholder proposes to nominate for election as a director (i) the
name, age, business address and residence address of the person, (ii) the
principal occupation or
55
<PAGE>
employment of the person, (iii) the class or series and number of shares of
capital stock of the Company which are owned beneficially or of record by the
person and (iv) any other information relating to the person that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for election of directors
pursuant to Section 14 of the Exchange Act, and the rules and regulations
promulgated thereunder; and (b) as to the stockholder giving the notice (i)
the name and record address of such stockholder, (ii) the class or series and
number of shares of capital stock of the Company which are owned beneficially
or of record by such stockholder, (iii) a description of all arrangements or
understandings between such stockholder and each proposed nominee and any
other person or persons (including their names) pursuant to which the
nomination(s) are to be made by such stockholder, (iv) a representation that
such stockholder intends to appear in person or by proxy at the meeting to
nominate the persons named in its notice and (v) any other information
relating to such stockholder that would be required to be disclosed in a proxy
statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of
the Exchange Act and the rules and regulations promulgated thereunder. Such
notice must be accompanied by a written consent of each proposed nominee to
being named as a nominee and to serve as a director if elected.
AMENDMENT OF GOVERNING DOCUMENTS
KKR. The KKR Certificate provides that KKR reserves the right at any time
and from time to time to amend, alter, change or repeal any provision
contained in the KKR Certificate or a preferred stock designation, and all
rights, preferences and privileges of whatsoever nature conferred upon
stockholders, directors or any other persons whomsoever by and pursuant to the
KKR Certificate are granted subject to this right to amend; provided, however,
that any amendment or repeal of the provisions of the KKR Certificate dealing
with indemnification or dealing with director liability shall not adversely
affect any right or protection existing thereunder immediately prior to such
amendment or repeal; and provided further that no preferred stock designation
shall be amended after the issuance of any shares of the series of preferred
stock created thereby, except in accordance with the terms of such preferred
stock designation and the requirements of applicable law. The KKR Certificate
provides that the affirmative vote of the holders of at least 75% of the then
outstanding voting stock, voting together as a single class, shall be required
to amend, repeal or adopt any provision inconsistent with the provisions of
the KKR Certificate dealing with the number and election of directors;
otherwise the KKR Certificate may be amended in the manner prescribed by
statute. The KKR Bylaws may be amended or repealed by the KKR Board at any
regular meeting, or at any special meeting if the proposed amendment is
contained in the notice of such meeting. Such amendment or repeal shall
require the affirmative vote of the holders of at least 75% of the voting
power of the outstanding capital stock of KKR, or of a majority of the KKR
Board, as the case may be.
The Company. The Company Certificate allows the Company to amend the
Certificate in the manner prescribed by statute. Section 242 of the DGCL
provides that a certificate of incorporation can be revised by a resolution of
the board of directors that receives stockholder approval. The Company Bylaws
provide that they may be altered, amended or repealed, in whole or in part by
the Company stockholders or the Company Board, provided, however, that notice
of such alteration, amendment, or repeal be contained in the notice of such
meeting of stockholders or the Company Board as the case may be. All such
amendments must be approved by either the holders of a majority of the
outstanding capital stock entitled to vote thereon or by a majority of the
entire Company Board.
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DESCRIPTION OF COMPANY CAPITAL STOCK FOLLOWING THE MERGER
The following description of the material terms of the authorized capital
stock of the Company does not purport to be complete and is qualified in its
entirety by reference to the Company Certificate and Company Bylaws. For
information as to how to obtain the Company Certificate and Company Bylaws,
see "Where You Can Find More Information."
AUTHORIZED CAPITAL STOCK
The authorized capital stock of the Company after the Merger will consist of
300 million shares of Company Common Stock and 50 million shares of preferred
stock of the Company ("Company Preferred Stock"). As of the Record Date there
were shares of FRI Common Stock outstanding, shares of FRI Common
Stock reserved for issuance and no shares of preferred stock of FRI
outstanding or reserved for issuance. Based upon the number of shares of FRI
Common Stock and KKR Common Stock issued and outstanding on the Record Date
and giving effect to the shares of Company Common Stock to be issued to FRI
stockholders and KKR stockholders pursuant to the Merger Agreement, there
would be approximately 174 million shares of Company Common Stock and no
shares of Company Preferred Stock outstanding immediately following
consummation of the Merger.
COMMON STOCK
Under the Company Certificate and Delaware law, the holders of Company
Common Stock have no preemptive rights and the Company Common Stock has no
redemption, sinking fund, or conversion privileges, except as set forth below.
The holders of Company Common Stock are entitled to one vote for each share
held on any matter submitted to the stockholders and do not have the right to
cumulate their votes in the election of directors. All corporate action
requiring stockholder approval, unless otherwise required by law, the Company
Certificate or the Company Bylaws, must be authorized by a majority of the
votes cast. Approval of only a majority of the outstanding voting shares is
required to effect (i) an amendment to the Company Certificate, (ii) a merger
or consolidation, and (iii) a disposition of all or substantially all of the
Company's assets. A majority of the directors on the Company Board, as well as
a majority of the outstanding voting shares, have the ability to amend the
Company Bylaws.
In the event of a liquidation, each share of Company Common Stock is
entitled to share ratably in the distribution of remaining assets after
payment of all debts, subject to the prior rights in liquidation of any share
of Company Preferred Stock issued. Holders of shares of Company Common Stock
are entitled to share ratably in such dividends as the Company Board, in its
discretion, may validly declare from funds legally available therefor, subject
to the prior rights of holders of shares of Company Preferred Stock as may be
outstanding from time to time. Certain restrictions on the payment of
dividends are imposed under the Foothill Credit Facility and certain other of
its debt instruments. See "Risk Factors--Lack of Dividends; Restrictions on
Payments of Dividends."
PREFERRED STOCK
No shares of Company Preferred Stock have been issued. The Company
Certificate authorizes the Company Board to provide from time to time for the
issuance of the shares of Company Preferred Stock and by resolution to
establish the terms of each such series, including (i) the number of shares of
the series and the designation thereof, (ii) the rights in respect of
dividends on the shares, (iii) liquidation rights, (iv) redemption rights, (v)
the terms of any purchase, retirement or sinking fund to be provided for the
shares of the series, (vi) terms of conversion, if any, (vii) restrictions,
limitations and conditions, if any, on issuance of indebtedness of the
Company, (viii) voting rights; and (ix) any other preferences and other rights
and limitations not inconsistent with law, the Company Certificate, or any
resolution of the Company Board.
The issuance of Company Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could
among other things adversely affect the rights of holders of
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<PAGE>
Company Common Stock, and, under certain circumstances, make it more difficult
for a third party to gain control of the Company. In the event that shares of
Company Preferred Stock are issued and convertible into shares of Company
Common Stock the holders of Company Common Stock may experience dilution. See
"Risk Factors--Possible Negative Impact of Blank Check Preferred Stock
Issuances."
PREEMPTIVE RIGHTS
The holders of Company Common Stock have no preemptive rights.
DELAWARE ANTITAKEOVER STATUTE
The Company is subject to the "business combination" statute of the DGCL
(Section 203). In general, such statute prohibits a publicly held Delaware
corporation from engaging in various "business combination" transactions with
any "interested stockholder" for a period of three years after the date of the
transaction in which the person became an "interested stockholder," unless (i)
such transaction is approved by the Company Board prior to the date the
"interested stockholder" obtains such status, (ii) upon consummation of the
transaction the "interested stockholder" beneficially owned at least 85% of
the voting stock of the corporation outstanding at the time the transaction
commenced, excluding for the purposes of determining the number of shares
outstanding those shares owned by (a) persons who are directors and also
officers and (b) employee stock plans in which the employee participants do
not have the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer or (iii) the "business
combination" is approved by the Company Board and authorized at an annual or
special meeting of the stockholders by the affirmative vote of the holders of
at least 66 2/3% of the outstanding voting stock which is not owned by the
"interested stockholder." A "business combination" includes mergers, asset
sales and other transactions resulting in a financial benefit to an
"interested stockholder." An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the corporation's voting Stock. The statute could prohibit or
delay merger or other takeover or change in control attempts with respect to
the Company and, accordingly, may discourage attempts to acquire the Company.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services LLC is the registrar and transfer agent for
the Company Common Stock.
NASDAQ NATIONAL MARKET LISTING; DELISTING AND DEREGISTRATION OF KKR COMMON
STOCK
It is a condition to the consummation of the Merger that shares of Company
Common Stock that will be issued in connection with the Merger and the other
transactions contemplated by the Merger Agreement be listed on the Nasdaq
National Market, subject to official notice of issuance. If the Merger is
consummated, the Company Common Stock will be listed on the Nasdaq National
Market and the KKR Common Stock will cease to be listed on the Nasdaq National
Market and will be deregistered under the Exchange Act. The Company has agreed
not to delist the Company Common Stock for at least five years following the
Effective Time unless the Company Board determines in good faith such listing
is not in the best interests of the stockholders of the Company.
58
<PAGE>
EXPERTS
The consolidated financial statements and schedule of FRI appearing in FRI's
Annual Report on Form 10-K for the year ended December 28, 1997 have been
audited by KPMG Peat Marwick LLP, independent certified public accountants, as
set forth in their report, included therein and incorporated herein by
reference. Such consolidated financial statements and schedule are
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements and related financial statement
schedules of KKR and its subsidiaries incorporated in this Proxy
Statement/Prospectus by reference from KKR's Annual Report on Form 10-K for
the year ended December 31, 1997 have been audited by BDO Seidman LLP,
independent certified public accountants, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Company Common
Stock to be issued pursuant to the Merger will be passed upon for FRI by
Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California, FRI's
outside legal counsel. Certain legal matters with respect to the federal
income tax consequences of the Merger will be passed upon for KKR by Latham &
Watkins, Los Angeles, California, KKR's outside legal counsel.
SUBMISSION OF FUTURE STOCKHOLDER PROPOSALS
Due to the contemplated consummation of the Merger, KKR does not currently
expect to hold a 1998 Annual Meeting of Stockholders because, following the
Merger, KKR will not be a publicly traded company. In the event that the
Merger is not consummated and such a meeting is held, to be eligible for
inclusion in KKR's proxy statement and form of proxy relating to that meeting,
proposals of stockholders intended to be presented at such meeting must be
received by KKR before the annual meeting. In the event that the date of the
meeting is advanced by more than 30 days or delayed by more than 60 days from
the anniversary date of last year's meeting, stockholder proposals to be
timely must be received not earlier than 90 days prior to the meeting and not
later than the date 60 days before the meeting or the tenth day following
public disclosure of the date of the meeting.
WHERE YOU CAN FIND MORE INFORMATION
KKR files annual, quarterly and current reports, proxy statements and other
information and FRI files annual, quarterly and current reports and other
information with the SEC. You may read and copy any reports, statements or
other information that the companies file at the SEC's public reference rooms
in Washington, D.C., New York, New York and Chicago, Illinois. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference rooms.
FRI and KKR public filings are also available to the public from commercial
document retrieval services and at the Internet World Wide Web site maintained
by the SEC at "http://www.sec.gov."
FRI has filed the Registration Statement to register with the SEC the shares
of Company Common Stock to be issued to KKR stockholders in the Merger. This
Proxy Statement/Prospectus is a part of the Registration Statement and
constitutes a prospectus of FRI and a proxy statement of KKR for the Special
Meeting.
As allowed by SEC rules, this Proxy Statement/Prospectus does not contain
all the information that stockholders can find in the Registration Statement
or the exhibits to the Registration Statement.
59
<PAGE>
The SEC allows FRI and KKR to "incorporate by reference" information into
this Proxy Statement/Prospectus, which means that the companies can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is deemed to
be part of this Proxy Statement/Prospectus, except for any information
superseded by information contained directly in the Proxy Statement/Prospectus.
This Proxy Statement/Prospectus incorporates by reference the documents set
forth below that FRI and KKR have previously filed with the SEC. These
documents contain important information about the companies and their financial
condition.
<TABLE>
<S> <C>
FRI SEC Filings (File No. 33-14051) Period
- ----------------------------------- ------
Annual Report on Form 10-K Year ended December 28, 1997.
Quarterly Report on Form 10-Q Quarter ended March 29, 1998.
Current Report on Form 8-K June 16, 1998.
KKR SEC Filings (File No. 0-19548) Period
- ---------------------------------- ------
Annual Report on Form 10-K Including Year ended December 31, 1997.
Amendment No. 1 Thereto (filed on
April 30, 1998)
Quarterly Report on Form 10-Q Quarter ended March 31, 1998.
Current Reports on Form 8-K February 5, 1998, March 5, 1998, April 3, 1998 and
June 11, 1998.
</TABLE>
FRI and KKR incorporate by reference additional documents that either FRI or
KKR may file with the SEC between the date of this Proxy Statement/Prospectus
and the date of the Special Meeting. These include periodic reports, such as
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K, as well as proxy statements.
FRI has supplied all information contained or incorporated by reference in
this Proxy Statement/ Prospectus relating to FRI, and KKR has supplied all such
information relating to KKR.
If you are a stockholder, KKR may have sent you some of the documents
incorporated by reference, but you can obtain any of them through KKR or FRI,
as the case may be, or the SEC or the SEC's Internet World Wide Web site
described above. Documents incorporated by reference are available from the
companies without charge, excluding all exhibits unless specifically
incorporated by reference as exhibits in this Proxy Statement/Prospectus.
Stockholders may obtain documents incorporated by reference in this Proxy
Statement/Prospectus by requesting them in writing or by telephone from the
appropriate company at the following addresses:
Family Restaurants, Inc.
18831 Von Karman Avenue
Irvine, California 92612
(949) 757-7900
Koo Koo Roo, Inc.
11075 Santa Monica Boulevard, Suite 225
Los Angeles, California 90025
(310) 479-2080
If you would like to request documents from either company, please do so by
August , 1998 to receive them before the Special Meeting. If you request any
incorporated documents, they will be mailed to you by first-class mail, or
other equally prompt means, within one business day of receipt of your request.
60
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DELIVERY OF FRI REPORTS WITH PROXY STATEMENT/PROSPECTUS
The FRI 1997 Form 10-K and March 29, 1998 Form 10-Q (collectively, the "FRI
Reports") have each been reproduced in their entirety, and are being delivered
to the KKR common stockholders, in connection with this Proxy
Statement/Prospectus. Each of the FRI Reports is bound with this Proxy
Statement/Prospectus and appears as an Exhibit after the Annexes hereto.
You should rely only on the information contained or incorporated by
reference in this Proxy Statement/Prospectus to vote your shares at the
Special Meeting. KKR and FRI have not authorized anyone to provide you with
information that is different from what is contained in this Proxy
Statement/Prospectus. This Proxy Statement/Prospectus is dated August ,
1998. You should not assume that the information contained in the Proxy
Statement/Prospectus is accurate as of any date other than that date, and
neither the mailing of this Proxy Statement/Prospectus to stockholders nor the
issuance of Company Common Stock in the Merger shall create any implication to
the contrary.
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ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
FAMILY RESTAURANTS, INC.
FRI-SUB, INC.
AND
KOO KOO ROO, INC.
DATED AS OF JUNE 9, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
ARTICLE I
<C> <S> <C>
DEFINITIONS.............................................................. A-1
SECTION 1.1 Definitions................................................. A-1
ARTICLE II
THE MERGER............................................................... A-6
SECTION 2.1 The Merger.................................................. A-6
SECTION 2.2 Effects of the Merger....................................... A-6
SECTION 2.3 Certificate of Incorporation and By-Laws.................... A-6
SECTION 2.4 Directors................................................... A-6
SECTION 2.5 Officers.................................................... A-6
SECTION 2.6 Conversion of Shares........................................ A-6
SECTION 2.7 Stock Plans................................................. A-7
SECTION 2.8 Warrants.................................................... A-8
SECTION 2.9 Tax Treatment............................................... A-8
ARTICLE III
EXCHANGE OF SHARES....................................................... A-9
SECTION 3.1 Surrender of Certificates................................... A-9
SECTION 3.2 No Dividends................................................ A-9
SECTION 3.3 Return to FRI............................................... A-9
SECTION 3.4 Dissenting Shares........................................... A-10
SECTION 3.5 No Further Transfer......................................... A-10
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FRI AND MERGER-SUB..................... A-10
SECTION 4.1 Organization, Standing and Qualification.................... A-10
SECTION 4.2 Capitalization.............................................. A-11
SECTION 4.3 Authorization of Agreement and Other Documents.............. A-11
SECTION 4.4 No Violation................................................ A-12
SECTION 4.5 Absence of Certain Changes.................................. A-12
SECTION 4.6 Insurance................................................... A-13
SECTION 4.7 Financial Statements; Full Disclosure....................... A-13
SECTION 4.8 Suppliers; Franchisees...................................... A-13
SECTION 4.9 Intellectual Property....................................... A-14
SECTION 4.10 Litigation.................................................. A-14
SECTION 4.11 Labor Matters............................................... A-14
SECTION 4.12 Taxes....................................................... A-15
SECTION 4.13 Employee Benefit Plans; ERISA............................... A-16
SECTION 4.14 Change in Control........................................... A-17
SECTION 4.15 Governmental Consents....................................... A-17
SECTION 4.16 Title to Properties......................................... A-17
SECTION 4.17 Environmental Matters....................................... A-17
SECTION 4.18 Books and Records........................................... A-18
SECTION 4.19 Contracts; No Defaults...................................... A-18
SECTION 4.20 Form S-4; KKR Proxy Statement............................... A-18
</TABLE>
A-i
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
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ARTICLE V
<C> <S> <C>
REPRESENTATIONS AND WARRANTIES OF KKR.................................... A-19
SECTION 5.1 Organization, Standing and Qualification.................... A-19
SECTION 5.2 Capitalization.............................................. A-19
SECTION 5.3 Authorization of Agreement and Other Documents.............. A-20
SECTION 5.4 No Violation................................................ A-20
SECTION 5.5 Absence of Certain Changes.................................. A-20
SECTION 5.6 Insurance................................................... A-21
SECTION 5.7 Financial Statements; Full Disclosure....................... A-22
SECTION 5.8 Suppliers; Franchisees...................................... A-22
SECTION 5.9 Intellectual Property....................................... A-22
SECTION 5.10 Litigation.................................................. A-22
SECTION 5.11 Labor Matters............................................... A-23
SECTION 5.12 Taxes....................................................... A-24
SECTION 5.13 Employee Benefit Plans; ERISA............................... A-24
SECTION 5.14 Change in Control........................................... A-25
SECTION 5.15 Governmental Consents....................................... A-26
SECTION 5.16 Title to Properties......................................... A-26
SECTION 5.17 Environmental Matters....................................... A-26
SECTION 5.18 Books and Records........................................... A-27
SECTION 5.19 Contracts; No Defaults...................................... A-27
SECTION 5.20 Form S-4; Proxy Statement................................... A-28
ARTICLE VI
COVENANTS OF FRI......................................................... A-28
SECTION 6.1 Sale of the Hamlet Shares to FRI-MRD........................ A-28
SECTION 6.2 Loan to KKR................................................. A-28
SECTION 6.3 Conduct of Business Pending Merger.......................... A-28
SECTION 6.4 No Solicitation............................................. A-30
SECTION 6.5 Amendment of Certificate and Bylaws; Recapitalization....... A-30
SECTION 6.6 Nasdaq National Market Quotation............................ A-30
SECTION 6.7 Indemnification and Insurance............................... A-30
SECTION 6.8 Employee Benefits; Severance................................ A-31
SECTION 6.9 Filing of Form S-8.......................................... A-32
ARTICLE VII
COVENANTS OF KKR......................................................... A-32
SECTION 7.1 Sale of the Hamlet Shares to FRI-MRD........................ A-32
SECTION 7.2 Loan to KKR................................................. A-32
SECTION 7.3 Conduct of Business Pending Merger.......................... A-32
SECTION 7.4 No Solicitation............................................. A-34
SECTION 7.5 KKR Stockholder Approval.................................... A-34
SECTION 7.6 Affiliates.................................................. A-34
SECTION 7.7 Employee Benefit Matters.................................... A-34
ARTICLE VIII
MUTUAL COVENANTS......................................................... A-35
SECTION 8.1 Access to Information....................................... A-35
SECTION 8.2 Preparation of Form S-4 and the KKR Proxy Statement......... A-35
</TABLE>
A-ii
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
SECTION 8.3 Reasonable Efforts........................................ A-35
SECTION 8.4 Brokers or Finders........................................ A-35
SECTION 8.5 Notification of Certain Matters........................... A-36
SECTION 8.6 Further Information....................................... A-36
SECTION 8.7 Fees and Expenses......................................... A-36
SECTION 8.8 Accountants' Letters...................................... A-37
SECTION 8.9 Public Announcements...................................... A-37
ARTICLE IX
CONDITIONS.............................................................. A-37
Conditions to Each Party's Obligation to Effect the
SECTION 9.1 Merger.................................................... A-37
SECTION 9.2 Conditions of Obligations of FRI.......................... A-38
SECTION 9.3 Conditions of Obligations of KKR.......................... A-38
ARTICLE X
TERMINATION AND AMENDMENT............................................... A-39
SECTION 10.1 Termination............................................... A-39
SECTION 10.2 Effect of Termination..................................... A-39
SECTION 10.3 Amendment................................................. A-40
SECTION 10.4 Extension; Waiver......................................... A-40
ARTICLE XI
MISCELLANEOUS........................................................... A-40
SECTION 11.1 Notices................................................... A-40
SECTION 11.2 Descriptive Headings...................................... A-41
SECTION 11.3 Counterparts.............................................. A-41
SECTION 11.4 Entire Agreement; Assignment.............................. A-41
SECTION 11.5 Governing Law............................................. A-41
SECTION 11.6 Specific Performance...................................... A-41
SECTION 11.7 Parties in Interest....................................... A-41
SECTION 11.8 Attorneys' Fees........................................... A-41
SECTION 11.9 Survival of Representations and Warranties................ A-41
SECTION 11.10 Obligation of FRI......................................... A-41
SECTION 11.11 Validity.................................................. A-41
EXHIBITS
Exhibit 1.1--Terms of Permitted Transactions
Exhibit 2.1--Form of Certificate of Merger
Exhibit 6.1--Form of Hamlet Stock Purchase Agreement
Exhibit 6.2--Form of Bridge Loan Agreement
Exhibit 6.5A1--Forms of FRI Amended Certificate of Incorporation
Exhibit 6.5A2--Form of FRI Amended Bylaws
Exhibit 6.5B--Form of further Amendment to FRI Certificate of
Incorporation
Exhibit 7.6--Form of Rule 145 Affiliate Agreement
Exhibit 8.8--Form of Joint Press Release
Exhibit 9.2(c)--Form of KKR's Officer's Certificate
Exhibit 9.2(d)--Form of Opinion of Counsel to KKR
Exhibit 9.3(c)--Reconstituted Board of Directors of FRI
Exhibit 9.3(d)--Form of FRI's Officer's Certificate
Exhibit 9.3(e)--Form of Opinion of Counsel to FRI
</TABLE>
A-iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of June 9, 1998, by
and among Family Restaurants, Inc., a Delaware corporation ("FRI"), FRI-Sub,
Inc., a Delaware corporation and indirect wholly owned subsidiary of FRI
("Merger-Sub") and Koo Koo Roo, Inc., a Delaware corporation ("KKR").
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. The following definitions when used herein shall
have the following meanings:
"Acquisition Proposal" means with respect to any Person, any offer or
proposal for, or any indication of interest in, the acquisition of a material
equity interest in, or substantial portion of the assets of, any such Person,
including by way of a merger, consolidation or other business combination
involving such Person, or any of its Subsidiaries; provided, however, that, as
used in this Agreement, the term "Acquisition Proposal" shall not apply to (i)
any Permitted Transaction or (ii) in the case of KKR, the primary issuance, in
a single transaction or series of related transactions, of equity securities
that results in gross proceeds to KKR of not more than $20 million.
"Adjusted KKR Shares" means the sum of (a) the aggregate number of KKR
Common Shares outstanding immediately prior to the Effective Time on a fully
diluted, as converted basis (assuming the exercise or conversion of (i) all
options and warrants with an exercise price of less than $5.00, (ii) all other
securities convertible into or exchangeable for KKR Common Shares, including
without limitation, the KKR Preferred Shares (assuming such Preferred Shares
are converted as provided for in Section 2.6(b) hereof) and (iii) all other
rights to purchase or receive KKR Common Shares and (b) the aggregate number
of KKR Common Shares that would be required to be issued, assuming KKR elected
to issue additional KKR Common Shares rather than pay cash, pursuant to
Section 4.6 of the Hamlet Purchase Agreement assuming that the Fair Market
Value (as such term is defined in the Hamlet Purchase Agreement) of a KKR
Common Share on the Valuation Date (as such term is defined in the Hamlet
Purchase Agreement) is calculated based on the average closing price of the
KKR Common Shares on the Nasdaq National Market for the ten trading days
immediately preceding (but not including) the Effective Date.
"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.
"Applicable Agreement" means with respect to any Person, any bond,
debenture, note or any other evidence of indebtedness, indenture, mortgage,
deed of trust, lease, contract, agreement, license or instrument to which such
Person or any of its Subsidiaries is a party or by which any of their
respective properties or assets is bound.
"Applicable Employment Law" means any Applicable Law governing or respecting
employment or the termination thereof, employment practices, terms and
conditions of employment, wages, hours of work, occupational safety and
health, immigration, family and medical leave, or discriminatory, wrongful or
tortious conduct in connection with the employment relationship.
"Applicable Law" means any law, statute, ordinance, judgment, injunction,
decree, writ, regulation, notice requirement, rule or order of any court or
Governmental Authority, and any other governmental restrictions or
requirements, including (without limitation) pursuant to any permit or
license.
A-1
<PAGE>
"Audit" means any audit, assessment of Taxes, other examination by any Tax
Authority or proceeding or appeal of such proceeding relating to Taxes.
"Benefit Plan" means each bonus, deferred compensation, incentive
compensation, stock purchase, stock option, employment, consulting, severance
or termination pay, hospitalization or other medical, life or other insurance,
supplemental unemployment benefits, profit-sharing, pension or retirement
plan, program, agreement or arrangement, and each other "employee benefit
plan" (within the meaning of Section 3(3) of ERISA), whether formal or
informal, written or oral and whether legally binding or not, that is
sponsored, maintained or contributed to or was sponsored, maintained or
contributed to at any time by a Person, any Subsidiary or any ERISA Affiliate
of any Person or Subsidiary within the last six years, for the benefit of any
employee, former employee, consultant, officer, or director of such Person,
other than any Multiemployer Plan.
"Certificate" means a certificate that immediately prior to the Effective
Time represented KKR Shares.
"Certificate of Merger" means the certificate of merger providing for the
Merger in substantially the form attached as Exhibit 2.1 hereto.
"Charter Documents" means with respect to any Person, the articles or
certificate of incorporation and by-laws, partnership agreement or other
organizational documents of such Person.
"Closing" shall have the meaning given in Section 2.1.
"COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended.
"Code" means the Internal Revenue Code of 1986 and the regulations
promulgated thereunder, in each case as amended from time to time, and any
successor statute, law or regulations.
"Commission" means the Securities and Exchange Commission.
"Common Merger Consideration" shall have the meaning given in Section 2.6.
"Credit Facility" means the Loan and Security Agreement by and among FRI and
its Subsidiaries, and Foothill Capital Corporation, dated as of January 10,
1997, as amended, a copy of which has been provided to KKR.
"DGCL" means the Delaware General Corporation Law.
"Dissenting Shares" shall have the meaning given in Section 3.5.
"Documents" means this Agreement and all other agreements or instruments
attached as exhibits hereto.
"DOL" means the United States Department of Labor or any similar state
agency.
"EEOC" means the United States Equal Employment Opportunity Commission or
any similar state agency.
"Effective Time" means the date and time the Merger becomes effective in
accordance with the DGCL.
"Environmental Claim" means any claim, action, cause of action,
investigation or notice (written or oral) by any Person alleging potential
liability (including, without limitation, potential liability for
investigatory costs, cleanup costs, governmental response costs, natural
resources damages, property damages, personal injuries, or penalties) arising
out of or resulting from (a) the presence, or release into the environment, of
any Materials of Environmental Concern at any location, whether or not owned
or operated by such Persons or any of its Subsidiaries, or (b) any violation
of any Environmental Law.
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"Environmental Law" means any Applicable Law relating to pollution or the
protection of human health or the environment or to emissions, discharges,
releases or threatened releases of any Materials of Environmental Concern into
the environment (including without limitation ambient air, surface water,
ground water, or land), or otherwise relating to the manufacture, processing,
distribution, generation, treatment, storage, disposal, transport or handling
of any Materials of Environmental Concern.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder.
"ERISA Affiliate" means with respect to any Person, any other Person that is
a member of such Person's controlled group, or under common control with such
Person, within the meaning of the Code, and includes any trade or business
whether or not incorporated, that together with such Person would be deemed a
"single employer" within the meaning of Section 4001 of ERISA.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the Commission thereunder.
"Exchange Agent" means a bank or trust company that FRI shall designate,
subject to the prior approval of KKR, which approval shall not be unreasonably
withheld, for purposes of exchanging KKR Shares in accordance herewith.
"Expenses" means all reasonable out-of-pocket expenses and fees (including,
without limitation, fees and expenses payable to Libra Investments, Inc. for
arranging or providing financial advice with respect to the Merger and all
reasonable fees and expenses of counsel, accountants, experts and consultants
to FRI) actually incurred by FRI or on its behalf in connection with the
consummation of the transactions contemplated by this Agreement and the other
Documents; provided, that the amount of such Expenses shall not exceed $2
million.
"Financial Statements" means (i) with respect to FRI, the financial
statements, together with the notes thereto, contained in the FRI SEC
Documents and (ii) with respect to KKR, the financial statements, together
with the notes thereto, contained in the KKR SEC Documents.
"Form S-4" means the registration statement on Form S-4 to be filed with the
Commission in connection with the issuance of FRI Shares in the Merger,
including any amendment or supplement thereto.
"FRI Dividend" means a number of FRI Shares such that, immediately following
the FRI dividend, the ratio (rounded to two places) of (a) the number of
Adjusted KKR Shares to (b) the sum of (i) the number of Adjusted KKR Shares
and (ii) the aggregate number of FRI Shares outstanding on a fully diluted
basis equals .33.
"FRI-MRD" means FRI-MRD Corporation, a Delaware corporation and a wholly
owned subsidiary of FRI.
"FRI SEC Documents" means all forms, reports and documents filed by, or
required under Applicable Law to be filed by, FRI or any of its Subsidiaries
with the Commission since December 31, 1996, including all exhibits thereto.
"FRI Shares" means shares of common stock, par value $.01 per share, of FRI.
"FRI Subsidiaries" means the Subsidiaries of FRI, each of which is
identified on Schedule 4.1 hereof.
"GAAP" means United States generally accepted accounting principles,
consistently applied.
"Governmental Authority" means any Federal, state, local or foreign court or
governmental, administrative or regulatory authority or agency.
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"Hamlet Purchase Agreement" means that certain Asset Purchase Agreement by
and between Hamburger Hamlet Restaurants Inc., Hamburger Hamlets Inc.,
Hamburger Hamlet of Sunset, Inc., Davilew Corporation, Valley Hamlet
Corporation, Hamburger Hamlet of Brentwood, Inc., Hamburger Hamlet of
Pasadena, Inc., Hamburger Hamlet of Hollywood, Inc., Hamburger Hamlet of
Sepulveda, Inc., Hamburger Hamlet of Palm Springs, Inc., Hamburger Hamlet of
Georgetown Square, Inc., 109 South Saint Asaph Street, Inc., Hamburger Hamlet
of Agoura Hills, Inc., Hamburger Hamlet of Gaithersburg, Inc., Hamburger
Hamlet of Crystal City, Inc., Hamburger Hamlet of Valencia, Inc. and Koo Koo
Roo, Inc., dated March 21, 1997.
"Hamlet Shares" means all of the issued and outstanding shares of capital
stock of The Hamlet Group, Inc., a California corporation.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
"Intellectual Property" means with respect to any Person, all trademarks,
service marks, trade names, fictitious business names, copyrights, patents,
patent applications, inventions, know-how and trade secrets, in each case
owned, used or licensed by, or required to permit the operation of, such
Person or any of its Subsidiaries.
"IRS" means the Internal Revenue Service.
"KKR Common Shares" means the shares of common stock, par value $.01 per
share, of KKR.
"KKR Notes" means the $12 million aggregate principal amount of 13% Senior
Notes due August 15, 2000, of KKR.
"KKR Preferred Shares" means the shares of Series A Convertible Preferred
Stock, par value $.01 per share, and Series B Convertible Preferred Stock, par
value $.01 per share, of KKR.
"KKR SEC Documents" means all forms, reports and documents filed by, or
required under Applicable Law to be filed by, KKR or any of the KKR
Subsidiaries with the Commission since December 31, 1996, including all
exhibits thereto.
"KKR Proxy Statement" means the proxy statement of KKR relating to the
annual or special meeting of stockholders of KKR at which such stockholders
will be asked to approve and adopt this Agreement and the Merger.
"KKR Shares" means the KKR Common Shares and the KKR Preferred Shares.
"KKR Subsidiaries" means the Subsidiaries of KKR, each of which is
identified on Schedule 5.1 hereof.
"Lien" means any mortgage, pledge, lien, encumbrance, charge or adverse
claim, or a security interest of any kind (including, without limitation, any
conditional sale or other title retention agreement or any lease in the nature
thereof).
"Material Adverse Change" means with respect to any Person, the occurrence
of any event or condition that has, or could reasonably be expected to have, a
Material Adverse Effect.
"Material Adverse Effect" means with respect to any Person, a material
adverse effect on (i) the financial position, results of operations, revenues,
assets, liabilities, or business of such Person and its Subsidiaries, taken as
a whole, (ii) the ability of such Person or any of its Affiliates to perform
its material obligations hereunder or under any other Document or (iii) the
validity or enforceability of this Agreement or any other Document; provided,
that, in the case of KKR, a fluctuation or fluctuations in the trading price
of the KKR Common Shares occurring other than as a result of KKR's willful
misconduct cannot, in and of itself, constitute a Material Adverse Effect.
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"Materials of Environmental Concern" shall mean any regulated quantity of
asbestos in any form, urea formaldehyde, lead-based paint, PCBs, radon gas,
crude oil or any fraction thereof, all regulated forms of natural gas,
petroleum products or by-products, any regulated radioactive substance, any
regulated toxic, infectious, reactive, corrosive, ignitable or flammable
chemical or chemical compound and any other regulated hazardous substance,
material or waste (as defined in or for purposes of any Environmental Law),
whether solid, liquid or gas.
"Merger" means the merger of Merger-Sub with and into KKR.
"Merger Consideration" means the Common Merger Consideration and the
Preferred Merger Consideration.
"Multiemployer Plan" means with respect to any Person, on any date, a
multiemployer plan defined as such in Section 3(37) of ERISA to which
contributions have been made at any time during the six-year period ending on
or prior to such date, by such Person or any of its ERISA Affiliates and that
is covered by Title IV of ERISA.
"NASD" means the National Association of Securities Dealers, Inc.
"NLRB" means the National Labor Relations Board or any similar state agency.
"OSHA" means the United States Occupational Safety and Health Administration
or any similar state agency.
"Permitted Liens" shall have the meaning given thereto in the Credit
Facility.
"Permitted Transactions" shall mean the transactions contemplated by this
Agreement including, without limitation, the declaration of the FRI Dividend
pursuant to Section 6.5, and in the case of KKR, any transaction between KKR
or any KKR Subsidiary, on the one hand, and any other Person, on the other,
providing for (a) the bona fide, arms length sale to such Person of (i) all of
the capital stock of, or substantially all of the assets of, Arrosto Coffee
Company, Inc. or Color Me Mine, Inc., or (ii) owned and operated stores of
Color Me Mine, or (b) payments to landlords in connection with obtaining
consents to the transactions contemplated hereby (and the amendment of leases
to require such payments), in each case substantially on the terms attached
hereto as Exhibit 1.1.
"Person" means any individual, partnership, corporation, limited liability
company, joint venture, association, joint-stock company, trust,
unincorporated organization, government or agency or political subdivision
thereof, or other entity.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Preferred Merger Consideration" shall have the meaning given in Section
2.6.
"Proceeding" means an action, claim, suit or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition).
"Securities Act" means the Securities Act of 1933, as amended, and the rules
and regulations promulgated by the Commission thereunder.
"Subsidiary" means with respect to any Person, (a) a corporation a majority
of whose capital stock with voting power, under ordinary circumstances, to
elect directors is at the time, directly or indirectly, owned by such Person,
by a subsidiary of such Person, or by such Person and one or more subsidiaries
of such Person, (b) a partnership in which such Person or a subsidiary of such
Person is a general partner of such partnership, or (c) any other Person
(other than a corporation) in which such Person, a subsidiary of such Person
or such Person
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and one or more subsidiaries of such Person, directly or indirectly, has (i)
at least a majority ownership interest or (ii) the power to elect or direct
the election of the directors or other governing body of such Person.
"Surviving Corporation" shall have the meaning given in Section 2.1.
"Taxes" means all Federal, state, local and foreign taxes, and other
assessments of a similar nature (whether imposed directly or through
withholding), including any interest, additions to tax, or penalties
applicable thereto.
"Tax Authority" means the Internal Revenue Service and any other domestic or
foreign governmental authority responsible for the administration of any
Taxes.
"Tax Returns" means all Federal, state, local and foreign tax returns,
declarations, statements, reports, schedules, forms and information returns
and any amended Tax Return relating to Taxes.
"ULP" means an unfair labor practice as defined in the National Labor
Relations Act or other Applicable Law.
"WARN Act" means the Worker Adjustment and Retraining Notification Act of
1988, and any successor statute or law thereto.
ARTICLE II
THE MERGER
SECTION 2.1 The Merger. Upon the terms and subject to the conditions hereof,
and in accordance with the relevant provisions of the DGCL (i) Merger-Sub
shall be merged with and into KKR and (ii) the Certificate of Merger shall be
duly prepared, executed and filed by KKR, as the surviving corporation (the
"Surviving Corporation") in the Merger, as promptly as practicable following
the satisfaction or waiver of the conditions set forth in Article IX hereof,
but in no event later than two business days thereafter, unless the parties
hereto shall otherwise agree. Following the Merger, the Surviving Corporation
shall continue under the name Koo Koo Roo, Inc. and the separate corporate
existence of Merger-Sub shall cease. Immediately prior to the filing of
the Certificate of Merger, a closing (the "Closing") shall take place at the
offices of Skadden, Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue,
Los Angeles, California, or such other place and at such time as the parties
shall agree.
SECTION 2.2 Effects of the Merger. The Merger shall have the effects set
forth in Sections 259, 260 and 261 of the DGCL.
SECTION 2.3 Certificate of Incorporation and By-Laws. Subject to Section
6.7, the Certificate of Incorporation and the By-laws of Merger-Sub, in each
case as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation and By-laws of the Surviving Corporation until
duly amended in accordance with applicable law.
SECTION 2.4 Directors. The persons identified on Schedule 2.4 shall be the
initial directors of the Surviving Corporation and shall hold office until
their respective successors are duly elected and qualified in accordance with
the Certificate of Incorporation and By-laws of the Surviving Corporation, or
their earlier death, resignation or removal.
SECTION 2.5 Officers. The persons identified on Schedule 2.5 shall be the
initial officers of the Surviving Corporation and shall serve as the officers
of the Surviving Corporation at the pleasure of the Board of Directors of the
Surviving Corporation.
SECTION 2.6 Conversion of Shares. At the Effective Time, by virtue of the
Merger and without any action on the part of the holders thereof:
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(a) Subject to Section 3.2, each issued KKR Common Share outstanding at the
Effective Time, other than (i) KKR Common Shares to be cancelled in accordance
with Section 2.6(c) hereof and (ii) Dissenting Shares, if any, shall
automatically be converted into and become the right to receive one FRI Share
(the "Common Merger Consideration").
(b) Subject to Section 3.2, each issued KKR Preferred Share outstanding at
the Effective Time, other than (i) KKR Preferred Shares to be canceled in
accordance with Section 2.6(c) hereof and (ii) Dissenting Shares, if any,
shall automatically be converted into the right to receive the number of FRI
Shares that the holder of such KKR Preferred Share would have been entitled to
receive pursuant to Section 2.6(a) had such holder converted such KKR
Preferred Share into KKR Common Shares immediately prior to the Effective Time
in accordance with the terms of the Certificate of Designation of KKR relating
to such KKR Preferred Share (the "Preferred Merger Consideration").
(c) Each share of capital stock of KKR that is held in the treasury of KKR
and each share of capital stock of KKR held by FRI or any FRI Subsidiary shall
be canceled and retired and cease to exist and no consideration shall be
issued in exchange therefor.
(d) The issued and outstanding shares of capital stock of Merger-Sub shall
be converted into and become, in the aggregate, 1,000 fully paid and
nonassessable shares of common stock of the Surviving Corporation, which
thereafter will constitute all of the issued and outstanding capital stock of
the Surviving Corporation.
SECTION 2.7 Stock Plans.
(a) Prior to the Effective Time, the Board of Directors of KKR and the Board
of Directors of FRI (or, if appropriate, a committee thereof) shall adopt
appropriate resolutions and take all other actions necessary, including,
without limitation, amending the KKR Stock Plans (as defined below), to
provide that effective at the Effective Time, the KKR Stock Awards Plan, as
amended, The Koo Koo Roo, Inc. Directors' Stock Option Plan, as amended, the
1997 Stock Option Plan for Restaurant Employees and Management and all other
stock-based compensatory arrangements identified on Schedule 2.7, if any (the
"KKR Stock Plans"), and all outstanding, unexercised stock options (the "KKR
Options") heretofore granted pursuant to the KKR Stock Plans, shall be assumed
by FRI and upon the occurrence of the Effective Time, and without any action
by the holder thereof, such KKR Options shall be converted automatically into
options (the "Roll-over Options") to purchase FRI Shares, on the same terms
and conditions as were applicable under the KKR Stock Plans, in an amount and
at an exercise price as provided below:
(i) the number of FRI Shares to be the subject of the Roll-over Option
shall be equal to the number of KKR Common Shares remaining (as of
immediately prior to the Effective Time) subject to the original KKR
Option; and
(ii) the exercise price per FRI Share under the Roll-over Option shall be
equal to the exercise price per KKR Share under the original KKR Option.
The adjustment provided in this Section 2.7 with respect to any options which
are "incentive stock options" as defined in section 422 of the Code shall be
and is intended to be effected in a manner which is consistent with section
424(a) of the Code. After the Effective Time, each Roll-over Option shall be
exercisable and shall, if not accelerated, vest upon the same terms and
conditions as were applicable to the related KKR Option immediately prior to
the Effective Time (except that, (x) with regard to such Roll-over Option, any
references to KKR shall be deemed, as appropriate, to include FRI and (y) the
vesting of options outstanding under the plans identified on Schedule 2.7 may
be accelerated at the Effective Time).
(b) FRI shall take all corporate action necessary to reserve for issuance a
sufficient number of FRI Shares for delivery pursuant to the KKR Stock Plans
assumed in accordance with this Section 2.7. As soon as practicable after the
Effective Time, (i) FRI shall deliver to the participants in the KKR Stock
Plans appropriate notice setting forth such participants' rights pursuant
thereto including, without limitation, the undertakings made
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in this Section 2.7 and (ii) shall file and use commercially reasonable
efforts to obtain the effectiveness of a registration statement on Form S-8
(or appropriate successor form) (the "Form S-8") with respect to the FRI
Shares subject to Roll-over Options and maintain the current status of such
registration statement and the related prospectus(es) for so long as such
assumed options remain outstanding.
(c) The Board of Directors of each of FRI and KKR shall, prior to the
Effective Time, as appropriate, take appropriate action to approve the deemed
cancellation of the KKR Options and the deemed grant of the Roll-over Options
for purposes of Section 16(b) of the Exchange Act.
SECTION 2.8 Warrants.
(a) Prior to the Effective Time, the Board of Directors of KKR and the Board
of Directors of FRI (or, if appropriate, a committee thereof) shall adopt
appropriate resolutions and take all other actions necessary, including,
without limitation, amending any applicable warrant agreements, to provide
that effective at the Effective Time, all warrants to purchase KKR Common
Shares issued pursuant to the warrant agreements and arrangements set forth on
Schedule 2.8 (the "KKR Warrants"), shall be assumed by FRI and upon the
occurrence of the Effective Time, and without any action by the holder
thereof, such KKR Warrants shall be converted automatically into warrants (the
"Roll-over Warrants") to purchase FRI Shares, on the same terms and conditions
as were applicable under the KKR Warrants, in an amount and at an exercise
price as provided below:
(i) the number of FRI Shares to be the subject of the Roll-over Warrant
shall be equal to the number of KKR Common Shares remaining (as of
immediately prior to the Effective Time) subject to the original KKR
Warrant; and
(ii) the exercise price per FRI Share under the Roll-over Warrant shall
be equal to the exercise price per KKR Share under the original KKR
Warrant.
After the Effective Time, each Roll-over Warrant shall be exercisable and
shall, if not accelerated, vest upon the same terms and conditions (if any) as
were applicable to the related KKR Warrant immediately prior to the Effective
Time (except that, with regard to such Roll-over Warrant, any references to
KKR shall be deemed, as appropriate, to include FRI).
(b) FRI shall take all corporate action necessary to reserve for issuance a
sufficient number of FRI Shares for delivery pursuant to the KKR Warrants
assumed in accordance with this Section 2.8.
(c) The Board of Directors of each of FRI and KKR shall, prior to the
Effective Time, as appropriate, take appropriate action to approve the deemed
cancellation of the KKR Warrants and the deemed grant of the Roll-over
Warrants for purposes of Section 16(b) of the Exchange Act.
SECTION 2.9 Tax Treatment. It is intended that the Merger shall constitute a
tax-free reorganization within the meaning of Section 368(a) of the Code.
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ARTICLE III
EXCHANGE OF SHARES
SECTION 3.1 Surrender of Certificates.
(a) At the Effective Time, FRI shall provide to the Exchange Agent, in trust
for the benefit of the holders of KKR Shares for exchange in accordance with
this Article III, certificates representing the aggregate number of FRI Shares
issuable pursuant to Section 2.6 of this Agreement. As soon as practicable
after the Effective Time, FRI shall cause to be mailed, by first class mail,
to each holder of record of KKR Shares immediately prior to the Effective
Time, a form letter of transmittal for return to the Exchange Agent and
instructions for use in effecting the surrender of Certificates in exchange
for certificates representing FRI Shares and cash in lieu of fractional share
interests, if applicable. Upon surrender of a Certificate to the Exchange
Agent, together with such letter of transmittal, duly completed and executed,
the holder of KKR Shares formerly represented by such Certificate shall be
entitled to receive and shall receive in exchange therefor the Merger
Consideration for each KKR Share formerly represented by such Certificate, and
the Certificate so surrendered shall be canceled.
(b) Until surrendered as contemplated by this Article III, from and after
the Effective Time, FRI shall be entitled to treat each Certificate which has
not been surrendered for exchange (other than Certificates represented by
Dissenting Shares, if any), as evidencing the ownership of the number of full
FRI Shares into which the KKR Shares represented by the Certificate shall have
been converted pursuant to Section 2.6, notwithstanding the failure to
surrender the Certificate. If a certificate representing FRI Shares is to be
issued or a cash payment in lieu of fractional share interests is to be made
to a person other than the one in whose name the Certificate surrendered in
exchange therefor is registered, it shall be a condition to such issuance or
payment that such Certificate so surrendered be properly endorsed (or
accompanied by an appropriate instrument of transfer) and accompanied by
evidence reasonably satisfactory to the Exchange Agent that any applicable
stock transfer or other taxes required by reason of payment to a person other
than the registered holder of such Certificate have been paid or provided for.
(c) If any Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the registered holder of such lost,
stolen or destroyed Certificate in form and substance reasonably acceptable to
FRI and the Exchange Agent and, if requested by FRI, accompanied by a bond in
a reasonable amount satisfactory to FRI and the Exchange Agent, the Exchange
Agent will issue in exchange for such lost, stolen or destroyed Certificate
the Merger Consideration and cash in lieu of fractional share interests
deliverable in respect thereof pursuant to this Agreement.
(d) FRI shall be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any holder of Certificates
such amounts, if any, as it is required to deduct and withhold with respect to
the making of such payment under the Code, or any applicable provision of
state, local or foreign law.
SECTION 3.2 No Dividends. Notwithstanding anything herein to the contrary,
no dividends or other distributions declared or made after the Effective Time
with respect to FRI Shares with a record date after the Effective Time shall
be paid to the holder of FRI Shares represented by any unsurrendered
Certificate until such holder shall surrender such Certificate. Dividends or
other distributions with a record date after the Effective Time payable in
respect of FRI Shares held by the Exchange Agent, if any, shall be held in
trust for the benefit of such holders, without interest, until the time such
Certificates are duly surrendered in accordance with the terms hereof.
SECTION 3.3 Return to FRI. Any FRI Shares exchanged for Certificates within
twelve months after the Effective Time and any dividends and distributions
held by the Exchange Agent for payment or delivery to the holders of
unsurrendered Certificates and unclaimed at the end of such twelve-month
period shall be redelivered or repaid by the Exchange Agent to FRI (which
thereafter shall act as the Exchange Agent), after which time any holder of
Certificates who has not theretofore delivered or surrendered such
Certificates to the Exchange Agent, subject to Applicable Law, may thereafter
surrender such Certificates to FRI in exchange for the Merger
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Consideration and for payment of any such dividends or distributions.
Notwithstanding the foregoing, none of the Exchange Agent, the Surviving
Corporation or any other party hereto shall be liable to a holder of KKR
Shares for any Merger Consideration or dividends or distributions properly
delivered to a public official pursuant to applicable escheat or similar laws.
SECTION 3.4 Dissenting Shares. If appraisal rights are available under the
DGCL to holders of any KKR Shares in connection with the Merger, any issued
and outstanding KKR Shares entitled thereto that have not been voted for
approval of this Agreement and the transactions contemplated hereby and with
respect to which appraisal shall have been properly demanded in accordance
with Section 262 of the DGCL ("Dissenting Shares") shall not be converted into
the right to receive the Merger Consideration and each holder thereof shall
have only such rights as are provided in Section 262 of the DGCL unless and
until such holder withdraws his demand for such appraisal in accordance with
Section 262(e) of the DGCL or otherwise loses his right to such appraisal. If
a holder of Dissenting Shares shall properly withdraw his demand for appraisal
or shall otherwise lose his right to such appraisal, then, as of the Effective
Time or the occurrence of such event, whichever last occurs, such holder's
Dissenting Shares shall cease to be Dissenting Shares and shall be converted
into and represent the right to receive the Merger Consideration without
interest thereon. Prior to the Effective Time, KKR shall give FRI prompt
notice of any written demands for appraisal or withdrawals of demands for
appraisal received by KKR pursuant to Section 262 of the DGCL and, except with
the prior written consent of FRI, which may be given or withheld in its sole
discretion, shall not settle or offer to settle any such demands. Any payment
in respect of Dissenting Shares shall be made solely from the funds of KKR.
SECTION 3.5 No Further Transfer. Following the Effective Time, there shall
be no further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of capital stock of KKR that were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged for the Merger Consideration as provided
in this Article III.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FRI AND MERGER-SUB
FRI and Merger-Sub hereby represent and warrant to KKR as follows:
SECTION 4.1 Organization, Standing and Qualification.
(a) FRI and each of the FRI Subsidiaries (i) is a corporation or other legal
entity duly organized, validly existing and in good standing under the laws of
its jurisdiction of organization; (ii) has all requisite power and authority
to own or lease, and operate its properties and assets, and to carry on its
business as now conducted and as proposed to be conducted; (iii) is duly
qualified or licensed to do business as a foreign corporation or other legal
entity and is in good standing in all jurisdictions in which it owns or leases
property or in which the conduct of its business requires it to so qualify or
be licensed, where the failure to qualify could, singly or in the aggregate,
reasonably be expected to have a Material Adverse Effect on FRI; and (iv) has
obtained all licenses, permits, franchises and other governmental
authorizations necessary to the ownership or operation of its properties or
the conduct of its business except for such failures to obtain that could not,
singly or in the aggregate, reasonably be expected to have a Material Adverse
Effect on FRI. Each FRI Subsidiary along with its jurisdiction of organization
is identified on Schedule 4.1.
(b) Except as set forth on Schedule 4.1(b), none of FRI or any of the FRI
Subsidiaries owns, directly or indirectly, any of the capital stock or other
equity securities of any other Person other than (i) the FRI Subsidiaries and
(ii) less than 100 shares of capital stock of a publicly traded corporation
whose principal business includes the operation of restaurants. All of the
issued and outstanding shares of capital stock of the FRI Subsidiaries are
duly authorized, have been validly issued, fully paid and nonassessable, are
free of preemptive and similar rights, and, except as set forth on Schedule
4.1(b), are, and as of the Closing will be,
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owned by FRI or a FRI Subsidiary free and clear of all Liens other than
Permitted Liens and Liens granted in connection with, and securing obligations
under, the Credit Facility.
SECTION 4.2 Capitalization.
(a) As of the date hereof, the total authorized capital stock of FRI
consists of 1,500,000 shares of common stock, par value $.01 per share,
988,285 shares of which are issued and outstanding and 500,000 shares of
preferred stock, par value $.01 per share, none of which are issued and
outstanding. Immediately following the Effective Time, the authorized capital
stock of FRI will consist of not less than 300 million shares of common stock,
par value $.01 per share, and not less than 50 million shares of preferred
stock, with the exact amount determined by the FRI Board of Directors.
(b) Each share of FRI capital stock that is issued and outstanding (i) has
been duly authorized and validly issued, and (ii) is fully paid and
nonassessable and free of preemptive and similar rights. Each of the FRI
Shares to be issued as Merger Consideration will, as of the Closing Date, (i)
be duly authorized and validly issued, and (ii) be fully paid and
nonassessable and free of preemptive and similar rights.
(c) Except as set forth in this Agreement or as set forth on Schedule
4.2(c), there are no outstanding (i) securities convertible into or
exchangeable for any capital stock of FRI or any FRI Subsidiary, (ii) options,
warrants or other rights to purchase or subscribe for capital stock of FRI or
any FRI Subsidiary or securities convertible into or exchangeable for capital
stock of FRI or any FRI Subsidiary, (iii) contracts, commitments, agreements,
understandings, arrangements, calls or claims of any kind relating to the
issuance of any capital stock of FRI or any FRI Subsidiary, any such
convertible or exchangeable securities or any such options, warrants or rights
or (iv) commitments or obligations to purchase or redeem any shares of capital
stock of any class or equity securities of FRI or any FRI Subsidiary, any such
convertible or exchangeable securities or any such options, warrants or other
rights.
(d) Schedule 4.2(d) sets forth and describes all indebtedness for borrowed
money (including capitalized lease obligations) of FRI and the FRI
Subsidiaries outstanding on the date hereof. Except as set forth on FRI's
Schedules to this Agreement or disclosed in the FRI SEC Documents, neither FRI
nor any of the FRI Subsidiaries has, or immediately following the Closing will
have, any material liabilities of any nature, absolute, accrued, contingent or
otherwise, other than liabilities incurred after the date hereof in a manner
not prohibited by Section 6.3 hereof.
SECTION 4.3 Authorization of Agreement and Other Documents.
(a) The execution and delivery of this Agreement and the other Documents to
which FRI or any FRI Subsidiary is a party, and the performance of their
respective obligations hereunder or thereunder and the consummation of the
transactions contemplated hereby and thereby, have been duly authorized and no
other proceedings on the part of FRI, any of the FRI Subsidiaries or any of
their respective stockholders or Affiliates are necessary to authorize this
Agreement, the Merger or the other Documents. This Agreement is and, as of the
Effective Time, each of the Documents to which FRI or any of the FRI
Subsidiaries is a party will be, a valid and binding obligation of FRI or such
FRI Subsidiary, as the case may be, enforceable in accordance with its terms,
except to the extent that enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or other similar
laws affecting enforcement of creditors' rights generally, and by general
principles of equity (regardless of whether enforcement is considered in a
proceeding at law or in equity).
(b) FRI and each of the FRI Subsidiaries has full power and authority to
execute and deliver each of the Documents to which it is a party, and to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby.
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SECTION 4.4 No Violation.
(a) Neither FRI nor any of the FRI Subsidiaries is (i) in violation of its
respective Charter Documents, or (ii) in default in the performance of any
obligation, agreement or condition contained in an Applicable Agreement, which
default could, singly or in the aggregate, be reasonably expected to have a
Material Adverse Effect on FRI.
(b) The execution and delivery of and the performance by FRI and each FRI
Subsidiary of its obligations under each Document to which it is a party, will
not (i) constitute a breach or violation under the Charter Documents of FRI or
any of the FRI Subsidiaries; (ii) conflict with, violate, constitute a breach
or violation of or a default (with the passage of time or otherwise) under,
require the consent of any Person under, give to others any rights of
termination, amendment, acceleration, redemption, repurchase or cancellation
of, or result in the imposition of a Lien on any of the properties or assets
of FRI or any of the FRI Subsidiaries or an acceleration of indebtedness
pursuant to, any Applicable Agreement; or (iii) constitute a violation of any
Applicable Law, except (A) in the case of clause (ii) above, consents that
have already been obtained or consents identified on Schedule 4.4(b) that FRI
will use commercially reasonable efforts to obtain on or prior to the time
required or (B) in the case of clauses (ii) and (iii) above, such conflicts,
breaches, violations, defaults, terminations, amendments, accelerations,
redemptions, repurchases or creation of Liens which, singly or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect
on FRI.
(c) The businesses of FRI and each of the FRI Subsidiaries are not being and
FRI has not received, any notice from any authority or Person that such
businesses have been or are being, conducted in violation of any Applicable
Law, except for possible violations which either singly or in the aggregate
have not resulted and could not reasonably be expected in the future to result
in a Material Adverse Effect.
SECTION 4.5 Absence of Certain Changes. Except (i) as and to the extent set
forth on Schedule 4.5, (ii) as disclosed in the FRI SEC Documents filed on or
prior to the date hereof, (iii) for the transactions contemplated by this
Agreement or (iv) for Permitted Transactions, since December 28, 1997, neither
FRI nor any of the FRI Subsidiaries has:
(a) suffered any Material Adverse Change;
(b) paid, discharged or otherwise satisfied any material claims, liabilities
or obligations (absolute, accrued, contingent or otherwise) other than the
payment, discharge or satisfaction in the ordinary course of business,
consistent with past practice of liabilities and obligations (i) reflected or
reserved against in the Financial Statements or (ii) incurred after December
28, 1997, in the ordinary course of business, consistent with past practice;
(c) permitted or allowed any of its material property or assets (real,
personal or mixed, tangible or intangible) to be subjected to any Liens,
except Permitted Liens;
(d) sold, transferred, or otherwise disposed of any of its properties or
assets (real, personal or mixed, tangible or intangible), except in the
ordinary course of business, consistent with past practice;
(e) granted (i) any increase in the compensation or benefits payable or to
become payable to any officer or director or general group of employees
(including any such increase pursuant to any bonus, pension, profit sharing or
other plan or commitment) or (ii) other than in the ordinary course of
business and consistent with past practice, any increase in the compensation
or benefits payable or to become payable to any employee;
(f) made any change in severance policy or practices;
(g) made any single expenditure capitalized in accordance with FRI's current
accounting policies or acquired any property or assets (other than new
materials and supplies) for a cost in excess of $100,000;
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(h) declared, paid or set aside for payment any dividend or other
distribution in respect of its capital stock or redeemed, purchased or
otherwise acquired, directly or indirectly, any shares of capital stock or
other securities of FRI or any of the FRI Subsidiaries;
(i) made any material change in any method of tax or financial accounting or
accounting practice or made or changed any material election for Federal
income tax purposes;
(j) paid, loaned or advanced any amount to, or sold, transferred or leased
any properties or assets (real, personal or mixed, tangible or intangible) to,
or entered into any agreement or arrangement with, any of its officers,
directors or greater than 5% stockholders or any Affiliate or associate of any
of its officers, directors or greater than 5% stockholders except for (x)
directors' fees, and compensation to officers at rates not exceeding the rates
of compensation paid during the fiscal year ended December 28, 1997 and (y)
customary advances for travel and similar business expenses; or
(k) agreed, whether in writing or otherwise, to take any action described in
this Section.
SECTION 4.6 Insurance. FRI and the FRI Subsidiaries maintain, with reputable
insurers, insurance in such amounts, including deductible arrangements, and of
such a character as is usually maintained by reasonably prudent managers of
companies engaged in the same or similar business. Except as set forth in
Schedule 4.6, all such policies are in full force and effect, all premiums
with respect thereto covering all periods up to and including the Effective
Time will have been paid, and no notice of cancellation or termination has
been received with respect to any such policy other than notices received
after the date of this Agreement, (copies of which FRI shall promptly deliver
to KKR); provided, that FRI shall timely replace each such policy that has
been cancelled or terminated. Except as set forth in Schedule 4.6, such
policies will not be materially affected by, or terminate or lapse by reason
of, the transactions contemplated by this Agreement and the other Documents.
All of such policies have been issued by reputable insurance companies
actively engaged in the insurance business.
SECTION 4.7 Financial Statements; Full Disclosure.
(a) The Financial Statements of FRI present fairly the financial position of
FRI and its consolidated Subsidiaries as of the dates thereof and the results
of their respective operations for the periods then ended. Except as otherwise
disclosed in the footnotes thereto, the audited Financial Statements of FRI
have been prepared in accordance with GAAP and with Regulation S-X. Except as
otherwise disclosed in the footnotes thereto, the unaudited Financial
Statements of FRI have been prepared in a manner consistent with the audited
Financial Statements of FRI and in accordance with GAAP for interim financial
information and with Regulation S-X and include all adjustments (consisting of
normal recurring accruals) that are necessary for a fair presentation.
(b) FRI has timely filed all FRI SEC Documents, each of which complied in
all material respects with all applicable requirements of the Securities Act
and the Exchange Act as of the dates so filed. None of the FRI SEC Documents
(as of their respective filing dates) contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements made therein, in light of
the circumstances under which they were made, not misleading. None of the FRI
Subsidiaries is required to file any forms, reports or other documents with
the Commission.
(c) No representation or warranty by FRI or any of the FRI Subsidiaries in
any of the Documents, and no statement contained in any written materials
furnished by or on behalf of FRI or any of the FRI Subsidiaries to KKR,
contains or will contain any untrue statement of a material fact, or omits or
will omit to state any material fact necessary to make the statements herein
or therein, in light of the circumstances under which they were made or will
be made, not misleading.
SECTION 4.8 Suppliers; Franchisees. Except as set forth on Schedule 4.8, (a)
to the best knowledge of FRI, there has not been any material adverse change
in the business relationship of FRI or any FRI Subsidiary
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with any of its material suppliers; (b) there is no default by FRI, any of the
FRI Subsidiaries or, to the best knowledge of FRI, any other party under any
agreement between FRI or any of the FRI Subsidiaries and any of their
respective franchisees; and (c) to the best knowledge of FRI, there has not
been an adverse change in the business relationship of FRI or any of the FRI
Subsidiaries with any of its franchisees which in any such event could, singly
or in the aggregate, be reasonably expected to have a Material Adverse Effect
on FRI.
SECTION 4.9 Intellectual Property. FRI and the FRI Subsidiaries own, or are
licensed to use, all of their Intellectual Property necessary to carry on its
business as now conducted and as proposed to be conducted. There are no
Proceedings pending or, to the best knowledge of FRI, threatened concerning
any of such items of Intellectual Property and to the best knowledge of FRI
there is no basis for any such Proceeding. The use of such Intellectual
Property does not conflict with, infringe upon, or violate any proprietary or
other rights of any other Person, except such conflicts, infringements or
violations that could not singly or in the aggregate be reasonably expected to
have a Material Adverse Effect on FRI.
SECTION 4.10 Litigation. There is no Proceeding or series of related
Proceedings against or affecting FRI or any of the FRI Subsidiaries or any of
their properties or assets pending, or to the best knowledge of FRI,
threatened, that could, singly or in the aggregate, be reasonably expected to
have a Material Adverse Effect on FRI. Neither FRI nor any of the FRI
Subsidiaries is subject to any judgment, injunction, decree, writ,
interpretation or order of any Governmental Authority that could, singly or in
the aggregate, be reasonably expected to have a Material Adverse Effect on
FRI.
SECTION 4.11 Labor Matters.
(a) Except as set forth on Schedule 4.11:
(i) there is no labor strike, dispute, slowdown, work stoppage or lockout
pending or, to the best knowledge of FRI, threatened against or affecting
FRI or any FRI Subsidiary that, singly or in the aggregate, could be
reasonably expected to have a Material Adverse Effect on FRI and, during
the past five years, there has not been any such action;
(ii) no union claims to represent the employees of FRI or any FRI
Subsidiary;
(iii) neither FRI nor any FRI Subsidiary is a party to or bound by any
collective bargaining or similar agreement with any labor organization, or
work rules or practices agreed to with any labor organization or employee
association applicable to employees of FRI or any FRI Subsidiary;
(iv) neither the employees of FRI nor any FRI Subsidiary are represented
by any labor organization, and neither FRI nor any FRI Subsidiary has any
knowledge of any current union organizing activities among the employees of
FRI or any FRI Subsidiary, nor to their best knowledge does any question
concerning representation exist concerning such employees;
(v) there are no written personnel policies, rules or procedures
applicable to employees of FRI or any FRI Subsidiary;
(vi) FRI and the FRI Subsidiaries are not engaged in any ULP; and there
is no ULP charge or complaint against FRI or any FRI Subsidiary pending or,
to the best knowledge of FRI, threatened before the NLRB;
(vii) there is no grievance or arbitration proceeding arising out of any
collective bargaining agreement or other grievance procedure relating to
FRI or any FRI Subsidiary;
(viii) no charges with respect to or relating to FRI or any FRI
Subsidiary are pending before the EEOC; and there are no pending or, to the
best knowledge of FRI, threatened wage and hour claims filed against FRI or
any of the FRI Subsidiaries with any Governmental Authority;
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(ix) to the knowledge of FRI and the FRI Subsidiaries, no Governmental
Authority responsible for the enforcement of Applicable Employment Laws
intends to conduct an investigation with respect to or relating to FRI or
any of the FRI Subsidiaries and no such investigation is in progress;
(x) there are no pending OSHA citations relating to FRI or any of the FRI
Subsidiaries and, to the best knowledge of FRI, OSHA has not threatened to
file any citation;
(xi) there is no pending investigation of, or complaint pending against,
FRI or any of the FRI Subsidiaries by the Office of Federal Contract
Compliance Programs or any similar state agency;
(xii) there are no Proceedings pending or, to the best knowledge of FRI,
threatened against, and no Person has alleged breach of any express or
implied contract of employment or of any Applicable Employment Law by, FRI
or any FRI Subsidiary; and
(xiii) there are no employment contracts or severance agreements with any
employees of FRI or the FRI Subsidiaries.
(b) Since the enactment of the WARN Act, FRI and its Subsidiaries have not
effectuated (i) a "plant closing" (as defined in the WARN Act) affecting any
site of employment or one or more facilities or operating units within any
site of employment or facility of FRI or any FRI Subsidiary, or (ii) a "mass
layoff" (as defined in the WARN Act) affecting any site of employment or
facility of FRI or any FRI Subsidiary; nor has FRI or any FRI Subsidiary been
affected by any transaction or engaged in layoffs or employment terminations
sufficient in number to trigger application of any similar state or local law.
SECTION 4.12 Taxes. Except as otherwise disclosed in Schedule 4.12:
(a) Each of FRI and the FRI Subsidiaries have timely filed (or have had
timely filed on their behalf) or will timely file or cause to be timely filed,
all Tax Returns required by applicable law to be filed by any of them prior to
or as of the Effective Time. All such Tax Returns and amendments thereto are
or will be true, complete and correct. The most recent financial statements
contained in the FRI SEC Documents provide an adequate accrual for the payment
of Taxes for the periods covered by such reports.
(b) Each of FRI and the FRI Subsidiaries have paid (or have had paid on
their behalf), or where payment is not yet due, have established (or have had
established on their behalf and for their sole benefit and recourse), or will
establish or cause to be established on or before the Effective Time, an
adequate accrual on the books and records of FRI and the FRI Subsidiaries for
the payment of, all Taxes due with respect to any fiscal quarter ending prior
to or as of the Effective Time.
(c) No Audit by a Tax Authority is pending or, to the best knowledge of FRI,
threatened with respect to any Tax Returns filed by, or Taxes due from, FRI or
the FRI Subsidiaries. No deficiency or adjustment for any Taxes has been
threatened, proposed, asserted or assessed against FRI or the FRI Subsidiaries
other than those that could not be reasonably expected to have a Material
Adverse Effect. There are no liens for Taxes upon the assets of FRI or the FRI
Subsidiaries, except liens for current Taxes not yet due for which adequate
reserves have been established in accordance with GAAP.
(d) Neither FRI nor the FRI Subsidiaries has given or been requested to give
any waiver of statutes of limitations relating to the payment of Taxes or have
executed powers of attorney with respect to Tax matters, which will be
outstanding as of the Effective Time. Subsection (d) of Schedule 4.12 sets
forth all open tax years with respect to FRI and the FRI Subsidiaries.
(e) Neither FRI nor the FRI Subsidiaries is a party to, is bound by any tax
sharing, tax indemnity, cost sharing, or similar agreement or policy relating
to Taxes.
(f) Neither FRI nor the FRI Subsidiaries has entered into agreements that
would result in the disallowance of any tax deductions pursuant to section
280G of the Code.
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SECTION 4.13 Employee Benefit Plans; ERISA.
(a) Schedule 4.13 sets forth a true and complete list of the Benefit Plans
of FRI and the FRI Subsidiaries.
(b) FRI has made available to KKR, with respect to all Benefit Plans of FRI
and the FRI Subsidiaries, true, complete and correct copies of the following:
all plan documents and the most recent summary plan descriptions and any
subsequent summaries of material modifications or other material employee
communications discussing any employee benefit provided thereunder; forms 5500
as filed with the IRS for the most recent three plan years; all trust
agreements with respect to the Benefit Plans of FRI and the FRI Subsidiaries;
copies of any contracts with service providers and insurers providing benefits
for participants or liability insurance or bonding for the sponsors,
administrators or trustees of any Benefit Plan of FRI and the FRI
Subsidiaries; the two most recent annual audits and accountings of plan assets
for all funded plans; the most recent IRS determination letter for all plans
qualified under Code section 401(a); all handbooks, manuals, and similar
documents governing material employment policies, practices and procedures and
each Form S-8 and each prospectus related thereto filed or used in the past
three years.
(c) With respect to each Benefit Plan of FRI and the FRI Subsidiaries: (i)
each Benefit Plan has been administered in compliance in all material
respects, with its terms including, but not limited to, any provisions
relating to contributions thereunder, and is in compliance in all material
respects with the applicable provisions of ERISA, the Code and all other
Applicable Laws (including, without limitation, provisions relating to
funding, filing, termination, reporting, disclosure and continuation coverage
obligations pursuant to Title V of COBRA); (ii) no Benefit Plan which is an
"employee pension benefit plan" (as defined in Section 3(2) of ERISA) has been
the subject of a "reportable event" (as defined in Section 4043 of ERISA) and
to the knowledge of FRI, there have been no "prohibited transactions" (as
described in section 4975 of the Code or in Part 4 of Subtitle B of Title I of
ERISA) with respect to any Benefit Plan of FRI and the FRI Subsidiaries; (iii)
there are no Proceedings (other than routine claims for benefits) pending or
to the knowledge of FRI threatened with respect to any Benefit Plan, the
assets of any trust thereunder, or the Benefit Plan sponsor or the Benefit
Plan administrator with respect to the design or operation of any Benefit
Plan; (iv) each Benefit Plan which is intended to be "qualified" within the
meaning of section 401(a) of the Code is so qualified, and any trust created
pursuant to any such Benefit Plan is exempt from federal income tax under
section 501(a) of the Code and the IRS has issued each such Benefit Plan a
favorable determination letter which to FRI's knowledge is currently
applicable; (v) FRI is not aware of any circumstance or event which would
jeopardize the tax-qualified status of any such Benefit Plan or the tax-exempt
status of any related trust, or would cause the imposition of any material
liability, penalty or tax under ERISA or the Code with respect to any Benefit
Plan; (vi) no unsatisfied liabilities to participants, the IRS, DOL, the PBGC
or to any other Person have been incurred as a result of the termination of
any Benefit Plan; and (vii) there has been no event with respect to a Benefit
Plan which would require disclosure under Sections 4062(c), 4063(a) or 4041(e)
of ERISA.
(d) Neither FRI nor the FRI Subsidiaries maintains or is obligated to
contribute to or has ever maintained or been obligated to contribute to a
Multiemployer Plan or any "multiple employer plan" (within the meaning of
section 413(c) of the Code).
(e) All reports and information required to be filed with the DOL, IRS and
PBGC and with plan participants and their beneficiaries with respect to each
Benefit Plan of FRI and the FRI Subsidiaries have been filed.
(f) Except as set forth on Schedule 4.13(f) and except to the extent
required by COBRA and any similar state law, neither FRI nor the FRI
Subsidiaries maintain any retiree life and/or retiree health insurance plans
which provide for continuing benefits or coverage for any employee or any
beneficiary of an employee after such employee's termination of employment.
(g) Except as set forth on Schedule 4.13(g), the consummation of the
transactions contemplated by this Agreement will not, either alone or in
combination with another event, (viii) entitle any employee of FRI or any FRI
Subsidiary to severance pay, unemployment compensation or any other payment,
(ix) accelerate the time of
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payment or vesting, or increase the amount of compensation due to any such
employee, or (x) result in any liability under Title IV of ERISA.
(h) Except as contemplated herein, FRI and its Subsidiaries have no
commitment or obligation to (i) create or incur material liability with
respect to or cause to exist any other employee benefit plan, program or
arrangement, (ii) enter into any material contract or agreement to provide
compensation or benefits to any individual or (iii) modify or terminate any
Benefit Plan, other than with respect to a modification or termination
required by ERISA or the Code.
SECTION 4.14 Change in Control. Except as set forth on Schedule 4.14,
neither FRI nor any of the FRI subsidiaries is a party to any Applicable
Agreement set forth on Schedules 4.11 or referred to in Section 4.19(a) that
contains a "change of control," "potential change in control" or similar
provision that is triggered by the transactions contemplated hereby. Except as
set forth on Schedule 4.14 or as otherwise contemplated by this Agreement, the
consummation of the transactions contemplated by this Agreement will not
(either alone or upon the occurrence of any additional acts or events) result
in any payment (whether of severance pay or otherwise) becoming due from FRI
or the FRI Subsidiaries to any Person.
SECTION 4.15 Governmental Consents. Except as set forth on Schedule 4.15, no
consent, approval or authorization of, or filing, registration or
qualification with, any Governmental Authority is required in connection with,
or as a condition to, the execution, delivery or performance of this Agreement
or any of the other Documents by FRI and the FRI Subsidiaries except (i)
filings, registrations or qualifications, if any, required to be made or
obtained on or before the Effective Time under (A) the Securities Act, (B) the
Exchange Act, (C) state securities or state corporation laws, (D) the HSR Act
or (E) any Applicable Law governing the sale of alcoholic beverages, each of
which FRI shall use commercially reasonable efforts to make or obtain on or
before the Effective Time and (ii) where failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or
notifications, would not, singly or in the aggregate, be reasonably expected
to have a Material Adverse Effect on FRI.
SECTION 4.16 Title to Properties. FRI and each of the FRI Subsidiaries (a)
has legal and valid title to all the real properties and other assets
(tangible, intangible or mixed) it reflects in its Financial Statements as
owned, free and clear of all Liens, except for Permitted Liens and Liens set
forth on Schedule 4.16 and (b) enjoys peaceful and undisturbed possession
under all leases to which it is a party as lessee. All of the leases to which
FRI or any FRI Subsidiary is a party are legal, valid and binding and in full
force and effect, and, except as set forth on Schedule 4.16, no default by
FRI, any FRI Subsidiary or, to the best knowledge of FRI, any other party
thereto has occurred or is continuing thereunder. No property or asset, the
value of which is reflected in the balance sheets included in the Financial
Statements of FRI, is held under any lease or under any conditional sale or
other title retention agreement. Except for such assets, plants and facilities
as are immaterial in the aggregate to the business of FRI and the FRI
Subsidiaries taken as a whole, all tangible assets, plants and facilities of
each of FRI and the FRI Subsidiaries are in good condition and repair and are
adequate for the uses to which they are being put.
SECTION 4.17 Environmental Matters.
(a) To the best knowledge of FRI, each of FRI and the FRI Subsidiaries is in
substantial compliance with the provisions of all Environmental Laws, which
compliance includes, but is not limited to, the possession by FRI or the FRI
Subsidiaries, as appropriate, of all licenses, permits and other governmental
authorizations required under applicable Environmental Laws, and compliance
with the terms and conditions thereof, where the failure to comply with their
terms and conditions could, singly or in the aggregate, have a Material
Adverse Effect on FRI. Except where the failure to comply could not, singly or
in the aggregate, have a Material Adverse Effect on FRI, neither FRI nor any
of the FRI Subsidiaries has received any communication (written or oral),
whether from a Governmental Authority, citizens group, employee or otherwise,
that alleges that FRI or any of the FRI Subsidiaries is not in compliance with
the provisions of all Environmental Laws, and there are no currently existing
circumstances known to FRI that, if not corrected, could prevent such
compliance in the future.
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(b) There is no Environmental Claim pending or, to the best knowledge of
FRI, threatened against FRI or any of the FRI Subsidiaries or against any
Person whose liability for any Environmental Claim FRI or any of the FRI
Subsidiaries has retained or assumed either contractually or by operation of
law and, to the best knowledge of FRI, there is no basis for any such claim
that could, singly or in the aggregate, have a Material Adverse Effect on FRI.
(c) Without in any way limiting the generality of the foregoing, to the best
knowledge of FRI, (a) there are no Materials of Environmental Concern present
in any soil or groundwater at any property owned or operated by FRI or any FRI
Subsidiaries, (b) there are no underground storage tanks present at any such
property, and (c) no polychlorinated biphenyls (PCBs) or PCB-containing items
are used or stored at any such property.
(d) True, complete and correct copies of the written reports, and all parts
thereof, of all environmental audits or assessments which have been conducted
at any property owned or operated by FRI or any FRI Subsidiary (within the
past five (5) years) have been made available to KKR.
SECTION 4.18 Books and Records. The books of account, minute books, stock
record books, and other records of FRI and the FRI Subsidiaries, all of which
have been made available to KKR, are complete and correct and have been
maintained in accordance with sound business practices and the requirements of
Section 13(b)(2) of the Exchange Act (regardless of whether or not FRI and the
FRI Subsidiaries are subject to that Section), including the maintenance of an
adequate system of internal controls. The minute books of FRI and the FRI
Subsidiaries contain accurate and complete records of all meetings held of,
and corporate action taken by, the stockholders, the Boards of Directors, and
committees of the Boards of Directors of FRI and the FRI Subsidiaries, and no
meeting of any such stockholders, Board of Directors, or committee has been
held for which minutes have not been prepared and are not contained in such
minute books.
SECTION 4.19 Contracts; No Defaults.
(a) Except as set forth in Schedule 4.19(a), each Applicable Agreement
material to FRI and the FRI Subsidiaries, taken as a whole, is in full force
and effect and is valid and enforceable in accordance with its terms.
(b) Except as set forth in Schedule 4.19(b):
(i) each of FRI and the FRI Subsidiaries and, to the knowledge of FRI,
each other party thereto, is in compliance in all material respects with
all applicable terms and requirements of each Applicable Agreement referred
to in Section 4.19(a); and
(ii) no event has occurred or circumstance exists that (with or without
notice or lapse of time) may contravene, conflict with, or result in a
violation or breach of, or give any of FRI and the FRI Subsidiaries or
other Person the right to declare a default or exercise any remedy under,
or to accelerate the maturity or performance of, or to cancel, terminate,
or modify, any Applicable Agreement referred to in Section 4.19(a).
SECTION 4.20 Form S-4; KKR Proxy Statement. None of the information supplied
by FRI or any FRI Subsidiary for inclusion or incorporation by reference in
(i) the Form S-4 will, at the time filed with the Commission, any time it is
amended or supplemented and at the time it becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated herein or necessary to make the
statements therein not misleading, and (ii) the KKR Proxy Statement will, at
the date it is first mailed to the KKR stockholders and at the time of the
meeting of KKR's stockholders held to vote on approval of this Agreement and
the Merger, contain any untrue statement of material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading. The Form S-4 will comply as to form in all material respects
with the requirements of the Securities Act and the rules and regulations of
the Commission thereunder, except that no representation is made by FRI with
respect to statements made or incorporated by reference therein based on
information supplied by KKR or any KKR Subsidiary for inclusion or
incorporation by reference in the Form S-4.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF KKR
KKR hereby represents and warrants to FRI and Merger-Sub as follows:
SECTION 5.1 Organization, Standing and Qualification.
(a) Except as set forth on Schedule 5.1 (which exceptions could not, singly
or in the aggregate, reasonably be expected to have a Material Adverse Effect
on KKR), KKR and each of the KKR Subsidiaries (i) is a corporation or other
legal entity duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization; (ii) has all requisite power and
authority to own or lease, and operate its properties and assets, and to carry
on its business as now conducted and as proposed to be conducted; (iii) is
duly qualified or licensed to do business as a foreign corporation or other
legal entity and is in good standing in all jurisdictions in which it owns or
leases property or in which the conduct of its business requires it to so
qualify or be licensed, where the failure to qualify could, singly or in the
aggregate, reasonably be expected to have a Material Adverse Effect on KKR;
and (iv) has obtained all licenses, permits, franchises and other governmental
authorizations necessary to the ownership or operation of its properties or
the conduct of its business except for such failures to obtain that could not,
singly or in the aggregate, reasonably be expected to have a Material Adverse
Effect on KKR. Each KKR Subsidiary, along with its jurisdiction of
organization, is identified on Schedule 5.1.
(b) Except as set forth on Schedule 5.1(b), none of KKR or the KKR
Subsidiaries owns, directly or indirectly, any of the capital stock or other
equity securities of any other Person other than (i) the KKR Subsidiaries and
(ii) less than 100 shares of capital stock of a publicly traded corporation
whose principal business includes the operation of restaurants. All of the
issued and outstanding shares of capital stock of the KKR Subsidiaries are
duly authorized, have been validly issued, fully paid and nonassessable, are
free of preemptive and similar rights, and except as set forth on Schedule
5.1(b) hereof are, and as of the Closing will be, owned by KKR or a KKR
Subsidiary free and clear of all Liens, except for Permitted Liens and Liens
granted in connection with and securing obligations under the Bridge Loan
Facility.
SECTION 5.2 Capitalization.
(a) As of the close of business on June 8, 1998, the total authorized
capital stock of KKR consists of 75,000,000 shares of common stock, $.01 par
value per share, 49,998,824 shares of which are issued and outstanding as of
the date hereof and 5,000,000 shares of preferred stock, par value $.01 per
share, no shares of Series A Convertible Preferred Stock of which are issued
and outstanding as of the date hereof and 20,048 shares of Series B
Convertible Preferred Stock of which are issued and outstanding as of the date
hereof.
(b) Each share of KKR capital stock that is issued and outstanding (i) has
been duly authorized and validly issued and (ii) is fully paid and
nonassessable and free of preemptive and similar rights.
(c) Except for this Agreement or as set forth on Schedule 5.2(c), there are
no outstanding (i) securities convertible into or exchangeable for any capital
stock of KKR or any KKR Subsidiary, (ii) options, warrants or other rights to
purchase or subscribe for capital stock of KKR or any KKR Subsidiary or
securities convertible into or exchangeable for capital stock of KKR or any
KKR Subsidiary, (iii) contracts, commitments, agreements, understandings,
arrangements, calls or claims of any kind relating to the issuance of any
capital stock of KKR or any KKR Subsidiary, any such convertible or
exchangeable securities or any such options, warrants or rights or (iv)
commitments or obligations to purchase or redeem any shares of capital stock
of any class of equity securities of KKR or any such convertible or
exchangeable securities or any such options, warrants or other rights.
(d) Schedule 5.2(d) sets forth and describes all indebtedness for borrowed
money (including capitalized lease obligations) of KKR and each of the KKR
Subsidiaries outstanding on the date hereof. Except as set forth on KKR's
Schedules to this Agreement or disclosed in the KKR SEC Documents, neither KKR
nor any of the
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KKR Subsidiaries has, or immediately following the Closing will have, any
material liabilities of any nature, absolute, accrued, contingent or
otherwise, other than liabilities incurred after the date hereof in a manner
not prohibited by Section 7.3 hereof.
SECTION 5.3 Authorization of Agreement and Other Documents.
(a) The execution and delivery of this Agreement and the other Documents to
which KKR or any KKR Subsidiary is a party, and the performance of their
respective obligations hereunder or thereunder and the consummation of the
transactions contemplated hereby and thereby, have been duly authorized and no
other proceedings on the part of KKR, any of the KKR Subsidiaries or any of
their respective stockholders or Affiliates are necessary to authorize this
Agreement, the Merger or the other Documents, except for the approval of this
Agreement and the Merger by the KKR stockholders as required by the DGCL. This
Agreement is and, as of the Effective Time, each of the Documents to which KKR
or any of the KKR Subsidiaries is a party will be, a valid and binding
obligation of KKR or such KKR Subsidiary, as the case may be, enforceable in
accordance with its terms, except to the extent that enforcement thereof may
be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or other similar laws affecting enforcement of creditors' rights
generally, and by general principles of equity (regardless of whether
enforcement is considered in a proceeding at law or in equity).
(b) KKR and each of the KKR Subsidiaries has full power and authority to
execute and deliver each of the Documents to which it is a party, and to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby.
(c) KKR has received an opinion from Sutro & Co. Incorporated to the effect
that the financial terms of the Merger are fair to KKR's stockholders.
SECTION 5.4 No Violation.
(a) Neither KKR nor any of the KKR Subsidiaries is (i) in violation of its
respective Charter Documents, or (ii) in default in the performance of any
obligation, agreement or condition contained in an Applicable Agreement, which
default could, singly or in the aggregate, be reasonably expected to have a
Material Adverse Effect on KKR.
(b) The execution and delivery of and the performance by KKR and each KKR
Subsidiary of its obligations under each Document to which it is a party, will
not (i) constitute a breach or violation under the Charter Documents of KKR or
any of the KKR Subsidiaries; (ii) conflict with, violate, constitute a breach
or violation of or a default (with the passage of time or otherwise) under,
require the consent of any Person under, give to others any rights of
termination, amendment, acceleration, redemption, repurchase or cancellation
of, or result in the imposition of a Lien on any of the properties or assets
of KKR or any of the KKR Subsidiaries or an acceleration of indebtedness
pursuant to, any Applicable Agreement; or (iii) constitute a violation of any
Applicable Law, except (A) in the case of clause (ii) above, consents that
have already been obtained or consents identified on Schedule 5.4(b) that KKR
will use commercially reasonable efforts to obtain on or prior to the time
required or (B) in the case of clauses (ii) and (iii) above, such conflicts,
breaches, violations, defaults, terminations, amendments, accelerations,
redemptions, repurchases or creation of Liens which, singly or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect
on KKR.
(c) The businesses of KKR and each of the KKR Subsidiaries are not being,
and KKR has not received any notice from any authority or Person that such
businesses have been or are being, conducted in violation of any Applicable
Law, except for possible violations which either singly or in the aggregate
have not resulted and could not reasonably be expected to in the future result
in a Material Adverse Effect.
SECTION 5.5 Absence of Certain Changes. Except (i) as and to the extent set
forth on Schedule 5.5, (ii) as disclosed in the KKR SEC Documents filed on or
prior to the date hereof, (iii) for the transactions
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contemplated by this Agreement or (iv) for Permitted Transactions, since
December 31, 1997, neither KKR nor any of the KKR Subsidiaries has:
(a) suffered any Material Adverse Change;
(b) paid, discharged or otherwise satisfied any material claims, liabilities
or obligations (absolute, accrued, contingent or otherwise) other than the
payment, discharge or satisfaction in the ordinary course of business,
consistent with past practice of liabilities and obligations (i) reflected or
reserved against in the Financial Statements or (ii) incurred after December
31, 1997, in the ordinary course of business, consistent with past practice;
(c) permitted or allowed any of its material property or assets (real,
personal or mixed, tangible or intangible) to be subjected to any Liens,
except Permitted Liens;
(d) sold, transferred, or otherwise disposed of any of its properties or
assets (real, personal or mixed, tangible or intangible), except in the
ordinary course of business, consistent with past practice;
(e) granted (i) any increase in the compensation or benefits payable or to
become payable to any officer or director or general group of employees
(including any such increase pursuant to any bonus, pension, profit sharing or
other plan or commitment) or (ii) other than in the ordinary course of
business and consistent with past practice, any increase in the compensation
or benefits payable or to become payable to any employee;
(f) made any change in severance policy or practices;
(g) made any single expenditure capitalized in accordance with KKR's current
accounting policies or acquired any property or assets (other than new
materials and supplies) for a cost in excess of $50,000, in the aggregate;
(h) except for regularly scheduled dividends paid in cash on the KKR
Preferred Stock, declared, paid or set aside for payment any dividend or other
distribution in respect of its capital stock or redeemed, purchased or
otherwise acquired, directly or indirectly, any shares of capital stock or
other securities of KKR or any of the KKR Subsidiaries;
(i) made any material change in any method of tax or financial accounting or
accounting practice or made or changed any material election for Federal
income tax purposes;
(j) paid, loaned or advanced any amount to, or sold, transferred or leased
any properties or assets (real, personal or mixed, tangible or intangible) to,
or entered into any agreement or arrangement with, any of its officers,
directors or greater than 5% stockholders or any Affiliate or associate of any
of its officers, directors or greater than 5% stockholders except for (x)
directors' fees, and compensation to officers at rates not exceeding the rates
of compensation paid during the fiscal year ended December 31, 1997 and (y)
customary advances for travel and similar business expenses; or
(k) agreed, whether in writing or otherwise, to take any action described in
this Section.
SECTION 5.6 Insurance. KKR and the KKR Subsidiaries maintain, with reputable
insurers, insurance in such amounts, including deductible arrangements, and of
such a character as is usually maintained by reasonably prudent managers of
companies engaged in the same or similar business. Schedule 5.6 contains an
accurate and complete description of all material policies of fire, liability,
workmen's compensation and other forms of insurance owned or held by KKR or
any of the KKR Subsidiaries. Except as set forth in Schedule 5.6, all such
policies are in full force and effect, all premiums with respect thereto
covering all periods up to and including the Effective Time will have been
paid, and no notice of cancellation or termination has been received with
respect to any such policy other than notices received after the date of this
Agreement (copies of which KKR shall promptly deliver to FRI); provided, that
KKR shall timely replace each such policy that has been
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cancelled or terminated. Except as set forth in Schedule 5.6, such policies
will remain in full force and effect through the respective dates set forth in
Schedule 5.6 without the payment of additional premiums; and will not be
materially affected by, or terminate or lapse by reason of, the transactions
contemplated by this Agreement and the other Documents. All of such policies
have been issued by reputable insurance companies actively engaged in the
insurance business.
SECTION 5.7 Financial Statements; Full Disclosure.
(a) The Financial Statements of KKR present fairly the financial position of
KKR and its consolidated Subsidiaries as of the dates thereof and the results
of their respective operations for the periods then ended. Except as otherwise
disclosed in the footnotes thereto, the audited Financial Statements of KKR
have been prepared in accordance with GAAP and with Regulation S-X. Except as
otherwise disclosed in the footnotes thereto, the unaudited Financial
Statements of KKR have been prepared in a manner consistent with the audited
Financial Statements of KKR and in accordance with GAAP for interim financial
information and with Regulation S-X and include all adjustments (consisting of
normal recurring accruals) that are necessary for a fair presentation.
(b) KKR has timely filed all KKR SEC Documents, each of which complied in
all material respects with all applicable requirements of the Securities Act
and the Exchange Act as of the dates so filed. None of the KKR SEC Documents
(as of their respective filing dates) contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements made therein, in light of
the circumstances under which they were made, not misleading. None of the KKR
Subsidiaries is required to file any forms, reports or other documents with
the Commission.
(c) No representation or warranty by KKR or any of the KKR Subsidiaries in
any of the Documents, and no statement contained in any written materials
furnished by or on behalf of KKR or its Subsidiaries to contains or will
contain any untrue statement of a material fact, or omits or will omit to
state any material fact necessary to make the statements herein or therein, in
light of the circumstances under which they were made or will be made, not
misleading.
SECTION 5.8 Suppliers; Franchisees. Except as set forth on Schedule 5.8, (a)
to the best knowledge of KKR, there has not been any material adverse change
in the business relationship of KKR or any KKR Subsidiary with any of its
material suppliers; (b) there is no default by KKR, any of the KKR
Subsidiaries or, to the best knowledge of KKR, any other party under any
agreement between KKR or any of the KKR Subsidiaries and any of their
respective franchisees; and (c) to the best knowledge of KKR, there has not
been an adverse change in the business relationship of KKR or any of the KKR
Subsidiaries with any of its franchisees which in any such event could, singly
or in the aggregate, be reasonably expected to have a Material Adverse Effect
on KKR.
SECTION 5.9 Intellectual Property. KKR and the KKR Subsidiaries own, or are
licensed to use, all of their Intellectual Property necessary to carry on its
business as now conducted and as proposed to be conducted. There are no
Proceedings pending or, to the best knowledge of KKR, threatened concerning
any of such items of Intellectual Property and to the best knowledge of KKR
there is no basis for any such Proceeding. The use of such of Intellectual
Property does not conflict with, infringe upon, or violate any proprietary or
other rights of any other Person except such conflicts, infringements or
violations that could not singly or in the aggregate be reasonably expected to
have a Material Adverse Effect on KKR.
SECTION 5.10 Litigation. There is no Proceeding or series of related
Proceedings against or affecting KKR or any of the KKR Subsidiaries or any of
their properties or assets, pending, or to the best knowledge of KKR,
threatened, that could, singly or in the aggregate, be reasonably expected to
have a Material Adverse Effect on KKR. Neither KKR nor any of the KKR
Subsidiaries is subject to any judgment, injunction, decree, writ,
interpretation or order of any Governmental Authority that could, singly or in
the aggregate, be reasonably expected to have a Material Adverse Effect on
KKR.
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SECTION 5.11 Labor Matters.
(a) Except as set forth on Schedule 5.11:
(i) there is no labor strike, dispute, slowdown, work stoppage or lockout
pending or, to the best knowledge of KKR, threatened against or affecting
KKR or any KKR Subsidiary that, singly or in the aggregate, could be
reasonably expected to have a Material Adverse Effect on KKR and, during
the past five years, there has not been any such action;
(ii) no union claims to represent the employees of KKR or any KKR
Subsidiary;
(iii) neither KKR nor any KKR Subsidiary is a party to or bound by any
collective bargaining or similar agreement with any labor organization, or
work rules or practices agreed to with any labor organization or employee
association applicable to employees of KKR or any KKR Subsidiary;
(iv) none of the employees of KKR or any KKR Subsidiary are represented
by any labor organization, and neither KKR nor any KKR Subsidiary has any
knowledge of any current union organizing activities among the employees of
KKR or any KKR Subsidiary, nor to their best knowledge does any question
concerning representation exist concerning such employees;
(v) there are no written personnel policies, rules or procedures
applicable to employees of KKR or any KKR Subsidiary;
(vi) KKR and the KKR Subsidiaries are not engaged in any ULP; and there
is no ULP charge or complaint against KKR or any KKR Subsidiary pending or,
to the best knowledge of KKR, threatened before the NLRB;
(vii) there is no grievance or arbitration proceeding arising out of any
collective bargaining agreement or other grievance procedure relating to
KKR or any KKR Subsidiary;
(viii) no charges with respect to or relating to KKR or any KKR
Subsidiary are pending before the EEOC; and there are no pending or, to the
best knowledge of KKR, threatened wage and hour claims filed against KKR or
any of the KKR Subsidiaries with any Governmental Authority;
(ix) to the knowledge of KKR and the KKR Subsidiaries, no Governmental
Authority responsible for the enforcement of Applicable Employment Laws
intends to conduct an investigation with respect to or relating to KKR or
any of the KKR Subsidiaries and no such investigation is in progress;
(x) there are no pending OSHA citations relating to KKR or any of the KKR
Subsidiaries and, to the best knowledge of KKR, OSHA has not threatened to
file any citation;
(xi) there is no pending investigation of, or complaint pending against,
KKR or any of the KKR Subsidiaries by the Office of Federal Contract
Compliance Programs or any similar state agency;
(xii) there are no Proceedings pending or, to the best knowledge of KKR,
threatened against, and no Person has alleged breach of any express or
implied contract of employment or of any Applicable Employment Law by, KKR
or any KKR Subsidiary; and
(xiii) there are no employment contracts or severance agreements with any
employees of KKR or the KKR Subsidiaries.
(b) Since the enactment of the WARN Act, KKR and the KKR Subsidiaries have
not effectuated (i) a "plant closing" (as defined in the WARN Act) affecting
any site of employment or one or more facilities or operating units within any
site of employment or facility of KKR or any KKR Subsidiary, or (ii) a "mass
layoff" (as defined in the WARN Act) affecting any site of employment or
facility of KKR or any KKR Subsidiary; nor has KKR or any KKR Subsidiary been
affected by any transaction or engaged in layoffs or employment terminations
sufficient in number to trigger application of any similar state or local law.
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SECTION 5.12 Taxes. Except as otherwise disclosed in Schedule 5.12:
(a) Each of KKR and the KKR Subsidiaries have timely filed (or have had
timely filed on their behalf) or will timely file or cause to be timely filed,
all Tax Returns required by applicable law to be filed by any of them prior to
or as of the Effective Time. All such Tax Returns and amendments thereto are
or will be true, complete and correct. The most recent financial statements
contained in the KKR SEC Documents provide an adequate accrual for the payment
of Taxes for the periods covered by such reports.
(b) Each of KKR and the KKR Subsidiaries have paid (or have had paid on
their behalf), or where payment is not yet due, have established (or have had
established on their behalf and for their sole benefit and recourse), or will
establish or cause to be established on or before the Effective Time, an
adequate accrual on the books and records of KKR and the KKR Subsidiaries for
the payment of, all Taxes due with respect to any fiscal quarter ending prior
to or as of, the Effective Time.
(c) No Audit by a Tax Authority is pending or, to the best knowledge of KKR,
threatened with respect to any Tax Returns filed by, or Taxes due from, KKR or
the KKR Subsidiaries. No deficiency or adjustment for any Taxes has been
threatened, proposed, asserted or assessed against KKR or the KKR Subsidiaries
other than those that could not reasonably be expected to have a Material
Adverse Effect. There are no liens for Taxes upon the assets of KKR or the KKR
Subsidiaries, except liens for current Taxes not yet due for which adequate
reserves have been established in accordance with GAAP.
(d) Neither KKR nor the KKR Subsidiaries has given or been requested to give
any waiver of statutes of limitations relating to the payment of Taxes or have
executed powers of attorney with respect to Tax matters, which will be
outstanding as of the Effective Time. Subsection (d) of Schedule 5.12 sets
forth all open tax years with respect to KKR and the KKR Subsidiaries.
(e) Neither KKR nor the KKR Subsidiaries is a party to, is bound by any tax
sharing, tax indemnity, cost sharing, or similar agreement or policy relating
to Taxes.
(f) Neither KKR nor the KKR Subsidiaries has entered into agreements that
would result in the disallowance of any tax deductions pursuant to section
280G of the Code.
SECTION 5.13 Employee Benefit Plans; ERISA.
(a) Schedule 5.13 sets forth a true and complete list of the Benefit Plans
of KKR and the KKR Subsidiaries.
(b) KKR has delivered to FRI, with respect to all Benefit Plans of KKR and
the KKR Subsidiaries, true, complete and correct copies of the following: all
plan documents and the most recent summary plan descriptions and any
subsequent summaries of material modifications or other material employee
communications discussing any employee benefit provided thereunder; forms 5500
as filed with the IRS for the most recent three plan years; all trust
agreements with respect to the Benefit Plans of KKR and the KKR Subsidiaries;
copies of any contracts with service providers and insurers providing benefits
for participants or liability insurance or bonding for the sponsors,
administrators or trustees of any Benefit Plan of KKR and the KKR
Subsidiaries; the two most recent annual audits and accountings of plan assets
for all funded plans; the most recent IRS determination letter for all plans
qualified under Code section 401(a); all handbooks, manuals, and similar
documents governing material employment policies, practices and procedures and
each Form S-8 and each prospectus related thereto filed or used in the past
three years.
(c) With respect to each Benefit Plan of KKR and the KKR Subsidiaries: (i)
each Benefit Plan has been administered in compliance in all material
respects, with its terms including, but not limited to, any provisions
relating to contributions thereunder, and is in compliance in all material
respects with the applicable provisions of ERISA, the Code and all other
Applicable Laws (including, without limitation, provisions relating to
funding, filing, termination, reporting, disclosure and continuation coverage
obligations pursuant to Title V of COBRA); (ii) no Benefit Plan which is an
"employee pension benefit plan" (as defined in Section 3(2) of ERISA) has
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been the subject of a "reportable event" (as defined in Section 4043 of ERISA)
and to the knowledge of KKR, there have been no "prohibited transactions" (as
described in section 4975 of the Code or in Part 4 of Subtitle B of Title I of
ERISA) with respect to any Benefit Plan of KKR and the KKR Subsidiaries; (iii)
there are no Proceedings (other than routine claims for benefits) pending or
to the knowledge of KKR threatened with respect to any Benefit Plan, the
assets of any trust thereunder, or the Benefit Plan sponsor or the Benefit
Plan administrator with respect to the design or operation of any Benefit
Plan; (iv) each Benefit Plan which is intended to be "qualified" within the
meaning of section 401(a) of the Code is so qualified, and any trust created
pursuant to any such Benefit Plan is exempt from federal income tax under
section 501(a) of the Code and the IRS has issued each such Benefit Plan a
favorable determination letter which to KKR's knowledge is currently
applicable; (v) KKR is not aware of any circumstance or event which would
jeopardize the tax-qualified status of any such Benefit Plan or the tax-exempt
status of any related trust, or would cause the imposition of any material
liability, penalty or tax under ERISA or the Code with respect to any Benefit
Plan; (vi) no unsatisfied liabilities to participants, the IRS, DOL, the PBGC
or to any other Person have been incurred as a result of the termination of
any Benefit Plan; and (vii) there has been no event with respect to a Benefit
Plan which would require disclosure under Sections 4062(c), 4063(a) or 4041(e)
of ERISA.
(d) Neither KKR nor the KKR Subsidiaries maintains or is obligated to
contribute to or has ever maintained or been obligated to contribute to a
Multiemployer Plan or any "multiple employer plan" (within the meaning of
section 413(c) of the Code).
(e) All reports and information required to be filed with the DOL, IRS and
PBGC and with plan participants and their beneficiaries with respect to each
Benefit Plan of KKR and the KKR Subsidiaries have been filed.
(f) Except as set forth on Schedule 5.13(f) and except to the extent
required by COBRA and any similar state law, neither KKR nor the KKR
Subsidiaries maintain any retiree life and/or retiree health insurance plans
which provide for continuing benefits or coverage for any employee or any
beneficiary of an employee after such employee's termination of employment.
(g) Except as set forth on Schedule 5.13(g), the consummation of the
transactions contemplated by this Agreement will not, either alone or in
combination with another event, (viii) entitle any employee of KKR or any KKR
Subsidiary to severance pay, unemployment compensation or any other payment,
(ix) accelerate the time of payment or vesting, or increase the amount of
compensation due to any such employee, or (x) result in any liability under
Title IV of ERISA.
(h) Except as set forth on Schedule 5.13(h), no amounts payable under the
Benefit Plans of KKR will fail to be deductible for federal income tax
purposes by virtue of section 280G of the Code.
(i) Except as set forth on Schedule 5.13(i), no Benefit Plan of KKR and the
KKR Subsidiaries distributes, invests in or holds as plan assets or otherwise,
any equity securities of KKR or any Affiliate.
(j) Except as contemplated herein, KKR and the KKR Subsidiaries have no
commitment or obligation to (i) create or incur material liability with
respect to or cause to exist any other employee benefit plan, program or
arrangement, (ii) enter into any material contract or agreement to provide
compensation or benefits to any individual or (iii) modify or terminate any
Benefit Plan, other than with respect to a modification or termination
required by ERISA or the Code.
SECTION 5.14 Change in Control. Except as set forth on Schedule 5.14,
neither KKR nor any of the KKR subsidiaries is a party to any Applicable
Agreement which is set forth on Schedules 5.11 or 5.19 that contains a "change
in control," "potential change in control" or similar provision that is
triggered by the transactions contemplated hereby. Except as set forth on
Schedule 5.14 or as otherwise contemplated by this Agreement, the consummation
of the transactions contemplated by this Agreement will not (either alone or
upon the occurrence of any additional acts or events) result in any payment
(whether of severance pay or otherwise) becoming due from KKR or the KKR
Subsidiaries to any Person.
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SECTION 5.15 Governmental Consents. Except as set forth on Schedule 5.15, no
consent, approval or authorization of, or filing, registration or
qualification with, any Governmental Authority is required in connection with,
or as a condition to, the execution, delivery or performance of this Agreement
or any of the other Documents by KKR and the KKR Subsidiaries except (i)
filings, registrations or qualifications, if any, required to be made or
obtained on or before the Effective Time under (A) the Securities Act, (B) the
Exchange Act, (C) state securities or state corporation laws, (D) the HSR Act
or (E) any Applicable Law governing the sale of alcoholic beverages, each of
which KKR shall use commercially reasonable efforts to make or obtain on or
before the Effective Time and (ii) where failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or
notifications, would not, singly or in the aggregate, be reasonably expected
to have a Material Adverse Effect on KKR.
SECTION 5.16 Title to Properties. Each of KKR and each KKR Subsidiary (a)
has legal and valid title to all the real properties and other assets
(tangible, intangible or mixed) it reflects in its Financial Statements as
owned, free and clear of all Liens, except for Permitted Liens and Liens set
forth on Schedule 5.16 and (b) enjoys peaceful and undisturbed possession
under all leases to which it is a party as lessee. All of the leases to which
KKR or any KKR Subsidiary is a party are legal, valid and binding and in full
force and effect, and, except as set forth on Schedule 5.16, no default by
KKR, any KKR Subsidiary or, to the best knowledge of KKR, any other party
thereto has occurred or is continuing thereunder. No property or asset, the
value of which is reflected in the balance sheets included in the Financial
Statements of KKR, is held under any lease or under any conditional sale or
other title retention agreement. Except for such assets, plants and facilities
as are immaterial in the aggregate to the business of KKR and the KKR
Subsidiaries taken as a whole, all tangible assets, plants and facilities of
each of KKR and the KKR Subsidiaries are in good condition and repair and are
adequate for the uses to which they are being put.
SECTION 5.17 Environmental Matters.
(a) To the best knowledge of KKR, each of KKR and the KKR Subsidiaries is in
substantial compliance with the provisions of all Environmental Laws, which
compliance includes, but is not limited to, the possession by KKR or the KKR
Subsidiaries, as appropriate, of all licenses, permits and other governmental
authorizations required under applicable Environmental Laws, and compliance
with the terms and conditions thereof where the failure to comply with their
terms and conditions could, singly or in the aggregate, have a Material
Adverse Effect on KKR. Except where the failure to comply would not, singly or
in the aggregate, have a Material Adverse Effect on KKR, neither KKR nor any
of the KKR Subsidiaries has received any communication (written or oral),
whether from a Governmental Authority, citizens group, employee or otherwise,
that alleges that KKR or any of the KKR Subsidiaries is not in such compliance
with the provisions of all Environmental Laws, and there are no currently
existing circumstances known to KKR that, if not corrected, could prevent such
compliance in the future.
(b) There is no Environmental Claim pending or, to the best knowledge of
KKR, threatened against KKR or any of the KKR Subsidiaries or against any
Person whose liability for any Environmental Claim KKR or any of the KKR
Subsidiaries has retained or assumed either contractually or by operation of
law and, to the best knowledge of KKR, there is no basis for any such claim
that could, singly or in the aggregate, have a Material Adverse Effect on KKR.
(c) Without in any way limiting the generality of the foregoing, to the best
knowledge of KKR, (a) there are no Material Environmental Concerns present in
any soil or groundwater at any property owned or operated by KKR or any KKR
Subsidiaries, (b) there are no underground storage tanks present at any such
real property owned by KKR or any KKR Subsidiary, and (c) no polychlorinated
biphenyls (PCBs) or PCB-containing items are used or stored at any such
property.
(d) True, complete and correct copies of the written reports, and all parts
thereof, of all environmental audits or assessments which have been conducted
at any property owned or operated by KKR or any KKR Subsidiary (within the
past five (5) years) have been made available to FRI.
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SECTION 5.18 Books and Records. The books of account, minute books, stock
record books, and other records of KKR and KKR Subsidiaries, all of which have
been made available to FRI, are complete and correct and have been maintained
in accordance with sound business practices and the requirements of Section
13(b)(2) of the Exchange Act (regardless of whether or not KKR and the KKR
subsidiaries are subject to that Section), including the maintenance of an
adequate system of internal controls. The minute books of KKR and the KKR
Subsidiaries contain accurate and complete records of all meetings held of,
and corporate action taken by, the stockholders, the Boards of Directors, and
committees of the Boards of Directors of KKR and the KKR Subsidiaries, and no
meeting of any such stockholders, Board of Directors, or committee has been
held for which minutes have not been prepared and are not contained in such
minute books. At the Closing, all of those books and records will be in the
possession of KKR and the KKR subsidiaries.
SECTION 5.19 Contracts; No Defaults.
(a) Schedule 5.19 contains a complete and accurate list, and KKR and the KKR
Subsidiaries shall at FRI's request deliver to FRI or make available for FRI's
review true and complete copies, of:
(i) each Applicable Agreement that involves performance of services or
delivery of goods or materials by or to one or more of KKR and the KKR
Subsidiaries of an amount or value in excess of $150,000.
(ii) each Applicable Agreement that was not entered into in the ordinary
course of business and that involves expenditures or receipts of one or
more KKR and the KKR Subsidiaries in excess of $75,000.
(iii) each lease, rental or occupancy agreement, license, installment and
conditional sale agreement, and other Applicable Agreement affecting the
ownership of, leasing of, title to, use of, or any leasehold or other
interest in, any real or personal property (except personal property leases
and installment and conditional sales agreements having a value per item or
aggregate payments of less than $50,000 and with terms of less than one
year);
(iv) each licensing agreement or other Applicable Agreement with respect
to Intellectual Property;
(v) each collective bargaining agreement and other Applicable Agreement
to or with any labor union or other employee representative of a group of
employees;
(vi) each joint venture, partnership, and other Applicable Agreement
involving a sharing of profits, losses, costs, or liabilities by any of KKR
and the KKR Subsidiaries with any other Person;
(vii) each Applicable Agreement containing covenants that in any way
purport to restrict the business activity of KKR or any of the KKR
Subsidiaries or any Affiliate of KKR or any of the KKR Subsidiaries, (other
than directors or officers of KKR) or limit the freedom of KKR or any of
the KKR Subsidiaries or any Affiliate of KKR or any of the KKR Subsidiaries
(other than directors or officers of KKR) to engage in any line of business
or to compete with any Person;
(viii) each power of attorney that is currently effective and
outstanding, other than powers of attorneys normally executed in connection
with the KKR SEC Documents;
(ix) each Applicable Agreement for capital expenditures in excess of
$50,000;
(x) each other Applicable Agreement material to KKR and the KKR
Subsidiaries, taken as a whole, which has not otherwise been set forth on
Schedules 5.1 through 5.20; and
(xi) each enforceable amendment, supplement, and modification (whether
oral or written) in respect of any of the foregoing.
(b) Except as set forth in Schedule 5.19(b), each Applicable Agreement
referred to in Section 5.19(a) is in full force and effect and is valid and
enforceable in accordance with its terms.
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(c) Except as set forth in Schedule 5.19(c):
(i) each of KKR and the KKR Subsidiaries and, to the knowledge of KKR,
each other party thereto is in compliance in all material respects with all
applicable terms and requirements of each Applicable Agreement referred to
in Section 5.19(a); and
(ii) no event has occurred or circumstance exists that (with or without
notice or lapse of time) may contravene, conflict with, or result in a
violation or breach of, or give any of KKR and the KKR Subsidiaries or
other Person the right to declare a default or exercise any remedy under,
or to accelerate the maturity or performance of, or to cancel, terminate,
or modify, any Applicable Agreement referred to in Section 5.19(a).
SECTION 5.20 Form S-4; Proxy Statement. None of the information supplied by
KKR or any KKR Subsidiary for inclusion or incorporation by reference in (i)
the Form S-4 will, at the time such Form is filed with the Commission, at any
time it is amended or supplemented and at the time it becomes effective under
the Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the KKR Proxy Statement will, at
the date it is first mailed to the KKR stockholders and at the time of the
meeting of KKR's stockholders held to vote on approval of this Agreement and
the Merger, contain any untrue statement of material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading. The KKR Proxy Statement will comply as to form in all material
respects with the requirements of the Exchange Act and the rules and
regulations of the Commission thereunder, except that no representation is
made by KKR with respect to statements made or incorporated by reference
therein based on information supplied by FRI or any FRI Subsidiary for
inclusion or incorporation by reference in the KKR Proxy Statement.
ARTICLE VI
COVENANTS OF FRI
SECTION 6.1 Sale of the Hamlet Shares to FRI-MRD. Concurrently with the
execution of this Agreement, FRI shall cause FRI-MRD to execute and deliver to
KKR a purchase and sale agreement substantially in the form of Exhibit 6.1
relating to the sale of the Hamlet Shares to FRI-MRD.
SECTION 6.2 Loan to KKR. Concurrently with the execution of this Agreement,
FRI-MRD, The Hamlet Group, Inc. and the Guarantors named therein shall execute
and deliver to KKR on behalf of The Hamlet Group, Inc. a term loan agreement
substantially in the form of Exhibit 6.2 (the "Bridge Loan Agreement") and,
subject to the conditions thereto, FRI shall cause FRI-MRD to advance to The
Hamlet Group, Inc. $3.0 million thereunder in cash.
SECTION 6.3 Conduct of Business Pending Merger. Except for Permitted
Transactions, as otherwise specifically provided in this Agreement or in the
other Documents or as otherwise consented to in writing by KKR, which consent
shall not be unreasonably withheld, from the date of this Agreement to the
Effective Time, FRI will, and will cause each of the FRI Subsidiaries to,
conduct its operations only in the ordinary and usual course of business and
consistent with past practices and will, and will cause each of the FRI
Subsidiaries to, preserve intact its present business organization, take
commercially reasonable efforts to keep available the services of its present
officers, employees and consultants and preserve its present relationships
with licensors, licensees, customers, suppliers, employees, labor
organizations and others with whom they have a significant business
relationship.
Without limiting the generality of the foregoing, and except for Permitted
Transactions, as otherwise specifically provided in this Agreement or in the
other Documents or as set forth in Schedule 6.3, FRI will not, and will not
permit any FRI Subsidiary to, indirectly, from the date of this Agreement to
the Effective Time, without the prior written consent of KKR, which shall not
be unreasonably withheld:
(a) adopt any amendment to or otherwise change the Charter Documents of FRI
or Merger-Sub;
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(b) authorize for issuance, sale, pledge, disposition or encumbrance, or
issue, sell, pledge, dispose of or encumber (whether through the issuance or
granting of options, warrants, commitments, subscriptions, rights to purchase,
convertible securities or otherwise), any capital stock of any class or any
other securities of, or any other ownership interest in, FRI or any FRI
Subsidiary, (other than the FRI Shares to be issued in the Merger), or amend
any of the terms of any such securities or agreements outstanding on the date
hereof;
(c) reclassify, combine, split or subdivide any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in cash,
securities or property or any combination thereof) in respect of any class or
series of its capital stock;
(d) redeem, purchase or otherwise acquire, or propose or offer to redeem,
purchase or otherwise acquire, any outstanding FRI Shares or other securities
of FRI or any of the FRI Subsidiaries;
(e) organize any new Subsidiary (other than Merger-Sub), acquire any capital
stock or equity securities of any Person or acquire any equity or ownership
interest (financial or otherwise) in any business, other than de minimus
investments in public corporations whose principal business includes the
operation of restaurants;
(f)(i) incur, assume or prepay any material liability, including, without
limitation, any indebtedness for borrowed money except in the ordinary course
of business and consistent with past practice, and in no event in excess of
$50,000, (ii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for obligations of
any third party, (iii) make any loans, advances or capital contributions to,
or investments in, any third party, (iv) mortgage or pledge any of its
material properties or assets, tangible or intangible, or create any material
Lien thereupon other than Permitted Liens, or (v) authorize any capital
expenditures not in FRI's capital budget on the date hereof which,
individually or in the aggregate, are in excess of $1,000,000;
(g) license or otherwise transfer, dispose of, permit to lapse or otherwise
fail to preserve any Intellectual Property of FRI or any FRI Subsidiary, or
dispose of or disclose to any person any trade secret, formula, process or
know-how not theretofore a matter of public knowledge, except where such
disposal or disclosure would not, individually or in the aggregate, be
reasonably expected to have a Material Adverse Effect on FRI;
(h) enter into any material agreement, contract, commitment or transaction
other than in the ordinary course of business, consistent with past practices;
(i) cancel any debts or waive, release or relinquish any material contract
rights or other rights of substantial value other than in the ordinary course
of business, consistent with past practices;
(j) authorize, recommend, propose or enter into or announce an intention to
authorize, recommend, propose or enter into an agreement in principle or a
definitive agreement with respect to any merger, consolidation, liquidation,
dissolution, or business combination, any acquisition of a material amount of
property or assets or securities, or any disposition of a material amount of
property or assets or securities, except as contemplated by this Agreement;
(k) make any material change with respect to accounting policies or
procedures in effect as of December 28, 1997 except as may be required by
generally accepted accounting principles;
(l) pay, discharge or satisfy any material claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise) other than the payment, discharge or satisfaction in the ordinary
course of business, consistent with past practices, of liabilities reflected
or reserved against in the FRI Financial Statements or incurred in the
ordinary course of business consistent with past practices since the date
hereof;
(m) effectuate (i) a "plant closing" (as defined in the WARN Act) affecting
any site of employment or one or more facilities or operating units within any
site of employment of FRI or any FRI Subsidiary, or (ii) a "mass layoff" (as
defined in the WARN Act) affecting any site of employment of FRI or any FRI
Subsidiary, without
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complying fully with any and all notice obligations (and/or pay and benefits
in lieu of notice) under the WARN Act or any similar obligation under
applicable state or local law requiring notice (and/or pay and benefits in
lieu of notice) to employees in the event of a plant closing or layoff. For
purposes of the WARN Act and this Agreement, the Effective Time is and shall
be the same as the "effective date" within the meaning of the WARN Act;
(n) commit or agree (in writing or otherwise) to take any of the foregoing
actions or any action that would make any representation or warranty in this
Agreement untrue or incorrect in any material respect, including as of the
date hereof and as of the Effective Time, as if made as of such time;
(o) take any action with the knowledge that such action would prevent the
Merger from qualifying as a reorganization within the meaning of sections
368(a) of the Code; or
(p) amend any Tax return, settle any Audit or make any election with respect
to Taxes which would materially adversely affect the Tax liability of FRI or
any FRI Subsidiary.
SECTION 6.4 No Solicitation. FRI will not, and will cause the FRI
Subsidiaries and each of their respective, officers, directors, employees,
agents and controlled Affiliates not to, directly or indirectly initiate,
solicit, engage in discussions or negotiations concerning, or provide any
information to any Person (other than KKR and its Representatives) relating to
any Acquisition Proposal. FRI will immediately cease and cause to be
terminated any existing activities, discussions and negotiations with respect
to any Acquisition Proposal. FRI shall immediately notify KKR if, subsequent
to the date hereof, any such negotiations, provision of information or data or
discussions are entered into or made or any such inquiries are received in
respect thereof, and shall provide details with respect thereto, including the
identity of any other party and the price and terms of any Acquisition
Proposal.
SECTION 6.5 Amendment of Certificate and Bylaws; Recapitalization. Prior to
the Effective Time FRI shall (a) amend and restate its Certificate of
Incorporation and Bylaws substantially in the forms set forth in Exhibit 6.5A1
and Exhibit 6.5A2, respectively, (b) issue to the holder of each FRI Share the
FRI Dividend and (c) duly adopt a further amendment to such Amended and
Restated Certificate of Incorporation, substantially in the form set forth in
Exhibit 6.5B, renaming FRI as Koo Koo Roo Enterprises, Inc., such amendment to
be filed with the Delaware Secretary of State and effective substantially
contemporaneous with the occurrence of the Effective Time.
SECTION 6.6 Nasdaq National Market Quotation. FRI shall use commercially
reasonable efforts to (a) cause the FRI Shares to be designated by the NASD as
a national market system security in the manner contemplated by Section
262(b)(2) of the DGCL no later than the effective date of the Merger and (b)
maintain such quotation on the Nasdaq National Market (or any successor
system) or list the FRI Shares on the New York Stock Exchange or the American
Stock Exchange for a period of five years from the Effective Time unless in
the good faith determination of the Board of Directors of FRI, the maintenance
of such quotation or listing is not in the best interests of the stockholders
of FRI.
SECTION 6.7 Indemnification and Insurance.
(a) After the consummation of the Merger, the Surviving Corporation shall
remain responsible for the officers' and directors' right to indemnification
and exculpation provided for in the Charter Documents of KKR as in effect on
the date hereof, with respect to acts and omissions occurring prior to the
Effective Time including, without limitation, the transactions contemplated by
this Agreement.
(b) For six years after the Effective Time, FRI shall maintain, or cause the
Surviving Corporation to maintain, officers' and directors' liability
insurance covering the persons who are presently covered by KKR's officers'
and directors' liability insurance policies (copies of which have heretofore
been delivered to FRI), with respect to actions and omissions occurring or
alleged to have occurred prior to the Effective Time, on terms that are not
materially less favorable than the terms of such current insurance in effect
on the date hereof; provided,
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however, that FRI and the Surviving Corporation shall not be obligated to make
annual premium payments for such insurance to the extent such premiums exceed
$225,050 (175% of the annual premiums paid as of the date hereof by KKR for
such insurance (the "Maximum Amount")). If the amount of the annual premiums
necessary to maintain or procure such insurance coverage exceeds the Maximum
Amount, FRI and the Surviving Corporation shall maintain the most advantageous
policies of directors and officers liability insurance obtainable for an
annual premium equal to the Maximum Amount.
(c) From and after the occurrence of the Effective Time, (i) FRI and the
Surviving Corporation shall, to the fullest extent permitted under applicable
law, indemnify, defend and hold harmless each present and former director and
officer of KKR (collectively, the "Indemnified Parties") against any costs or
expenses (including reasonable attorneys' fees), judgments, fines, losses,
claims, damages, liabilities and amounts paid in settlement in connection with
any pending, threatened or completed claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative,
arising out of or pertaining to any action or omission occurring prior to the
Effective Time (including, without limitation, any claim, action, suit,
proceeding or investigation arising out of or pertaining to the transactions
contemplated by this Agreement); (ii) in the event of any such claim, action,
suit, proceeding or investigation (whether arising before or after the
Effective Time), FRI and the Surviving Corporation shall advance expenses to
each such Indemnified Party, including the payment of the reasonable fees and
expenses of counsel selected by such Indemnified Party, which counsel shall be
reasonably satisfactory to the Surviving Corporation promptly after statements
therefor are received, provided that (1) FRI and the Surviving Corporation may
require such Indemnified Party to undertake to repay such amount if it is
ultimately determined in a judicial proceeding that is final and unappealable
that such Indemnified Party is not entitled to be indemnified by FRI and the
Surviving Corporation in accordance with Section 145 of the DGCL, (2) in any
single action or series of related actions, FRI and the Surviving Corporation
shall only be obligated to pay for the fees and expenses of one such counsel
(together with appropriate local counsel) for all of the Indemnified Parties
unless such counsel would have a conflict of interest in such representation
under applicable rules of professional conduct, (3) FRI and the Surviving
Corporation will cooperate fully in the defense of any such matter and (4) if
it is ultimately determined in a judicial proceeding that is final and
unappealable that FRI and the Surviving Corporation wrongly denied their
obligation to indemnify the Indemnified Parties pursuant to this Section
6.7(c), the losses to be indemnified shall include the Indemnified Parties'
reasonable attorneys' fees in seeking indemnification. Neither FRI nor the
Surviving Corporation shall be liable for any settlement effected without its
written consent (which consent shall not be unreasonably withheld).
(d) The provisions of this Section 6.7 are intended to be in addition to the
rights otherwise available to the directors and officers of KKR by law,
charter, statute, bylaw or agreement, shall survive the closing of the
transactions contemplated hereby, are intended to benefit each of the
Indemnified Parties (each of whom shall be entitled to enforce this Section
against the Surviving Corporation) and shall be binding on all successors and
assigns of FRI and the Surviving Corporation.
(e) In the event FRI, the Surviving Corporation or any of their respective
successors or assigns (i) consolidate with or merges into any other person and
shall not be the continuing or surviving corporation or entity of such
consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any Person, then, and in each such case, proper
provision shall be made so that the successors and assigns of FRI or the
Surviving Corporation assume the obligations set forth in this Section 6.7.
SECTION 6.8 Employee Benefits; Severance.
(a) For purposes of determining eligibility to participate, entitlement to
benefits and in all other respects where length of service is relevant under
any of Benefit Plans of FRI and the FRI Subsidiaries, following the Effective
Time, FRI shall cause the Benefit Plans of FRI and the FRI Subsidiaries
(including vesting, other than vesting under any defined contribution or
defined Benefit Plan of FRI and the FRI Subsidiaries), to credit an applicable
employee for such employee's service with KKR and any of the KKR Subsidiaries
to the same extent such service was credited under the applicable Benefit
Plans of KKR and the KKR Subsidiaries immediately prior to the Effective Time.
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(b) At the Effective Time, FRI shall assume and honor, or cause the
Surviving Corporation to honor, in accordance with their terms the employment
contracts, severance agreements and severance pay policies identified in
Schedule 6.8.
(c) FRI and KKR agree that each may enter into retention and transition
bonus arrangements with its employees after the date hereof and prior to the
Effective Time, with the terms and amounts of such payments to be determined
and agreed to jointly by the Chief Executive Officers of FRI and KKR.
SECTION 6.9 Filing of Form S-8. FRI shall file the Form S-8 with the
Commission as soon as practicable after the Effective Time and request and use
its commercially reasonable efforts to obtain immediate effectiveness thereof.
ARTICLE VII
COVENANTS OF KKR
KKR covenants and agrees as follows:
SECTION 7.1 Sale of the Hamlet Shares to FRI-MRD. Concurrently with the
execution of this Agreement, KKR shall execute and deliver to FRI-MRD a
purchase and sale agreement substantially in the form of Exhibit 6.1 relating
to the sale of Hamlet Shares to FRI-MRD.
SECTION 7.2 Loan to KKR. Concurrently with the execution of this Agreement,
KKR shall, and shall cause each of its Subsidiaries that is a party thereto,
to execute and deliver to FRI-MRD the Bridge Loan Agreement.
SECTION 7.3 Conduct of Business Pending Merger. Except for Permitted
Transactions, as otherwise specifically provided in this Agreement or in the
other Documents or as otherwise consented to in writing by FRI, which consent
shall not be unreasonably withheld, from the date of this Agreement to the
Effective Time, KKR will, and will cause each of the KKR Subsidiaries to,
conduct its operations only in the ordinary and usual course of business and
consistent with past practices and will, and will cause each of the KKR
Subsidiaries to, preserve intact its present business organization, take
commercially reasonable efforts to keep available the services of its present
officers, employees and consultants and preserve its present relationships
with licensors, licensees, customers, suppliers, employees, labor
organizations and others with whom they have a significant business
relationship.
Without limiting the generality of the foregoing, and except for Permitted
Transactions, as otherwise specifically provided in this Agreement or in the
other Documents, or as set forth on Schedule 7.3, KKR will not, and will not
permit any KKR Subsidiary to, directly or indirectly, from the date of this
Agreement to the Effective Time, without the prior written consent of FRI,
which shall not be unreasonably withheld:
(a) adopt any amendment to or otherwise change the Charter Documents of KKR
or any KKR Subsidiary;
(b) authorize for issuance, sale, pledge, disposition or encumbrance, or
issue, sell, pledge, dispose of or encumber (whether through the issuance or
granting of options, warrants, commitments, subscriptions, rights to purchase,
convertible securities or otherwise), any capital stock of any class or any
other securities of, or any other ownership interest in, KKR or any KKR
Subsidiary (except for (1) the issuance of KKR Common Shares (i) upon the
exercise of options and warrants outstanding on the date hereof, (ii) upon
conversion or exchange of the KKR Preferred Shares outstanding on the date
hereof or issuable upon the exercise of warrants outstanding as of the date
hereof, or (iii) the issuance of KKR Common Shares in payment of accrued and
unpaid dividends on the KKR Preferred Shares in accordance with the terms
thereof and (2) as contemplated by Sections 7.1 and 7.2 hereof), or amend any
of the terms of any such securities or agreements outstanding on the date
hereof;
(c) reclassify, combine, split or subdivide any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in cash,
securities or property or any combination thereof) in respect of
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any class or series of its capital stock (other than regularly scheduled
dividends on the KKR Preferred Shares paid in cash in accordance with the
terms thereof);
(d) redeem, purchase or otherwise acquire, or propose or offer to redeem,
purchase or otherwise acquire, any outstanding KKR Shares or other securities
of KKR or the KKR Subsidiaries;
(e) organize any new Subsidiary, acquire any capital stock or equity
securities of any Person or acquire any equity or ownership interest
(financial or otherwise) in any business;
(f)(i) incur, assume or prepay any material liability, including, without
limitation, any indebtedness for borrowed money except in the ordinary course
of business and consistent with past practice, and in no event in excess of
$50,000, (ii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for obligations of
any third party, (iii) make any loans, advances or capital contributions to,
or investments in, any third party, (iv) mortgage or pledge any of its
material properties or assets, tangible or intangible, or create any material
Lien thereupon other than Permitted Liens, or (v) authorize any capital
expenditures not in KKR's capital budget on the date hereof which,
individually or in the aggregate, are in excess of $50,000;
(g) license or otherwise transfer, dispose of, permit to lapse or otherwise
fail to preserve any Intellectual Property of KKR or any KKR Subsidiary, or
dispose of or disclose to any person any trade secret, formula, process or
know-how not theretofore a matter of public knowledge, except where such
disposal or disclosure would not, individually or in the aggregate, be
reasonably expected to have a Material Adverse Effect on KKR.
(h) enter into or amend any material agreement, contract, lease, commitment
or transaction other than in the ordinary course of business, consistent with
past practices;
(i) cancel any debts or waive, release or relinquish any material contract
rights or other rights of substantial value other than in the ordinary course
of business, consistent with past practices;
(j) except in accordance with Sections 7.1, 7.4 and 10.1(e), authorize,
recommend, propose or enter into or announce an intention to authorize,
recommend, propose or enter into an agreement in principle or a definitive
agreement with respect to any merger, consolidation, liquidation, acquisition
of a material amount of property or assets or securities, or any disposition
of a material amount of property or assets or securities;
(k) make any material change with respect to accounting policies or
procedures in effect as of December 31, 1997 except as may be required by
generally accepted accounting principles;
(l) pay, discharge or satisfy any material claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise) other than the payment, discharge or satisfaction in the ordinary
course of business, consistent with past practices, of liabilities reflected
or reserved against in the Financial Statements of KKR or incurred in the
ordinary course of business, consistent with past practices since the date
hereof;
(m) effectuate (i) a "plant closing" (as defined in the WARN Act) affecting
any site of employment or one or more facilities or operating units within any
site of employment of KKR or any KKR Subsidiary, or (ii) a "mass layoff" (as
defined in the WARN Act) affecting any site of employment of KKR or any KKR
Subsidiary, without complying fully with any and all notice obligations
(and/or pay and benefits in lieu of notice) under the WARN Act or any similar
obligation under applicable state or local law requiring notice (and/or pay
and benefits in lieu of notice) to employees in the event of a plant closing
or layoff. For purposes of the WARN Act and this Agreement, the Effective Time
is and shall be the same as the "effective date" within the meaning of the
WARN Act;
(n) commit or agree (in writing or otherwise) to take any of the foregoing
actions or any action that would make any representation or warranty in this
Agreement untrue or incorrect in any material respect, including as of the
date hereof and as of the Effective Time, as if made as of such time;
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(o) take any action with knowledge that such action would prevent the Merger
from qualifying as a reorganization within the meaning of sections 368(a) of
the Code; or
(p) amend any Tax Return, settle any Audit or make any election with respect
to Taxes which would materially adversely affect the Tax liability of KKR or
any KKR Subsidiary.
SECTION 7.4 No Solicitation.
KKR will not, and will cause the KKR Subsidiaries and each of their
respective Affiliates, officers, directors, employees and agents (collectively
"Representatives") not to, directly or indirectly initiate, solicit or, except
to the extent the Board of Directors of KKR determines in good faith, after
consultation with its outside counsel, that such action is required for the
Board of Directors of KKR to comply with its duties under Applicable Law,
engage in discussions or negotiations concerning, or provide any information
to any Person (other than FRI and its Representatives) relating to any
Acquisition Proposal. KKR will immediately cease and cause to be terminated
any existing activities, discussions and negotiations with any Persons
conducted heretofore with respect to any Acquisition Proposal. KKR shall
notify FRI immediately if KKR, any of the KKR Subsidiaries or any of their
respective Representatives receives any unsolicited proposal concerning an
Acquisition Proposal, the identity of the Person making any such proposal and
all of the terms and conditions thereof, and shall keep FRI promptly advised
of all developments relating thereto. The provisions of this Section 7.4 shall
not apply to the Permitted Transactions.
SECTION 7.5 KKR Stockholder Approval. KKR, acting through its Board of
Directors, shall in accordance with its Charter Documents and all Applicable
Laws cause a meeting of its stockholders to be duly called and held as soon as
reasonably practicable for purposes of voting on the approval and adoption of
this Agreement and the Merger. The exact time period from the date of mailing
of the KKR Proxy Statement to the date of the meeting shall be determined by
the Board of Directors of KKR, in consultation with FRI, it being understood
that such period shall be designed to allow an adequate period for all KKR
stockholders to receive such material and vote by proxy, provided that such
time period shall in no event exceed 40 calendar days without the prior
consent of FRI. The Board of Directors of KKR shall, subject to their
fiduciary duties, recommend approval and adoption of this Agreement and the
Merger by KKR's stockholders. In connection with such meeting, KKR (a) will,
together with FRI in respect of the offering of the FRI Shares pursuant to the
Form S-4, use their respective commercially reasonable efforts to file and
have cleared by the Commission and will thereafter mail to its stockholders as
promptly as practicable the KKR Proxy Statement and all other proxy materials
for such meeting and (b) will, subject to the foregoing, use commercially
reasonable efforts to obtain the necessary approvals by its stockholders of
this Agreement and the transactions contemplated hereby in accordance with the
DGCL.
SECTION 7.6 Affiliates. Prior to the execution of this Agreement KKR shall
deliver to FRI a letter identifying all persons who, in KKR's reasonable
judgment, may be deemed, as of the date of this Agreement, "affiliates" of KKR
for purposes of Rule 145 under the Securities Act. KKR shall use commercially
reasonable efforts to cause each person named in such letter to deliver a
written agreement substantially in the form attached hereto as Exhibit 7.6.
SECTION 7.7 Employee Benefit Matters. KKR and the KKR Subsidiaries shall
terminate each Benefit Plan of KKR and the KKR Subsidiaries which is a
"defined contribution plan" or "defined benefit plan," as
such terms are defined in Sections 3(34) and 3(35) of ERISA, respectively,
effective prior to the Effective Time, and shall appoint FRI as plan
administrator under each such plan for the sole purpose of completing the
termination thereof, filing all appropriate documents with government agencies
and distributing participant accounts in accordance with the applicable
provisions of each such terminated Benefit Plan. FRI shall offer participation
in each Benefit Plan of FRI and the FRI Subsidiaries which is a defined
contribution plan or defined benefit plan to participants in such terminated
Benefit Plans of KKR and the KKR Subsidiaries as soon as practicable after the
Effective Time, and shall permit such participants to elect direct rollovers
of their accounts in such terminated Benefit Plans to such FRI Benefit Plans.
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ARTICLE VIII
MUTUAL COVENANTS
SECTION 8.1 Access to Information.
(a) So long as this Agreement has not been terminated, upon reasonable
notice and subject to restrictions contained in confidentiality agreements
with third parties to which such party is subject (from which such party shall
use commercially reasonable efforts to be released), each of KKR and FRI shall
(and shall cause each of their respective Subsidiaries to) afford to the
officers, employees, accountants, counsel and other representatives of the
other, reasonable access, during normal business hours during the period prior
to the Effective Time, to all its properties, books, contracts, commitments
and records and, during such period, each of KKR and FRI shall (and shall
cause each of their respective Subsidiaries to) furnish promptly to the other
all information concerning its business, properties and personnel as such
other party may reasonably request.
(b) Each party shall keep such information confidential in accordance with,
and shall otherwise abide by, the terms of the Confidentiality,
Noncircumvention and Nondisclosure Agreement, dated as of January 20, 1998, as
if such party is the Confidant thereunder.
SECTION 8.2 Preparation of Form S-4 and the KKR Proxy Statement. Promptly
following the date of this Agreement, FRI shall prepare and file with the SEC
the Form S-4, in which the KKR Proxy Statement will be included as a
prospectus. Each of FRI and KKR shall use commercially reasonable efforts to
have the Form S-4 declared effective under the Securities Act as promptly as
practicable after such filing. FRI shall also take any action (other than
qualifying to do business or subjecting itself to taxation or service of
process in any jurisdiction in which it is not now so qualified or subject)
reasonably required to be taken under any applicable state securities law in
connection with the issuance of the FRI Shares in the Merger, and KKR shall
furnish all information concerning KKR and the holders of the KKR Common
Shares and rights to acquire KKR Common Shares pursuant to the KKR Stock
Plans, warrants or other arrangements as may be reasonably required in
connection with any such action. Each of FRI and KKR shall furnish all
information concerning itself to the other as may be reasonably requested in
connection with any such action and the preparation, filing and distribution
of the Form S-4 and the preparation, filing and distribution of the KKR Proxy
Statement. FRI, Merger-Sub and KKR each agree to correct any information
provided by it for use in the Form S-4 or the KKR Proxy Statement which shall
have become false or misleading.
SECTION 8.3 Reasonable Efforts. Subject to the terms and conditions of this
Agreement, each of the parties hereto agrees to use commercially reasonable
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, all things necessary, proper or advisable consistent with Applicable Law
to assure that all conditions to Closing set forth in Article IX of this
Agreement are satisfied as expeditiously as possible including, without
limitation, (i) the prompt preparation and filing with the Commission of the
Form S-4, (ii) the preparation and filing of all applicable forms under the
HSR Act, (iii) supplying certification to Latham & Watkins for the purpose of
satisfying the condition set forth in Section 9.3(g) and (iv) the preparation
and filing of all other forms, registrations and notices required to be filed
to consummate the transactions contemplated hereby and the taking of such
actions as are necessary to obtain any requisite approvals, consents, orders,
exemptions, waivers by any public or private third party. Each party shall
promptly consult with the other with respect to, provide any necessary
information with respect to and provide the other (or its counsel) copies of,
all filings made by such party with any Governmental Authority in connection
with this Agreement and the transactions contemplated hereby.
SECTION 8.4 Brokers or Finders. Each of KKR and FRI represents, as to
itself, its Subsidiaries and its Affiliates, that no agent, broker, investment
banker, financial advisor or other firm or person is or will be entitled to
any brokers' or finder's fee or any other commission or similar fee in
connection with any of the transactions contemplated by this Agreement, except
(a) fees and expenses to F.M. Roberts & Co. Inc. and to Sutro & Co.
Incorporated, which fees and expenses will be paid by KKR in accordance with
KKR's agreements as in place on the date hereof with such firms (copies of
which have been delivered by KKR to FRI prior to the date of this
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Agreement), and (b) fees and expenses to Libra Investments, Inc., which fees
and expenses will be paid by FRI in accordance with FRI's agreement as in
place on the date hereof with such firm. Each of KKR and FRI agrees to
indemnify, defend and hold the other harmless from and against any and all
claims, liabilities or obligations with respect to any other fees, commissions
or expenses asserted by any person on the basis of any act or statement
alleged to have been made by or on behalf of such party.
SECTION 8.5 Notification of Certain Matters. Between the date of this
Agreement and the Effective Time, KKR shall give prompt written notice to FRI
and FRI shall give prompt written notice to KKR, of the occurrence (or non-
occurrence) of any event of which any executive officer or director of KKR or
FRI, respectively, has knowledge, the occurrence (or non-occurrence) of which
would be likely to cause any representation or warranty contained in this
Agreement or any other Document to be untrue or inaccurate in any material
respect and of any material failure of either party to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder and shall use commercially reasonable efforts to cure any such
defect; provided, however, that delivery of any notice pursuant to this
Section 8.4 shall not limit or otherwise affect the remedies available to
either party hereunder.
SECTION 8.6 Further Information. As soon as practicable after such
information becomes available, and in any event not later than thirty (30)
days after the end of each fiscal month, KKR shall provide to FRI and FRI
shall provide to KKR an unaudited consolidated balance sheet as of the end of
such month and the related consolidated statements of results of operations
and statements of cash flows for such period provided that such internal
financial statements shall be supplied in a form and manner consistent with
previously supplied statements.
SECTION 8.7 Fees and Expenses.
(a) Except as set forth in clauses (b) and (c) below or Section 11.8,
whether or not the Merger is consummated, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall
be the exclusive obligation of, and shall be paid by, the party incurring such
expenses.
(b) If (i) this Agreement is terminated pursuant to Section 10.1(e) and at
the time of such termination neither FRI nor Merger-Sub is in material breach
of this Agreement or (ii) following the making by any Person (the "referrent
Person") of an Acquisition Proposal with respect to KKR, which Acquisition
Proposal is publicly disclosed and not withdrawn, this Agreement is terminated
pursuant to Section 10.1(d), at the time of termination neither FRI nor
Merger-Sub is in material breach of this Agreement and KKR or any of its
Affiliates enters into an agreement setting forth any substantive terms of, or
consummates, any Acquisition Proposal with respect to KKR with the referrent
Person or any of its Affiliates within six months of the date of such
termination, then KKR shall pay to FRI, by wire transfer of immediately
available funds, a fee of $6.0 million (the "Fee") (x) in the case of clause
(i) above, within three business days of delivery of written notice of such
termination or (y) in the case of clause (ii) above, concurrently with
consummation by such referrent Person or any of its Affiliates of any
Acquisition Proposal with respect to KKR. KKR shall in no event be obligated
to pay more than one such Fee with respect to all such occurrences and such
termination. The parties hereto acknowledge that an agreement relating solely
to the treatment of confidential information shall not be deemed to relate to
the substantive terms of an Acquisition Proposal.
(c) If (i) this Agreement is terminated (A) pursuant to Section 10.1(b)
(unless at the time of termination any of the conditions contained in Sections
9.3(a) through (h) remain unsatisfied or FRI has failed to obtain the consents
identified on Schedule 4.4(b)) or (B) pursuant to Section 10.1(d) and (ii) at
the time of either such termination neither FRI nor Merger-Sub is in breach in
any material respect of this Agreement and KKR or any of its Affiliates enters
into an agreement setting forth any substantive terms of, or consummates, any
Acquisition Proposal with respect to KKR within six months of the date of such
termination, concurrently with consummation of such Acquisition Proposal, KKR
shall pay to FRI, by wire transfer of immediately available funds, an amount
equal to all of the Expenses incurred by FRI; provided, that no Expenses shall
be payable pursuant to this clause (c) if KKR has paid the Fee pursuant to
clause (b).
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SECTION 8.8 Accountants' Letters.
(a) FRI shall use commercially reasonable efforts to cause to be delivered
to KKR a "comfort" letter of KPMG Peat Marwick LLP, its independent
accountants, dated a date within two business days before the date on which
the Form S-4 shall become effective, addressed to KKR, in form and substance
reasonably satisfactory to KKR and customary in scope and substance for
letters delivered by independent public accountants in connection with
registration statements similar to the Form S-4. In connection with FRI's
efforts to obtain such letter, if requested by KPMG Peat Marwick LLP, KKR
shall deliver to such accounting firm a representation letter complying with
SAS 72.
(b) KKR shall use commercially reasonable efforts to cause to be delivered
to FRI a "comfort" letter of BDO Seidman LLP, its independent accountants,
dated a date within two business days before the date on which the Form S-4
shall become effective, addressed to FRI, in form and substance reasonably
satisfactory to FRI and customary in scope and substance for letters delivered
by independent public accountants in connection with registration statements
similar to the Form S-4. In connection with KKR's efforts to obtain such
letter, if requested by BDO Seidman LLP, FRI shall deliver to such accounting
firm a representation letter complying with SAS 72.
SECTION 8.9 Public Announcements. FRI and KKR shall consult with each other
before issuing any press release or otherwise making any public statements
with respect to the Merger and shall not, and shall cause each of their
Representatives not to, issue any such press release or make any such public
statement prior to such consultation, except as may be required by law or any
listing agreement with its securities exchange. Contemporaneous with the
execution and delivery of this Agreement, FRI and KKR shall cause to be
released a joint press release in the form attached hereto as Exhibit 8.8.
ARTICLE IX
CONDITIONS
SECTION 9.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following
conditions:
(a) The applicable waiting period with respect to the Merger under the HSR
Act shall have expired or been terminated.
(b) The Form S-4 and any required post-effective amendment (if any) shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings seeking a stop order.
(c) No statute, rule, regulation, executive order, decree or injunction
shall have been enacted, entered, promulgated or enforced by any United States
court or Governmental Authority of competent jurisdiction which prohibits the
consummation of the Merger and shall be in effect.
(d) This Agreement shall have been approved and adopted by the affirmative
vote of the required percentage(s) of each of the outstanding KKR Shares, in
each case, in accordance with the DGCL.
(e) Each party hereto shall have obtained all consents, approvals,
authorizations and permits required from third parties and any Governmental
Authority necessary for the consummation of the transactions contemplated by
this Agreement, except for those consents, approvals, authorizations and
permits which the failure to obtain would not reasonably be expected to result
in a Material Adverse Effect on FRI or KKR, as the case may be; provided that
the failure to obtain required consents in connection with (i) any of KKR's
restaurant leases set forth on Schedule 9.1(e) or three or more of KKR's other
restaurant leases (in each case unless waived by FRI) or (ii) fourteen or more
of FRI's restaurant leases (unless waived by KKR), shall be deemed to
constitute a Material Adverse Effect.
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(f) KKR shall have received from Sutro & Co. Incorporated a bring-down
opinion dated within two business days of the date of the KKR Proxy Statement
confirming the opinion referred to in Section 5.3(c).
SECTION 9.2 Conditions of Obligations of FRI. The obligation of FRI to
effect the Merger are further subject to the satisfaction at or prior to the
Effective Time of the following conditions, unless waived by FRI:
(a) The representations and warranties of KKR set forth in this Agreement
shall be true and correct in all material respects (except for representations
and warranties that contemplate a Material Adverse Effect or Material Adverse
Change, which shall be true and correct as written) as of the date of this
Agreement and (except to the extent such representations speak as of an
earlier date) as of the Effective Time as though made on and as of the
Effective Time, except for changes contemplated by this Agreement.
(b) KKR shall have performed and complied, in all material respects, with
all obligations and covenants required to be performed or complied with by it
under this Agreement at or prior to the Effective Time.
(c) FRI shall have received from KKR an officer's certificate substantially
in the form of Exhibit 9.2(c) attached hereto.
(d) FRI shall have received from Latham & Watkins or other counsel to KKR
acceptable to FRI, an opinion substantially in the form of Exhibit 9.2(d)
attached hereto.
(e) From the date of this Agreement through the Effective Time, KKR shall
not have suffered a Material Adverse Change.
(f) Holders of no more than seven and one-half percent (7.5%) of KKR Shares
outstanding at the Effective Time shall have properly demanded and not
rescinded appraisal pursuant to Section 262 of the DGCL.
(g) The sale of Hamlet Shares to FRI-MRD shall have been completed, and such
shares shall be owned by FRI-MRD free and clear of any and all Liens imposed
by any action or inaction of KKR or any KKR Subsidiary.
(h) The KKR Notes shall have been repaid in full.
(i) The aggregate liquidation preference of the outstanding shares of Series
B Convertible Preferred Stock shall not exceed $100,000, and the only rights
the holders of such outstanding shares of Series B Convertible Preferred Stock
shall have upon consummation of the Merger shall be of those set forth in
Sections 2.6 and 3.4 hereof.
SECTION 9.3 Conditions of Obligations of KKR. The obligation of KKR to
effect the Merger is further subject to the satisfaction at or prior to the
Effective Time of the following conditions, unless waived by KKR:
(a) The representations and warranties of FRI set forth in this Agreement
shall be true and correct in all material respects (except for representations
and warranties that contemplate a Material Adverse Effect or Material Adverse
Change, which shall be true and correct as written) already specified as of
the date of this Agreement and (except to the extent such representations
speak as of an earlier date) as of the Effective Time as though made on and as
of the Effective Time, except for changes contemplated by this Agreement.
(b) FRI shall have performed and complied, in all material respects, with
all obligations and covenants required to be performed or complied with by it
under this Agreement at or prior to the Effective Time.
(c) The Board of Directors of FRI shall have been reconstituted as of the
Effective Time to consist of those individuals set forth in Exhibit 9.3(c)
attached hereto.
(d) KKR shall have received from FRI an officer's certificate substantially
in the form of Exhibit 9.3(d) attached hereto.
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(e) KKR shall have received from Skadden, Arps, Slate, Meagher & Flom LLP,
or other counsel to FRI acceptable to KKR, an opinion substantially in the
form of Exhibit 9.2(e) attached hereto.
(f) From the date of this Agreement through the Effective Time, FRI shall
not have suffered a Material Adverse Change.
(g) At or prior to the time the KKR Proxy Statement is mailed to the KKR
stockholders, KKR shall have received an opinion from Latham & Watkins, based
on customary representations of FRI, Merger-Sub and KKR, substantially to the
effect that (i) the Merger will constitute a reorganization within the meaning
of section 368(a) of the Code. In the event that Latham & Watkins is unable to
deliver such opinion or subsequently withdraws or modifies its opinion as
contemplated by the last sentence of this paragraph, FRI may, at its sole and
absolute discretion, propose an alternative structure to the Merger which KKR
will be required to use commercially reasonable efforts to implement;
provided, that (i) KKR shall have received an opinion from Latham & Watkins,
based on customary representations of FRI, Merger-Sub and KKR, substantially
to the effect that the alternative structure will constitute a reorganization
within the meaning of section 368(a) of the Code, (ii) FRI proposes such
alternate structure within 15 business days of receiving notice from KKR that
Latham & Watkins is unable to give such opinion and (iii) such alternative
structure does not adversely affect the Merger Consideration to be received by
the KKR stockholders or any other material economic term of this Agreement.
Further, the opinion of Latham & Watkins delivered pursuant to this section
shall not have been withdrawn or modified in any material respect as a result
of a change in Applicable Law or a change in the underlying facts.
(h) The FRI Shares shall be approved for quotation on the Nasdaq National
Market.
(i) The sale of Hamlet Shares to FRI-MRD shall have been completed resulting
in the receipt by KKR of cash in an amount not less than $20 million.
ARTICLE X
TERMINATION AND AMENDMENT
SECTION 10.1 Termination. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval of the matters
presented in connection with the Merger by the stockholders of KKR:
(a) by mutual written consent of KKR and FRI;
(b) by either KKR or FRI, if the Merger shall not have been consummated
before December 18, 1998 unless the failure to consummate the Merger by such
date shall be due to the action or failure to act of the party seeking to
terminate);
(c) by either KKR or FRI, if any permanent injunction or other order of a
court or other competent authority preventing the consummation of the Merger
shall have become final and nonappealable;
(d) by either FRI or KKR if, at the meeting of KKR stockholders called to
act on this Agreement (including any adjournment or postponement thereof), the
requisite vote of the KKR stockholders shall not have been obtained; or
(e) by either KKR or FRI, if KKR's Board of Directors shall have withdrawn
or modified or changed (including by amendment to the KKR Proxy Statement) in
a manner adverse to FRI or Merger-Sub its approval or recommendation of this
Agreement or the Merger.
SECTION 10.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 10.1 hereof, this Agreement
shall forthwith become void and have no effect, without any liability on the
part of any party hereto or its affiliates, directors, officers or
stockholders, other than the provisions of this Article X and Sections 8.1(b),
8.7, 11.1, 11.4, 11.5, 11.6, 11.7, 11.8 and 11.11. Notwithstanding the
foregoing, nothing contained in this Section shall relieve any party from
liability for any material breach of any covenant, representation or warranty
contained herein.
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SECTION 10.3 Amendment. This Agreement may be amended by the parties hereto
at any time before or after approval of the matters presented in connection
with the Merger by the stockholders of KKR and FRI but, after any such
approvals, no amendment shall be made that by law requires further approvals
by such stockholders without such further approvals. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
SECTION 10.4 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties of
the other parties hereto contained herein or in any document delivered
pursuant hereto and (iii) waive compliance with any of the agreements or
conditions contained herein by the other parties hereto. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.
ARTICLE XI
MISCELLANEOUS
SECTION 11.1 Notices. All notices and other communications hereunder shall
be in writing, and shall be deemed given upon receipt if delivered personally,
sent by facsimile transmission (receipt of which is confirmed) or by certified
or registered mail, return receipt requested, or by a nationally recognized
private overnight courier to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
(a) if to KKR, to:
Koo Koo Roo, Inc.
11075 Santa Monica Boulevard, Suite 225
Los Angeles, CA 90025
Attention: A. William Allen, III, Chief Executive Officer and
Ronald D. Garber, Esq., General Counsel
Facsimile No.: (310) 479-4221
with copies to:
Latham and Watkins
633 West Fifth Street, Suite 4000
Los Angeles, CA 90071
Attention: Anthony J. Richmond
Facsimile No.: (213) 891-8763
and
(b) if to FRI, to:
Family Restaurants, Inc.
18831 Von Karman Avenue, 3rd Floor
Irvine, CA 92612
Attention: Todd E. Doyle, Vice President and General Counsel
Facsimile No.: (949) 757-8076
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue
Los Angeles, California 90071
Attention: Michael Woronoff
Facsimile No.: (213) 687-5600
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SECTION 11.2 Descriptive Headings. The descriptive headings herein are
inserted for convenience only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement.
SECTION 11.3 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
SECTION 11.4 Entire Agreement; Assignment. This Agreement, along with the
schedules, exhibits and other documents referred to herein, (a) constitutes
the entire agreement and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof (other than the Non-disclosure Agreement, any provisions of such latter
agreement which are inconsistent with the transactions contemplated by this
Agreement being superseded by the provisions hereof) and (b) may not be
assigned by operation of law or otherwise without the prior written consent of
the other parties which may be given or withheld in their sole discretion.
Subject to the preceding sentence, this Agreement shall be binding on, inure
to the benefit of, and be enforceable by the parties hereto and their
respective successors and assigns.
SECTION 11.5 Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of Delaware without regard to any
applicable principles of conflicts of law.
SECTION 11.6 Specific Performance. The parties hereto agree that if any of
the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached, irreparable damage would occur, no
adequate remedy at law would exist and damages would be difficult to
determine, and that the parties shall be entitled to specific performance of
the terms hereof, in addition to any other remedy at law or equity.
SECTION 11.7 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and, except for the
provisions of Section 6.7 which are intended to be for the benefit of the
persons referred to therein and their beneficiaries, and may be enforced by
such persons as intended third-party beneficiaries, nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person or
persons any rights, benefits or remedies of any nature whatsoever under or by
reason of this Agreement.
SECTION 11.8 Attorneys' Fees. In any suit or action brought by any party
hereto to enforce this Agreement, the prevailing party shall be entitled to
reasonable attorneys' fees and costs incurred by the prevailing party in
connection therewith, including costs and expenses associated with any and all
appeals.
SECTION 11.9 Survival of Representations and Warranties. None of the
representations and warranties made in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive beyond the Effective Time
and each shall be deemed to have terminated at and as of the Effective Time.
This Section 11.9 shall not limit any covenant or agreement of the parties
which by its terms contemplates performance after the Effective Time.
SECTION 11.10 Obligation of FRI. Whenever this Agreement requires Merger-Sub
to take any action, such requirement will be deemed to include an undertaking
by FRI to cause Merger-Sub to take such action.
SECTION 11.11 Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or unenforceability of any
other provisions of this Agreement, which shall remain in full force and
effect.
A-41
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement and Plan of
Merger to be signed by their respective officers thereunto duly authorized as
of the date first written above.
KOO KOO ROO, INC.
/s/ A. William Allen, III
By: _________________________________
Name: A. William Allen, III
Title: Chief Executive Officer
FAMILY RESTAURANTS, INC
/s/ R.T. Trebing, Jr.
By: _________________________________
Name: R.T. Trebing, Jr.
Title: EVP/CFO
FRI-SUB, INC.
/s/ R.T. Trebing, Jr.
By: _________________________________
Name: R.T. Trebing, Jr.
Title: President
A-42
<PAGE>
ANNEX B
OPINION OF SUTRO & CO. INCORPORATED
June 9, 1998
The Board of Directors
Koo Koo Roo, Inc.
11075 Santa Monica Boulevard
Suite 225
Los Angeles, CA 90025
Members of the Board:
You have requested our opinion (the "Opinion") as to the fairness, from a
financial point of view, to the stockholders of Koo Koo Roo, Inc. (the
"Company" or "Koo Koo Roo"), of the financial terms of the proposed merger
between the Company and Family Restaurants, Inc. ("FRI"). We understand the
financial terms of the merger to be (i) the exchange of one share of Koo Koo
Roo, Inc. common stock ("Koo Koo Roo Common Stock") for one share of FRI
common stock ("FRI Common Stock") and (ii) the conversion of each share of Koo
Koo Roo Series B Convertible Preferred Stock into shares of FRI Common Stock,
in each case in accordance with Section 2.6 of the Agreement and Plan of
Merger, dated as of June 9, 1998, by and among FRI, FRI-Sub, Inc. and Koo Koo
Roo (the "Merger Agreement"). As more fully described in the Merger Agreement,
at the effective time of the merger, the Company will merge with and into an
indirect, wholly-owned subsidiary of FRI and FRI will thereafter change its
name to Koo Koo Roo Enterprises, Inc. (the "Merger").
In arriving at our Opinion, we have reviewed the financial terms of the
Merger Agreement as well as publicly available business and financial
information relating to the Company and FRI for recent years and interim
periods to date, including (i) the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 and Quarterly Report on Form 10-Q for
the period ended March 31, 1998; and (ii) FRI's Annual Report on Form 10-K for
the fiscal year ended December 28, 1997 and Quarterly Report on Form 10-Q for
the period ended March 29, 1998. We have also reviewed certain internal
financial forecasts and projections provided to us by the Company and have met
with management of the Company to review and discuss such information as well
as the Company's business, operations, assets, financial condition and future
prospects. We have also reviewed certain internal financial forecasts and
projections provided to us by FRI and have discussed with the management of
FRI such information and the respective business, operations, assets,
financial condition and future prospects. In addition, we have compared
certain financial and securities data of the Company and FRI with various
other companies in the restaurant industry, reviewed historical stock prices
and trading volumes of the common stock of the Company, reviewed the financial
terms of other business combinations and conducted such other financial
studies, analyses and investigations as we deemed appropriate for purposes of
this Opinion.
In our review and analysis and in formulating our Opinion, we have assumed
and relied upon the accuracy and completeness of all the financial and other
information provided to us or publicly available, and we have not assumed any
responsibility for independently verifying any such information. We have
relied upon the respective managements of the Company and FRI as to the
reasonableness and achievability of the internal projections (and the
assumptions and bases thereof) provided to us, and we have assumed that such
internal projections reflect the best currently available estimates. In
addition, we have made certain assumptions concerning the operations of the
combined entity consistent with the financial projections supplied by the
Company and FRI. We understand that the Merger is conditioned upon receipt of
an opinion of counsel that the Merger will constitute a tax-free transaction
under the Internal Revenue Code and therefore have assumed that the Merger
will be treated as a tax-free reorganization for federal income tax purposes.
Our Opinion, as set forth herein, relates to the relative values of the
Company and FRI. We are not expressing any opinion as to what the value of Koo
Koo Roo Enterprises, Inc. Common Stock actually will be when issued to the
Company's stockholders pursuant to the
B-1
<PAGE>
Merger or the price at which Koo Koo Roo Enterprises, Inc. Common Stock will
actually trade subsequent to the Merger.
We have relied as to all legal matters on counsel of the Company. We have
made no independent investigation of any legal matters affecting the Company
or FRI. We have assumed the correctness of the legal advice given to the Board
of Directors of the Company by its counsel, and have assumed that upon
consummation of the Merger, each company shall have all the appropriate
approvals, licenses and permits to conduct its business as proposed.
We have not been authorized to and have not solicited alternative offers for
the Company or its assets, nor investigated alternative transactions which may
be available to the Company. For the purposes of this Opinion, we have assumed
that the final form of the Merger Agreement, as executed by the parties
thereto, will not differ in any material respect from the draft provided to
us.
We have acted as a financial advisor to the Board of Directors of the
Company in connection with the Merger described above and we will receive a
fee for our services. In the ordinary course of our business, we may actively
trade the securities of the Company for our own account or the account of our
customers and, accordingly, may at any time hold a long or short position in
such securities.
Our Opinion is necessarily based on economic, market, financial, precedent
transactions and other conditions as they exist and can be evaluated as of the
date of this letter and any change in such conditions would require a re-
evaluation of this Opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. We have
advised the Board of Directors that our entire analysis must be considered as
a whole and that selecting portions of the analyses and the factors considered
by us without considering all analyses and factors, could create an incomplete
view of the evaluation process underlying our Opinion.
It is understood that this letter is for the use and benefit of the Board of
Directors of the Company and is rendered to the Board of Directors in
connection with its consideration of the Merger Agreement. This Opinion does
not constitute a recommendation to the Board of Directors or to any
stockholder of the Company with respect to the Merger. Our Opinion may not be
published or otherwise used or referred to, nor shall any public reference to
Sutro be made, other than in connection with the filings required to be made
by the Company with the Securities and Exchange Commission pursuant to the
Securities Act of 1933 or the Securities Exchange Act of 1934 and in materials
delivered to the stockholders, without Sutro's prior written consent.
Based upon and subject to the foregoing and such other factors as we deemed
relevant, it is our opinion that the financial terms of the proposed merger as
defined in the first paragraph of this letter, from a financial point of view,
are fair to the stockholders of Koo Koo Roo, Inc.
Sincerely,
SUTRO & CO. INCORPORATED
B-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 33-14051
----------------
FAMILY RESTAURANTS, INC.
INCORPORATED IN DELAWARE I.R.S. EMPLOYER IDENTIFICATION
NO. 33-0197361
18831 VON KARMAN AVENUE, IRVINE, CA 92612
TELEPHONE: (714) 757-7900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE.
----------------
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to the filing
requirements for at least the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [_]
Index to exhibits appears on page 26.
The common stock of the registrant is not publicly traded. Therefore, the
aggregate market value of voting stock held by non-affiliates is not readily
determinable.
Number of shares of outstanding common stock as of March 27, 1998 is
988,285.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
FAMILY RESTAURANTS, INC.
PART I
ITEM 1. BUSINESS
BACKGROUND
Family Restaurants, Inc. (together with its subsidiaries, the "Company") was
incorporated in Delaware in 1986 and is primarily engaged in the operation of
full-service restaurants through its subsidiaries. At December 28, 1997, the
Company operated 275 restaurants in 30 states, with approximately 65% of its
restaurants located in California, Ohio, Pennsylvania, Michigan, Illinois and
Indiana. Additionally, as of December 28, 1997, the Company was the franchisor
and licensor of two restaurants in the United States and 23 restaurants
outside the United States. See "--Franchised and Licensed Restaurants."
On January 27, 1994, Apollo FRI Partners, L.P. ("Apollo"), Green Equity
Investors, L.P. ("GEI") and Foodmaker, Inc. ("Foodmaker") acquired
approximately 98% of the then outstanding common stock, par value $.01 per
share (the "Common Stock"), of the Company. Concurrently, Chi-Chi's, Inc.
("Chi-Chi's") was merged with and into a subsidiary of the Company. On
November 20, 1995, Apollo entered into an Exchange Agreement with Foodmaker
and GEI, pursuant to which, among other things, (i) on December 20, 1995,
Foodmaker transferred all of the shares of the Common Stock and the Warrant
(as defined below) owned by it to Apollo and (ii) on November 20, 1995, GEI
transferred 19,609 shares of the Common Stock held by it to Apollo. See "--
Change in Control."
On May 23, 1996, the Company completed the sale of its family restaurant
division, which operated full-service family-style restaurants primarily under
the Coco's and Carrows names (the "Family Restaurant Division"), to FRD
Acquisition Co. ("FAC"), an indirect, wholly-owned subsidiary of Flagstar
Companies, Inc. (now known as Advantica Restaurant Group, Inc.) ("Flagstar"),
in exchange for $125 million cash, $150 million principal amount of 12 1/2%
Senior Notes due in 2004 (the "FRD Notes") and the assumption of $31.5 million
of long-term debt, primarily consisting of capitalized lease obligations.
Based on the subsequent completion of a closing balance sheet, the purchase
price was increased and such increase was satisfied by the issuance of
$6.9 million in additional FRD Notes. See "--Sale of Family Restaurant
Division."
On July 3, 1996, the Company repurchased $151.0 million aggregate principal
amount of its 9 3/4% Senior Notes due 2002 (the "Senior Notes") and $108.6
million aggregate principal amount of its 10 7/8% Senior Subordinated Discount
Notes due 2004 (the "Discount Notes" and together with the Senior Notes, the
"Notes") in exchange for (or from the proceeds from the sale of) $133.5
million aggregate principal amount of the FRD Notes. In separate transactions,
the Company repurchased (i) an additional $8.5 million aggregate principal
amount of its Discount Notes in the third quarter of 1996 and (ii) an
additional $30.0 million aggregate principal amount of its Senior Notes and an
additional $2.0 million aggregate principal amount of its Discount Notes in
the fourth quarter of 1996. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital
Resources--Liquidity."
On January 10, 1997, the Company entered into a five-year, $35 million
credit facility (the "Foothill Credit Facility") with Foothill Capital
Corporation ("Foothill") to provide for the ongoing working capital needs of
the Company. The Foothill Credit Facility, which replaced the Company's old
credit facility with Credit Lyonnais (the "Old Credit Facility"), provides for
up to $15 million in revolving cash borrowings and up to $35 million in
letters of credit (less the outstanding amount of revolving cash borrowings).
The Foothill Credit Facility is secured by substantially all of the real and
personal property of the Company and contains customary restrictive covenants,
including the maintenance of certain financial ratios. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--
Liquidity and Capital Resources--Liquidity."
On August 12, 1997, FRI-MRD Corporation (a wholly-owned subsidiary of the
Company) ("FRI-MRD") issued new senior discount notes (the "Senior Discount
Notes") in the face amount of $61 million at a price of
K-2
<PAGE>
approximately 75% of par. The Senior Discount Notes are due on January 24,
2002 and accrete at a rate of 15% per annum until July 31, 1999, and
thereafter, interest will be payable in cash semi-annually at the rate of 15%
per annum. The $61 million of Senior Discount Notes were issued to an existing
holder of the Company's Senior Notes in exchange for $15.6 million of Senior
Notes plus approximately $34 million of cash, and are part of an agreement
pursuant to which FRI-MRD had the ability to issue up to a maximum of $75
million of Senior Discount Notes. In January 1998, FRI-MRD issued the
remaining $14 million in face value of the Senior Discount Notes available
under such agreement to the same purchaser at a price of 83% of par. FRI-MRD
received approximately $11.6 million in cash as a result of this subsequent
sale. Proceeds from the sales of the Senior Discount Notes will be used to
fund the Company's capital expenditure programs and for general corporate
purposes. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Liquidity and Capital Resources--Liquidity."
Unless the context otherwise requires, reference to the "Company" refers to
The Restaurant Enterprises Group, Inc. and its consolidated subsidiaries (not
including Chi-Chi's) when used with respect to historical information relating
to periods prior to January 27, 1994 included herein, and refers to Family
Restaurants, Inc. and its consolidated subsidiaries when used with respect to
information relating to periods after January 27, 1994.
ONGOING RESTAURANT OPERATIONS
The Company operated 275 restaurants primarily under the Chi-Chi's, El
Torito and Casa Gallardo names as of December 28, 1997. The Chi-Chi's, El
Torito and Casa Gallardo restaurants serve moderately priced, high-quality
Mexican food and a wide selection of alcoholic beverages. The Company is the
largest operator of full-service Mexican restaurants in the United States,
based upon both number of restaurants and annual revenues. The average food
check per person (excluding alcoholic beverage sales) is approximately $7.62
for Chi-Chi's, $9.49 for El Torito and $8.11 for Casa Gallardo restaurants.
Chi-Chi's restaurants generally contain from 5,000 to 10,600 square feet of
floor space and accommodate approximately 200 to 400 guests in the restaurant
and lounge. El Torito restaurants generally contain from 8,000 to 10,000
square feet of floor space and accommodate approximately 300 to 400 guests in
the restaurant and lounge. The Company's restaurants are generally located in
freestanding buildings in densely populated suburban areas, and the Company
believes their festive atmosphere and moderate prices are especially appealing
to family clientele.
SITE SELECTION
The selection of sites for new restaurants is the responsibility of the
senior management of El Torito and Chi-Chi's. Typically, potential sites are
brought to the attention of the Company by real estate brokers and developers
familiar with its needs. Sites are evaluated on the basis of a variety of
factors, including demographic data, land use and environmental restrictions,
competition in the area, ease of access, visibility, availability of parking
and proximity to a major traffic generator such as a shopping mall, office
complex, stadium or university.
EMPLOYEES
At December 28, 1997, the Company had 17,520 employees, of whom 16,038 were
restaurant employees, 1,134 were field management and 348 were corporate
personnel. Employees are paid on an hourly basis, except restaurant managers,
corporate and field management and administrative personnel. Restaurant
employees include a mix of full-time and part-time, mostly hourly personnel,
enabling the Company to provide services necessary during hours of restaurant
operations. The Company has not experienced any significant work stoppages and
believes its labor relations are good.
COMPETITION AND MARKETS
The restaurant business is highly competitive and is affected by changes in
the public's eating habits and preferences, population trends and traffic
patterns, and local and national economic conditions affecting consumer
spending habits. Key competitive factors in the industry are the quality and
value of the food products offered, quality and speed of service, advertising,
name identification, attractiveness of facilities and restaurant location.
K-3
<PAGE>
The Company's restaurants compete with a wide variety of restaurants ranging
from national and regional restaurant chains to locally owned restaurants.
GOVERNMENT REGULATION
Each of the Company's restaurants is subject to Federal, state and local
laws and regulations governing health, sanitation, environmental matters,
safety, the sale of alcoholic beverages and regulations regarding hiring and
employment practices. The Company believes it has all licenses and approvals
material to the operation of its business, and that its operations are in
material compliance with applicable laws and regulations.
The Company is subject to Federal and state laws governing matters such as
minimum wages, overtime and other working conditions. Approximately half of
the Company's employees are paid at rates related to the minimum wage.
Therefore, increases in the minimum wage or decreases in the allowable tip
credit (tip credits reduce the minimum wage that must be paid to tipped
employees in certain states) increase the Company's labor costs. This is
especially true in California, where there is no tip credit. Effective October
1, 1996, the Federal minimum wage was increased from $4.25 to $4.75, and
effective September 1, 1997, it was further increased to $5.15. However, a
provision of the new measure effectively froze the minimum wage for tipped
employees at current levels by increasing the allowable tip credit in those
states which allow for a tip credit. Furthermore, California voters approved a
proposition on November 5, 1996 that increased the state's minimum wage to
$5.00 on March 1, 1997 and further increased the state's minimum wage to $5.25
on March 1, 1998. In response to the minimum wage increases on October 1,
1996, March 1, 1997 and March 1, 1998, the Company raised menu prices at its
El Torito restaurants in an effort to recover the higher payroll costs. Menu
prices were not increased at Chi-Chi's during the first nine months of 1997
due to marketing strategies and the fact that Chi-Chi's experienced a lesser
impact from the Federal minimum wage increases due to the increased allowable
tip credit in certain states. However, Chi-Chi's did raise menu prices in
October 1997 as a result of the cumulative impact of these minimum wage
increases. At the request of President Clinton, the Congress is considering
further increases in the Federal minimum wage over the next two years.
The Company is also subject to both Federal and state regulations governing
disabled persons' access to its restaurant facilities, including the Americans
with Disabilities Act ("ADA"), which became effective in January 1992. If the
ADA were interpreted to require a higher degree of accessibility for disabled
persons than presently established, it could have a significant economic
impact on the Company, inasmuch as such interpretation could require the
Company, and the restaurant industry as a whole, to make substantial
modifications to its restaurant facilities.
Currently, the Company franchises and licenses two restaurants in the United
States and 23 restaurants internationally. The Company began franchising its
El Torito concept both domestically and internationally in 1997. See "--
Franchised and Licensed Restaurants." The Company believes its franchises are
operating in substantial compliance with applicable laws and regulations
governing such operations.
TRADEMARKS AND SERVICE MARKS
The Company regards its trademarks and service marks as important to the
identification of its restaurants and believes that they have significant
value in the conduct of its business. The Company has registered various
trademarks and service marks with the United States Patent and Trademark
Office. In addition to its Federal registrations, certain trademarks and
service marks have been registered in various states and selected
international markets in which the Company operates restaurants. Also, many of
the Company's menus, training manuals and other printed manuals utilized in
conjunction with its business are copyrighted.
FRANCHISED AND LICENSED RESTAURANTS
In May 1994, El Torito Restaurants, Inc. ("El Torito") and Coco's
Restaurants, Inc. ("Coco's"), a former indirect subsidiary of the Company,
entered into a license agreement, which, among other things, granted to
K-4
<PAGE>
Coco's an exclusive right and license that permits Coco's to grant other
parties a sublicense to develop the Company's El Torito Mexican restaurant
concept in Japan. As a result, in April 1995, Coco's entered into a Technical
Assistance and License Agreement, which, among other things, granted to Coco's
Japan Co., Ltd. ("CJCL") the right to develop the Company's El Torito Mexican
restaurant concept in Japan. At December 28, 1997, CJCL operated six El Torito
restaurants in Japan.
On October 15, 1997, Chi-Chi's entered into a binding term sheet agreement
with its licensee, Chi-Chi's International Operations, Inc. ("CCIO"), whereby
the parties agreed to resolve various ongoing disputes. Under the general
provisions of the term sheet, (i) the rights to develop Chi-Chi's restaurants
throughout the world, except in areas of currently existing Chi-Chi's
franchises, have been transferred back to Chi-Chi's; (ii) for a period of five
years, CCIO shall operate the existing 16 international Chi-Chi's restaurants
for Chi-Chi's in exchange for a fee equal to all royalties and fees payable
from the international franchisees and licensees; (iii) CCIO has the right to
convert the existing 16 international Chi-Chi's restaurants to other concepts;
and (iv) under certain conditions, Chi-Chi's has the right to terminate the
management arrangement with CCIO within five years. As a result of the term
sheet, Chi-Chi's will not receive any royalties or license fees from CCIO or
the currently existing international Chi-Chi's restaurant operations until
Chi-Chi's terminates the management agreement with CCIO. In 1996, Chi-Chi's
received no royalties from CCIO due to a payment abatement, and during 1997,
Chi-Chi's received royalties of $16,000 from CCIO.
In 1996, the Company established El Torito Franchising Company ("ETFC") to
market domestically and internationally the El Torito Mexican restaurant
concept. At December 28, 1997, ETFC was authorized to sell franchises in 41
states. On January 16, 1997, ETFC entered into a Master Franchise and
Development Agreement with Evliyaoglu Ltd. ("EL"), pursuant to which EL was
granted the rights to develop 50 El Torito restaurants over 15 years in
Turkey. At December 28, 1997, EL operated one El Torito restaurant in Turkey.
As described above, under existing license and other franchise agreements,
six El Torito restaurants are operated in Japan, one El Torito restaurant is
operated in Turkey, two El Torito restaurants are operated in the United
States and 16 Chi-Chi's restaurants are operated in international markets.
Franchise and license fees were $219,000 for the year ended December 28, 1997.
This compares to $1,605,000 for the year ended December 29, 1996 and
$4,824,000 for the year ended December 31, 1995, of which 92% and 84%,
respectively, were from Coco's restaurants licensed by CJCL. The license
arrangement for Coco's restaurants was transferred to Flagstar upon completion
of the sale of the Family Restaurant Division.
CHANGE IN CONTROL
On November 20, 1995, Apollo entered into an Exchange Agreement with each of
Foodmaker and GEI (the "Exchange Agreements") pursuant to which, among other
things, (i) on December 20, 1995 Foodmaker transferred all of the shares of
Common Stock and a warrant to purchase, at an aggregate exercise price of
$26.7 million, 10% of the Common Stock outstanding assuming the full exercise
thereof (the "Warrant") held by it to Apollo, (ii) on November 20, 1995 GEI
transferred 19,609 shares of Common Stock held by it to Apollo and (iii) the
Shareholders' Agreement, dated as of January 27, 1994, by and among Apollo,
GEI and Foodmaker (the "Shareholders' Agreement") was terminated as between
themselves and the Company. In connection with the foregoing, Jackson W.
Goodall, Jr., Charles W. Duddles and Edward Gibbons, the three members of the
Company's Board of Directors (the "Board") nominated by Foodmaker pursuant to
the Shareholders' Agreement, and Leonard I. Green and Jonathan D. Sokoloff,
the two members of the Board nominated by GEI, resigned from the Board and
from all other positions, if any, held with the Company or its subsidiaries.
The foregoing transactions were consummated after the lenders under the Old
Credit Facility, in connection with their consent to an amendment thereto,
required certain of the Company's shareholders to purchase a participation in
certain loans under such agreement. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital
Resources." Apollo agreed to purchase such participation and, in consideration
therefor, Foodmaker and GEI agreed to the transactions set forth above.
K-5
<PAGE>
Prior to the consummation of the foregoing transactions, Apollo, GEI and
Foodmaker, the Company's three largest shareholders, held approximately 39%,
18% and 39%, respectively, of the Company's Common Stock, and pursuant to the
terms of the Shareholders' Agreement, controlled the Company. Upon
consummation of the foregoing transactions, Apollo, GEI and Foodmaker held
approximately 81%, 16% and 0% of the Common Stock, respectively. Consequently,
Apollo, through its ownership of the Common Stock, controls the Company.
SALE OF FAMILY RESTAURANT DIVISION
On May 23, 1996, the Company completed the sale of the Family Restaurant
Division to Flagstar in exchange for $125 million cash, $150 million principal
amount of the FRD Notes and the assumption of $31.5 million of long-term debt,
primarily consisting of capitalized lease obligations. Based on the subsequent
completion of a closing balance sheet, the purchase price was increased and
such increase was satisfied by the issuance of $6.9 million in additional FRD
Notes. The Company recorded a gain of $62.6 million on the sale of the Family
Restaurant Division, which gain included the effect of the increase in
purchase price of $6.9 million discussed above. Cash proceeds from the sale
were used to pay indebtedness outstanding under the Old Credit Facility of $82
million, help fund the repurchases of the Notes and for general corporate
purposes. As of March 27, 1998, the Company had sold or exchanged $153.65
million aggregate principal amount of the FRD Notes. The remaining balance of
$3.25 million is restricted until the fourth anniversary of the sale in
accordance with the sale agreement with Flagstar to secure potential future
indemnity claims. The remaining FRD Notes are carried at their fair value
which approximates their cost.
ITEM 2. PROPERTIES
Of the 275 restaurants operated by the Company as of December 28, 1997, the
Company owned the land and building for 34, owned the building and leased the
land for 53 and leased both land and building for the remaining 188
restaurants. The restaurants are primarily free-standing units ranging from
approximately 5,000-10,000 square feet. Most of the leases provide for the
payment of a base rental or approximately 5% to 6% of gross sales, whichever
is greater, plus real estate taxes, insurance and other expenses.
The leases (assuming exercise of all options) have terms expiring as
follows:
<TABLE>
<CAPTION>
LEASE NUMBER OF
EXPIRATION RESTAURANTS
---------- -----------
<S> <C>
1998-2002...................................................... 12
2003-2007...................................................... 19
2008-2012...................................................... 46
2013-2017...................................................... 56
2018 and later................................................. 108
---
Total........................................................ 241
===
</TABLE>
In addition, the Company owns a 43,120 square-foot building in Irvine,
California which houses support personnel for the Company. The Company leases
34,200 square feet of space in an office building in Irvine, California which
houses El Torito operations staff, the Company's headquarters personnel and
certain support functions of the Company. The Company also leases 26,270
square feet of space in a building in Louisville, Kentucky which houses the
Chi-Chi's operations and support functions and various other smaller offices
and warehouses.
Substantially all of the Company's assets have been pledged under the
Foothill Credit Facility. However, of the 87 owned restaurants at December 28,
1997 (building or land and building), six were subject to security interests
in favor of other third parties.
K-6
<PAGE>
The following table details the Company-operated restaurants by state of
operation as of December 28, 1997.
<TABLE>
<CAPTION>
TOTAL
NUMBER OF
STATE CHI-CHI'S EL TORITO RESTAURANTS
----- --------- --------- -----------
<S> <C> <C> <C>
California................................. -- 76 76
Ohio....................................... 28 -- 28
Pennsylvania............................... 25 -- 25
Michigan................................... 17 -- 17
Illinois................................... 15 1 16
Indiana.................................... 14 2 16
Maryland................................... 10 -- 10
Missouri................................... 2 8 10
Virginia................................... 10 -- 10
Wisconsin.................................. 10 -- 10
Minnesota.................................. 7 -- 7
New Jersey................................. 7 -- 7
Iowa....................................... 6 -- 6
Kentucky................................... 6 -- 6
New York................................... 5 -- 5
Florida.................................... 1 2 3
Kansas..................................... 3 -- 3
Massachusetts.............................. 3 -- 3
Oregon..................................... -- 3 3
West Virginia.............................. 3 -- 3
Arizona.................................... -- 2 2
Colorado................................... 1 -- 1
Connecticut................................ 1 -- 1
Delaware................................... 1 -- 1
Nebraska................................... 1 -- 1
Nevada..................................... -- 1 1
North Carolina............................. 1 -- 1
North Dakota............................... 1 -- 1
South Dakota............................... 1 -- 1
Washington................................. -- 1 1
--- --- ---
Total.................................... 179 96 275
=== === ===
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various litigation matters incidental to its
business. The Company does not believe that any of the claims or actions filed
against it will have a material adverse effect upon the consolidated financial
position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 7, 1997, Apollo, the majority stockholder of the Company, acting
by written consent, consented to the contribution by the Company to FRI-MRD of
$215.4 million of debt payable by Chi-Chi's to the Company. On August 7, 1997,
Apollo, the majority stockholder of the Company, acting by written consent,
consented to the gratuitous forgiveness of $30.8 million of intercompany debt
owed by FRI-MRD to the Company. On October 20, 1997, Apollo, the majority
stockholder of the Company, acting by written consent, authorized and approved
the amendment and restatement of the Company's Value Creation Units Plan,
which Amended and Restated Value Creation Units Plan is attached to this Form
10-K as Exhibit 10(dd).
K-7
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
There is no established public trading market for the Common Stock.
Accordingly, earnings per common share information has not been presented.
At March 27, 1998, there were 84 stockholders of record of Common Stock. No
other class of stock was outstanding as of that date. No dividends have been
paid by the Company to its common stockholders.
Each of the indentures, as amended, (collectively, the "Indentures")
governing the Company's outstanding Senior Notes and Discount Notes, the note
agreement governing the FRI-MRD Senior Discount Notes and the Foothill Credit
Facility imposes restrictions on the Company's ability to pay dividends.
K-8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
SUCCESSOR COMPANY(1) PREDECESSOR COMPANY(1)
------------------------------------------------- ----------------------------
AS OF AND FOR THE YEARS ENDED AS OF AND FOR FOR THE ONE
------------------------------- THE ELEVEN MONTH ENDED AS OF AND FOR
DEC. 28, DEC. 29, DEC. 31, MONTHS ENDED JAN. 26, THE YEAR
1997 1996 1995 DEC. 25, 1994 1994 DEC. 26, 1993
-------- --------- ---------- ------------- ----------- -------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales................... $463,724 $ 724,229 $1,134,359 $1,048,674 $ 64,741 $ 884,910
Cost of Sales:
Product cost........... 123,803 200,379 322,194 293,413 19,184 259,512
Payroll and related
costs................. 162,807 273,536 419,185 377,569 24,780 331,747
Occupancy and other
operating expenses.... 129,428 181,730 275,164 243,147 13,712 197,797
Depreciation and
amortization........... 22,583 34,475 57,836 48,646 2,800 32,224
General and
administrative
expenses............... 30,186 41,742 56,245 49,059 4,071 44,164
Gain (loss) on
disposition of
properties............. (3,885) (8,600) (12,067) (5,685) 12 (4,916)
Gain on sale of
division............... 0 62,601 0 0 0 0
Provision for
divestitures and write-
down of
long-lived assets...... 2,640 0 44,500 144,780 (2) 0 10,400
Restructuring costs..... 0 6,546 4,392 0 0 0
Debt restructuring
costs.................. 0 0 0 0 0 4,239
Reorganization items.... 0 0 0 0 479,427 (1,091)
Interest expense, net... 19,476 36,725 65,277 51,419 4,097 50,276
Income tax provision.... 509 890 1,208 1,773 55 658
-------- --------- ---------- ---------- -------- ---------
Income (loss) before
extraordinary item..... (31,593) 2,207 (123,709) (166,817) 475,481 (52,114)
Extraordinary gain on
extinguishment of debt. 0 134,833 0 2,941 72,561 0
-------- --------- ---------- ---------- -------- ---------
Net income (loss)....... (31,593) 137,040 (123,709) (163,876) 548,042 (52,114)
Preferred dividends..... 0 0 0 0 1,698 20,232
-------- --------- ---------- ---------- -------- ---------
Net income (loss)
attributable to common
shares................. $(31,593) $ 137,040 $ (123,709) $ (163,876) $546,344 $ (72,346)
======== ========= ========== ========== ======== =========
BALANCE SHEET DATA:
Working capital
(deficiency)........... $(66,412) $ (85,524) $ 45,114 (3) $ (155,481) $ (95,209)
Current assets.......... 45,117 46,612 267,077 43,015 77,109
Total assets............ 289,768 307,606 551,270 734,598 366,577
Current liabilities..... 111,529 132,136 221,963 198,496 172,318
Liabilities subject to
settlement under
reorganization
proceedings............ 0 0 0 0 320,194 (4)
Non-current portion of
long-term debt,
including capitalized
lease obligations...... 199,955 165,325 455,203 (5) 536,495 78,658
Redeemable cumulative
exchangeable preferred
stock.................. 0 0 0 0 183,921
Common stockholders'
equity (deficit)....... (26,194) 5,399 (131,576) (7,259) (391,638)
SELECTED CONSOLIDATED
FINANCIAL RATIOS AND
OTHER DATA:
EBITDA(6)............... $ 17,500 $ 26,842 $ 61,571 $ 85,486 $ 2,994 $ 51,690
Net income (loss)....... (31,593) 137,040 (123,709) (163,876) 548,042 (52,114)
Net cash provided by
(used in) operating
activities............. (13,105) (21,857) 6,083 18,346 (18,252) 25,352
Capital expenditures.... 13,588 9,848 38,022 65,618 779 20,064
Net cash provided by
(used in) investing
activities............. (16,631) 165,024 (19,615) (64,167) (192,610) (10,717)
Net cash provided by
(used in) financing
activities............. 28,434 (117,717) 13,663 31,858 223,754 (19,839)
Restaurants open at end
of period.............. 275 281 670 702 524 528
Ratio of EBITDA to
interest expense....... 0.90x 0.73x 0.94x 1.66x 0.73x (7) 1.03x (7)
</TABLE>
- --------
(1) Reference to the "Predecessor Company" refers to The Restaurant
Enterprises Group, Inc. and its consolidated subsidiaries (excluding Chi-
Chi's) with respect to information relating to periods prior to January
27, 1994 included herein, and reference to the "Successor Company" refers
to Family Restaurants,
K-9
<PAGE>
Inc. and its consolidated subsidiaries, giving effect to the acquisition on
January 27, 1994, when Apollo, GEI and Foodmaker acquired approximately 98%
of the Common Stock and Chi-Chi's was merged with and into a subsidiary of
the Company.
(2) Chi-Chi's reported significant sales declines in the second half of 1994
which continued into 1995. These sales declines resulted in operating
performance for Chi-Chi's which was significantly lower than anticipated
when Chi-Chi's was acquired on January 27, 1994. These operating results
caused the Company to reevaluate its business strategy for Chi-Chi's.
Consistent with this strategic reevaluation, the Company revised its
forecasts for the future operations of Chi-Chi's which resulted in a
significant reduction in projected future cash flows and a lower valuation
of the business. The Company determined that its projected results for Chi-
Chi's would not support the future amortization of the remaining Chi-Chi's
goodwill balance of $144,780,000 at December 25, 1994. Accordingly, the
Company wrote off the remaining unamortized Chi-Chi's goodwill balance of
$144,780,000 in the fourth quarter of 1994.
(3) Includes the impact of working capital loan classification of $79,815,000
in current liabilities and the classification of $240,077,000 in property
held for sale as a current asset.
(4) Liabilities that were canceled and extinguished as part of the prepackaged
joint plan of reorganization of the Company and REG-M Corp. were separately
classified in the consolidated balance sheet at December 26, 1993 as
liabilities subject to settlement under reorganization proceedings and
include the following:
<TABLE>
<CAPTION>
1993
----------------
($ IN THOUSANDS)
<S> <C>
Old Senior Subordinated Notes............................. $191,928
Old Subordinated Notes.................................... 78,916
Accrued interest.......................................... 52,720
Debt issuance and other costs............................. (3,370)
--------
$320,194
========
</TABLE>
(5) Excludes amounts related to the Family Restaurant Division and the
traditional dinnerhouse restaurants which were held for sale.
(6) EBITDA is defined as earnings (loss) before gain (loss) on disposition of
properties, provision for divestitures and write-down of long-lived assets,
interest, taxes, depreciation and amortization. The Company has included
information concerning EBITDA herein because it understands 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, operating income (loss) as an
indicator of operating performance or to cash flows from operating
activities as a measure of liquidity.
(7) Ratio of EBITDA to interest expense is based on the Company's historical
capital structure which is not representative of the Company's capital
structure subsequent to January 27, 1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain information and statements included in this Annual Report on Form 10-
K, including those in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, including, without limitation, statements
containing the words "believes," "anticipates," "expects" and words of similar
import, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 and involve known and unknown
risks and uncertainties that could result in actual results of the Company or
the restaurant industry differing materially from expected results expressed or
implied by such forward-looking statements. Although it is not possible to
itemize all of the factors and specific events that could affect the outlook of
a restaurant company operating in a competitive environment, factors that could
significantly impact expected results include (i) the development of successful
marketing strategies for Chi-Chi's and
K-10
<PAGE>
El Torito, (ii) the effect of national, regional and local economic
conditions, (iii) the availability of adequate working capital, (iv)
competitive products and pricing, (v) changes in legislation, (vi) demographic
changes, (vii) the ability to attract and retain qualified personnel, (viii)
changes in business strategy or development plans, (ix) business disruptions,
(x) changes in consumer preferences, tastes and eating habits and (xi)
increases in food and labor costs. The Company disclaims any obligation to
update any such factors or to publicly announce the result of any revisions to
any of the forward-looking statements contained herein to reflect future
events or developments.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The Company has been relying and will continue to rely primarily on
internally generated funds, supplemented if necessary by working capital
advances available under the Foothill Credit Facility, for its liquidity. In
addition, FRI-MRD has raised approximately $45.6 million in cash from the
issuance of the Senior Discount Notes to supplement its liquidity needs. The
Company's viability has been and will continue to be dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis and to comply with the terms of its financing agreements.
Operating Cash Flow. For the year ending December 28, 1997, the Company
reported EBITDA (defined as earnings (loss) before gain (loss) on disposition
of properties, provision for divestitures and write-down of long-lived assets,
interest, taxes, depreciation and amortization) of $17.5 million, compared to
$8.0 million for the year ended December 29, 1996 for the comparable ongoing
operations of El Torito and Chi-Chi's. The $9.5 million improvement was due to
El Torito and Chi-Chi's cost reduction and reengineering strategies, which
have improved operating margins.
The Company has included information concerning EBITDA herein because it
understands 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, operating income
(loss) as an indicator of operating performance or to cash flows from
operating activities as a measure of liquidity.
Working Capital Deficiency. The Company operates with a substantial working
capital deficiency because (i) restaurant operations are conducted primarily
on a cash (and cash equivalent) basis with a low level of accounts receivable,
(ii) rapid turnover allows a limited investment in inventories and (iii) cash
from sales is usually received before related accounts payable for food,
beverages and supplies become due. The Company had a working capital
deficiency of $66.4 million on December 28, 1997.
Credit Facility. On January 10, 1997, the Company entered into the Foothill
Credit Facility to provide for the ongoing working capital needs of the
Company. The Foothill Credit Facility, which replaced the Old Credit Facility,
provides for up to $15 million in revolving cash borrowings and up to $35
million in letters of credit (less the outstanding amount of revolving cash
borrowings). The Foothill Credit Facility is secured by substantially all of
the real and personal property of the Company and contains customary
restrictive covenants, including the maintenance of certain financial ratios.
The Company is in compliance with all financial ratios for the year ended
December 28, 1997. Letters of credit are issued under the Foothill Credit
Facility primarily to provide security for future amounts payable under the
Company's workers' compensation insurance program ($15.5 million of such
letters of credit were outstanding as of March 27, 1998). No revolving cash
borrowings were outstanding as of March 27, 1998.
Other. The Company sold the Family Restaurant Division on May 23, 1996 to
Flagstar for $125 million cash, $150 million principal amount of the FRD
Notes, and the assumption of $31.5 million of long-term debt, primarily
consisting of capitalized lease obligations. Upon completion of the closing
balance sheet, the purchase price was increased by $6.9 million and was
satisfied by the issuance of $6.9 million in additional FRD Notes.
On July 3, 1996, the Company repurchased $151.0 million aggregate principal
amount of the Senior Notes and $108.6 million aggregate principal amount of
the Discount Notes in exchange for (or from the proceeds from
K-11
<PAGE>
the sale of) $133.5 million aggregate principal amount of the FRD Notes. In
separate transactions, the Company repurchased (i) an additional $8.5 million
aggregate principal amount of its Discount Notes in the third quarter of 1996
and (ii) an additional $30.0 million aggregate principal amount of its Senior
Notes and an additional $2.0 million aggregate principal amount of its
Discount Notes in the fourth quarter of 1996.
As of March 27, 1998, the Company had sold or exchanged $153.65 million
aggregate principal amount of the FRD Notes. The remaining $3.25 million
balance is restricted until the fourth anniversary of the sale in accordance
with the sale agreement with Flagstar to secure potential future indemnity
claims.
On August 12, 1997, FRI-MRD issued the Senior Discount Notes in the face
amount of $61 million to an existing holder of the Company's Senior Notes in
exchange for $15.6 million of Senior Notes plus approximately $34 million of
cash. In January 1998, FRI-MRD issued the remaining $14 million in face value
of the Senior Discount Notes to the same purchaser for approximately $11.6
million in cash. Proceeds from the sales of the Senior Discount Notes will be
used to fund the Company's capital expenditure programs and for general
corporate purposes. The Company is currently considering additional sources of
cash, such as the sale of non-core assets.
The Company continues to be highly leveraged and has significant debt
service requirements. Although management believes that its current sources of
cash should be sufficient to meet its operating and debt service requirements
for the foreseeable future, there can be no assurance that the Company will be
able to repay or refinance the Notes, or that FRI-MRD will be able to repay or
refinance the Senior Discount Notes, at their respective maturities.
Capital Resources
Net cash used in investing activities was $16.6 million for the year ended
December 28, 1997, including $13.6 million for capital expenditures, as
compared to net cash provided by investing activities of $165.0 million for
fiscal 1996 and net cash used in investing activities of $19.6 million for
fiscal 1995. The net cash provided by investing activities for 1996 was
primarily due to the completion of the sale of the Company's Family Restaurant
Division and certain notes receivable.
Capital expenditures of approximately $30 million are planned for fiscal
1998, including approximately $6 million devoted to normal improvements of the
Company's restaurants. The Company is continuing its remodeling of both El
Torito and Chi-Chi's restaurants and is committing approximately $13 million
to $14 million for this purpose in fiscal 1998. The Company also anticipates
opening up to seven new El Torito restaurants, including quick-service casual-
style restaurants, and the Company is also planning to upgrade El Torito's in-
store POS technology during fiscal 1998.
By December 28, 1997, the Company had completed the remodeling of nine El
Torito restaurants in the Los Angeles/Orange County market and 11 Chi-Chi's
restaurants, primarily in the Detroit market. In addition, Chi-Chi's had
completed the exterior painting of 78 restaurants. Certain of these newly
painted Chi-Chi's restaurants also had other exterior improvements, including
installation of new awnings. The Company has announced plans for an aggressive
remodel program for the Chi-Chi's chain over the next three years. This
program could cost up to $50 million.
Included in 1998 capital spending are continuing expenditures to replace the
Company's mainframe computer software applications with new software to be run
in a client/server environment. The new software includes work flow
capabilities allowing for improved processes and wider access to data. In
addition, acquisition of the new software will insure that the Company's
computer systems are year 2000 compliant. The Company spent $0.4 million
during fiscal 1997 and expects to spend an additional $1.6 million on the new
software and related hardware and installation costs in 1998. The project is
expected to be completed before year-end 1998. The Company is requesting year
2000 compliance reports from significant vendors and service providers. If the
computer systems of a significant vendor or service provider were not year
2000 compliant, it could have a material adverse effect on the Company.
K-12
<PAGE>
RESULTS OF OPERATIONS
As used herein, "comparable restaurants" are restaurants operated by the
Company on the first day of the earlier fiscal year and that continued in
operation through the last day of the later year being compared.
FISCAL YEAR 1997 AS COMPARED TO FISCAL YEAR 1996
Total sales of $463,724,000 for 1997 decreased by $260,505,000 or 36.0% as
compared to 1996. The decrease was due to (i) the loss of sales from the
Family Restaurant Division which was sold by the Company on May 23, 1996, (ii)
sales decreases for restaurants sold or closed and (iii) sales declines in the
comparable El Toritos and Chi-Chi's. The breakdown of the sales decline for
1997 is detailed below:
<TABLE>
<CAPTION>
1997 SALES
DECREASES
----------------
($ IN THOUSANDS)
<S> <C>
Sales of the Family Restaurant Division..................... $(194,464)
Decrease in Sales from Restaurants Sold or Closed........... (42,995)
Decrease in Sales from Comparable Restaurants............... (23,046)
---------
$(260,505)
=========
</TABLE>
Sales for comparable restaurants of $456,965,000 for 1997 decreased by
$23,046,000 or 4.8% compared to 1996. The decrease is comprised of a
$21,816,000 or 8.2% decline in Chi-Chi's and a $1,230,000 or 0.6% decline in
El Torito primarily reflecting a continuing competitive operating environment
for restaurants.
<TABLE>
<CAPTION>
1997 COMPARABLE
SALES DECREASE
-----------------
AMOUNT PERCENT
-------- -------
($ IN THOUSANDS)
<S> <C> <C>
Comparable Chi-Chi's...................................... $(21,816) (8.2)%
Comparable El Torito...................................... (1,230) (0.6)
--------
Total................................................... $(23,046) (4.8)%
======== ====
</TABLE>
El Torito comparable sales for fiscal 1997 were down slightly as compared to
the same period in 1996. El Torito has hired a new advertising agency, Grey
Advertising, to continue to refine and build upon its long-term marketing
strategy, positioning El Torito as a "Mexican Getaway." Both television and
radio commercials are being utilized to communicate this position. In
addition, the theme is incorporated into all in-store materials and menus.
Chi-Chi's continued with its new marketing direction through the end of 1997
portraying the concept as a value-oriented, fun Mexican restaurant where you
can "put a little salsa in your life." A new menu was introduced in December
that expanded the product offerings to appeal to a greater segment of the
population. Barbequed and grilled meats, related to Mexican cuisine, but not
considered traditional Mexican dishes, were added along with additional
Mexican entrees. To extend the marketing message with more emphasis on the
food and value components, Chi-Chi's will work with Evans, Hardy & Young,
formerly their media buyer, now their primary advertising agency. Chi- Chi's
comparable sales trend for 1997 improved 5.4 percentage points over that of
1996 with comparable sales down 8.2% for 1997 as compared with the 1996 versus
1995 negative trend of 13.6% for the same group of restaurants. Although the
Company believes that such improvement is a result of the new advertising
campaign that began at the end of the first quarter of 1997, there can be no
assurances that the advertising campaign will continue to result in improved
comparable sales versus prior periods.
Product cost of $123,803,000 for 1997 decreased by $76,576,000 or 38.2% in
1997 as compared to 1996 primarily due to the sale of the Family Restaurant
Division which accounts for $54,187,000 or 70.8% of the decrease, as well as
the impact of the 47 other restaurants sold or closed since the end of fiscal
1995. In addition, El Torito and Chi-Chi's cost reduction strategies further
contributed to product cost savings by revising product
K-13
<PAGE>
specifications, reducing the number of ingredients used and controlling
inventories. As a percentage of sales, product cost declined to 26.7% in 1997
as compared to 27.7% in 1996.
Payroll and related costs of $162,807,000 for 1997 decreased by $110,729,000
or 40.5% as compared to 1996 primarily due to the sale of the Family
Restaurant Division which accounts for $72,997,000 or 65.9% of the decrease,
as well as the impact of the 47 other restaurants sold or closed since the end
of fiscal 1995. As a percent of sales, payroll and related costs decreased
from 37.8% in 1996 to 35.1% in 1997 due in part to savings realized from the
El Torito and Chi-Chi's cost reduction strategies which have focused on
improving labor scheduling and efficiencies. The improvement in payroll and
related costs was offset, in part, by the impact of the minimum wage increases
nationally on October 1, 1996 and September 1, 1997 and on March 1, 1997 in
California.
The Company is subject to Federal and state laws governing matters such as
minimum wages, overtime and other working conditions. Approximately half of
the Company's employees are paid at rates related to the minimum wage.
Therefore, increases in the minimum wage or decreases in the allowable tip
credit (tip credits reduce the minimum wage that must be paid to tipped
employees in certain states) increase the Company's labor costs. This is
especially true in California, where there is no tip credit. Effective October
1, 1996, the Federal minimum wage was increased from $4.25 to $4.75, and
effective September 1, 1997, it was further increased to $5.15. However, a
provision of the new measure effectively froze the minimum wage for tipped
employees at current levels by increasing the allowable tip credit in those
states which allow for a tip credit. Furthermore, California voters approved a
proposition on November 5, 1996 that increased the state's minimum wage to
$5.00 on March 1, 1997 and further increased the state's minimum wage to $5.25
on March 1, 1998. In response to the minimum wage increases on October 1,
1996, March 1, 1997 and March 1, 1998, the Company raised menu prices at its
El Torito restaurants in an effort to recover the higher payroll costs. Menu
prices were not increased at Chi-Chi's during the first nine months of 1997
due to marketing strategies and the fact that Chi-Chi's experienced a lesser
impact from the Federal minimum wage increases due to the increased allowable
tip credit in certain states. However, Chi-Chi's did raise menu prices in
October 1997 as a result of the cumulative impact of these minimum wage
increases. At the request of President Clinton, the Congress is considering
further increases in the Federal minimum wage over the next two years.
Occupancy and other operating expenses of $129,428,000 for 1997 decreased by
$52,302,000 or 28.8% as compared to 1996 primarily due to the sale of the
Family Restaurant Division which accounts for $37,568,000 or 71.8% of the
decrease, as well as the impact of the 47 other restaurants sold or closed
since the end of fiscal 1995. As a percentage of sales, occupancy and other
expenses increased from 25.1% in 1996 to 27.9% in 1997. These increases
primarily reflect (i) the impact of declining sales without an offsetting
reduction in fixed expenses, (ii) an increase in planned media spending in
both El Torito and Chi-Chi's in connection with the implementation of new
marketing campaigns in 1997 to reposition both concepts and (iii) the lower
occupancy and other operating expenses as a percentage of sales in the Family
Restaurant Division in the first five months of 1996.
Depreciation and amortization of $22,583,000 for 1997 decreased by
$11,892,000 or 34.5% as compared to 1996 primarily due to the sale of the
Family Restaurant Division which accounts for $11,162,000 or 93.9% of the
decrease.
General and administrative expenses of $30,186,000 for 1997 decreased by
$11,556,000 or 27.7% as compared to 1996 primarily due to the sale of the
Family Restaurant Division and the elimination of its direct and allocated
general and administrative expenses of $10,014,000. The Company eliminated 134
positions in its Louisville corporate office and 52 positions in its Irvine
corporate offices in connection with its reorganization after the sale of the
Family Restaurant Division. As a percentage of sales, general and
administrative expenses increased from 5.8% in 1996 to 6.5% in 1997 primarily
reflecting general and administrative expenses spread over fewer restaurants.
Management continues to closely evaluate the Company's general and
administrative cost structure for savings opportunities.
K-14
<PAGE>
The Company reported a loss on disposition of properties of $3.9 million for
1997 compared to a loss of $8.6 million in 1996. These amounts reflect losses
associated with restaurant divestments and closures in such periods.
As a result of a continued review of operating results, the Company
identified 18 unprofitable Chi-Chi's restaurants which may either take too
long to recover profitability or may not recover at all, despite current
marketing and cost control programs. In connection with this analysis, the
Company analyzed the carrying value of the long-lived assets of these
restaurants and recorded a write-down of long-lived assets of $2.6 million
during the second quarter of 1997 to reduce the assets' carrying value to
their estimated fair market value. The Company is actively marketing these
restaurants for sale, and the restaurants continue in operation.
The Company reported no restructuring costs in 1997 versus $6.5 million in
1996. These costs were primarily related to amounts paid to consultants,
professional fees, severance and related costs, and other restructuring
related expenses that were not incurred in 1997.
Interest expense, net of $19,476,000 for 1997 decreased by $17,249,000 or
47.0% as compared to 1996 primarily resulting from (i) lower interest expense
due to the repurchases of $181.0 million aggregate principal amount of the
Company's Senior Notes and $119.1 million aggregate principal amount of its
Discount Notes in the third and fourth quarters of 1996 and the exchange of
$15.6 million of Senior Notes on August 12, 1997, (ii) the repayment of
outstanding revolving debt under the Old Credit Facility in May 1996 and (iii)
the elimination of the Family Restaurant Division's interest costs, primarily
for capitalized lease obligations. These decreases were partially offset by
the increase due to the issuance of the Senior Discount Notes on August 12,
1997 and the accretion of interest thereon.
The Company recorded a gain of $62,601,000 in 1996 as a result of the sale
of the Family Restaurant Division.
The Company recognized an extraordinary gain of $134,833,000 in 1996 as a
result of several repurchases of the Notes.
FISCAL YEAR 1996 AS COMPARED TO FISCAL YEAR 1995
Total sales of $724,229,000 for 1996 decreased by $410,130,000 or 36.2% as
compared to 1995. The decrease was due to (i) the loss of sales from the
Family Restaurant Division which was sold by the Company on May 23, 1996, (ii)
sales decreases for restaurants sold or closed, (iii) sales declines in the
comparable El Toritos and Chi-Chi's and (iv) the 53rd week in 1995. The
breakdown of the sales decline for 1996 is detailed below:
<TABLE>
<CAPTION>
1996 SALES
DECREASES
----------------
($ IN THOUSANDS)
<S> <C>
Sales of the Family Restaurant Division..................... $(308,021)
Decrease in Sales from Restaurants Sold or Closed........... (47,823)
Decrease in Sales from Comparable Restaurants............... (45,533)
Decrease in Sales for the 53rd Week in 1995................. (8,753)
---------
$(410,130)
=========
</TABLE>
Sales for comparable restaurants of $484,655,000 for 1996 decreased by
$45,533,000 or 8.6% compared to a 52-week 1995. The decrease is comprised of a
$38,038,000 or 12.4% decline in Chi-Chi's and a $7,495,000 or 3.4% decline in
El Torito primarily reflecting a continuing competitive operating environment
for restaurants. Also contributing to the comparable sales decline was severe
winter weather in several markets in early 1996 and an overall weakness in
summer sales during the 1996 Summer Olympics which affected three weekends and
two full weeks during July and August.
K-15
<PAGE>
Product cost of $200,379,000 for 1996 decreased by $121,815,000 or 37.8% in
1996 as compared to 1995 primarily due to the sale of the Family Restaurant
Division which accounts for $89,347,000 or 73.3% of the decrease. Chi-Chi's
cost re-engineering project further contributed to product cost savings by
simplifying menus, reducing the number of ingredients used and controlling
inventories. As a percentage of sales, product cost declined to 27.7% in 1996
as compared to 28.4% in 1995.
Payroll and related costs of $273,536,000 for 1996 decreased by $145,649,000
or 34.7% as compared to 1995 primarily due to the sale of the Family
Restaurant Division which accounts for $108,406,000 or 74.4% of the decrease.
As a percent of sales, payroll and related costs increased from 37.0% in 1995
to 37.8% in 1996 due in part to labor inefficiencies resulting from the
declining sales without an offsetting reduction in fixed labor expense,
combined with the negative impact of the minimum wage increase on October 1,
1996.
Occupancy and other expenses of $181,730,000 for 1996 decreased by
$93,434,000 or 34.0% as compared to 1995 primarily due to the sale of the
Family Restaurant Division which accounts for $58,314,000 or 62.4% of the
decrease. As a percentage of sales, occupancy and other expenses increased
from 24.3% in 1995 to 25.1% in 1996 due primarily to declining sales without
an offsetting reduction in fixed expenses and the lower costs as a percentage
of sales in the Family Restaurant Division in 1995.
Depreciation and amortization of $34,475,000 for 1996 decreased by
$23,361,000 or 40.4% as compared to 1995 primarily due to the sale of the
Family Restaurant Division which accounts for $16,744,000 or 71.7% of the
decrease. The decrease also reflects the third quarter 1995 adjustment to the
depreciable asset base of Chi-Chi's restaurants either held for sale or having
impaired values.
General and administrative expenses of $41,742,000 for 1996 decreased by
$14,503,000 or 25.8% as compared to 1995 primarily due to the sale of the
Family Restaurant Division and the elimination of its related general and
administrative expenses of $10,187,000. As a percentage of sales, general and
administrative expenses increased from 5.0% in 1995 to 5.8% in 1996 primarily
reflecting general and administrative expenses spread over fewer restaurants
due to the sale of the Family Restaurant Division.
Loss on disposition of properties of $8.6 million for 1996 compared to a
loss of $12.1 million in 1995. These amounts reflect losses associated with
restaurant divestments and closures and the 1995 write-off of costs associated
with canceled capital projects, both remodels and new restaurant expansion.
During the third quarter of 1995, the Company closed seven Chi-Chi's
restaurants and identified additional restaurants to be sold or having
impaired asset value. Approximately 32 marginally profitable or unprofitable
restaurants were offered for sale. In conjunction with this divestment
program, the Company analyzed the carrying value of the Chi-Chi's long-lived
assets to determine if any impairment had occurred. In connection with this
analysis, the Company recorded a charge for divestitures and writedowns of
long-lived assets of $41.9 million.
The Company reported restructuring costs of $6.5 million in 1996 versus $4.4
million in 1995. These costs are primarily related to amounts paid to
consultants, professional fees, severance and related costs, and other
restructuring related expenses.
Interest expense, net of $36,725,000 for 1996 decreased by $28,552,000 or
43.7% as compared to 1995 primarily resulting from (i) lower accretion of
interest expense due to the repurchases of the Notes, as previously discussed,
(ii) paying off outstanding revolving debt under the Old Credit Facility in
May 1996, (iii) the elimination of the Family Restaurant Division's interest
costs, primarily for capitalized lease obligations and (iv) interest income
related to the FRD Notes.
ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This Statement specifies the computation,
K-16
<PAGE>
presentation, and disclosure requirements for earnings per share for entities
with publicly held common stock. Therefore, this Statement is not applicable
to the Company.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure." This Statement is effective for fiscal years ending
after December 15, 1997. This statement, requiring only additional information
disclosures, is effective for the Company's fiscal year ended December 28,
1997. The Company has complied with all requirements of this Statement.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement shall be
effective for fiscal years beginning after December 15, 1997. Reclassification
of financial statements for earlier periods provided for comparative purposes
is required. This statement, requiring only additional informational
disclosures, is effective for the Company's fiscal year ending December 27,
1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This Statement established standards
for the way that public business enterprises report information about
operating segments in annual financial statements and requires that
enterprises report selected information about operating segments in interim
financial reports issued to stockholders. This Statement shall be effective
for fiscal years beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is to be restated. This
statement, requiring only additional information disclosures, is effective for
the Company's fiscal year ending December 27, 1998.
SELECTED OPERATING DATA
The Company primarily operates full-service Mexican restaurants in two
divisions under the El Torito, Chi-Chi's, Casa Gallardo and other names. At
December 28, 1997 the Company's El Torito restaurant division operated 96
full-service restaurants and the Company's Chi-Chi's restaurant division
operated 179 full-service restaurants.
K-17
<PAGE>
The following table sets forth certain information regarding the Company,
its El Torito and Chi-Chi's restaurant divisions, and the various operations
divested in 1996.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
---------------------------
DEC. 28, 1997 DEC. 29, 1996
------------- -------------
($ IN THOUSANDS, EXCEPT
AVERAGE CHECK AMOUNTS)
<S> <C> <C>
El Torito Restaurant
Division
- --------------------
Restaurants Open at End of
Period:
Owned/operated.......... 96 97
Franchised and Licensed. 9 7
Sales..................... $217,949 $219,466
Restaurant Level Cashflow. 30,051 26,355
Divisional EBITDA(a)...... 17,627 11,956
Percentage decrease in
comparable restaurant
sales.................... (0.6)% (3.0)%
Average check............. $ 9.87 $ 9.47
Chi-Chi's Restaurant
Division
- --------------------
Restaurants Open at End of
Period:
Owned/operated.......... 179 184
Franchised and Licensed. 16 18
Sales..................... $245,775 $278,065
Restaurant Level Cashflow. 16,515 9,674
Divisional EBITDA(a)...... 36 (4,278)
Percentage decrease in
comparable restaurant
sales.................... (8.2)% (11.5)%
Average check............. $ 7.62 $ 7.54
Ongoing Operations
- ------------------
Restaurants Open at End of
Period:
Owned/operated.......... 275 281
Franchised and Licensed. 25 25
Sales..................... $463,724 $497,531
Divisional EBITDA(a)...... 17,663 7,678
Divested Operations(b)
- ----------------------
Restaurants Open at End of
Period:
Owned/operated.......... 0 0
Franchised and Licensed. 0 0
Sales..................... $ 0 $226,698
Divisional EBITDA(a)...... 0 18,877
Total Company
- -------------
Restaurants Open at End of
Period:
Owned/operated.......... 275 281
Franchised and Licensed. 25 25
Sales..................... $463,724 $724,229
EBITDA(c)................. 17,500 26,842
</TABLE>
- --------
(a) Divisional EBITDA with respect to any operating division is defined as
earnings (loss) before gain (loss) on disposition of properties, interest,
taxes, depreciation and amortization.
(b) Divested Operations in 1996 includes the results of the Family Restaurant
Division until it was divested on May 23, 1996 and the traditional
dinnerhouse restaurants that were divested by year-end 1996.
K-18
<PAGE>
(c) EBITDA is defined as earnings (loss) before gain (loss) on disposition of
properties, provision for divestitures and write-down of long-lived
assets, restructuring costs, interest, taxes, depreciation and
amortization. The Company has included information concerning EBITDA
herein because it understands 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, operating income (loss) as an indicator of operating
performance or to cash flows from operating activities as a measure of
liquidity.
INFLATION
The inflationary factors which have historically affected the Company's
results of operations include increases in the cost of food, alcoholic
beverages, labor and other operating expenses. In addition, most of the
Company's real estate leases require the Company to pay taxes, maintenance,
insurance, repairs and utility costs, all of which are subject to the effects
of inflation. To date, the Company has offset the effects of inflation, at
least in part, through periodic menu price increases and various cost-cutting
programs, but no assurance can be given that the Company will continue to be
able to offset such increases in the future.
During 1997 and 1996, the effects of inflation did not have a significant
impact on the Company's results of operations.
SEASONALITY
The Company, as a whole, does not experience significant seasonal
fluctuations in sales. However, the Company's sales tend to be slightly
greater during the spring and summer months.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Index to Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
K-19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
current Directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
---- --- ---------------------
<C> <C> <S>
Peter P. Copses......... 39 Director
David B. Kaplan......... 30 Director
Antony P. Ressler....... 37 Director
Kevin S. Relyea......... 43 President, Chief Executive Officer and a Director
Executive Vice President, President of El Torito
William D. Burt......... 45 Restaurants, Inc.
Executive Vice President, President of Chi-Chi's,
Roger K. Chamness....... 45 Inc.
Executive Vice President and Chief Financial
Robert T. Trebing, Jr. . 48 Officer
Michael E. Malanga...... 44 Executive Vice President, Corporate Development
Gayle A. DeBrosse....... 40 Senior Vice President, Quality Assurance and
Product Safety, Purchasing and Distribution,
Public Affairs
Todd E. Doyle........... 36 Vice President, General Counsel and Secretary
Janie M. Bereczky....... 42 Vice President, Taxes
</TABLE>
Mr. Copses has served as a Director of the Company since January 1994. Since
1990, Mr. Copses has been a principal of Apollo Advisors, L.P. ("Apollo
Advisors") which, together with an affiliate, serves as managing general
partner of Apollo Investment Fund, L.P. ("AIF"), AIF II, L.P. ("AIF II") and
Apollo Investment Fund III, L.P., private securities investment funds, and of
Lion Advisors, L.P. ("Lion Advisors"), which acts as financial advisor to and
representative for certain institutional investors with respect to securities
investments. AIF II is the general partner of Apollo. Mr. Copses is also a
director of Dominick's Supermarkets, Inc., Paragon Health Network, Inc. and
Zale Corporation.
Mr. Kaplan has served as a Director of the Company since December 1996.
Since 1991, Mr. Kaplan has been associated with and is a limited partner of
Apollo Advisors. Prior to 1991, Mr. Kaplan was a member of the Investment
Banking Department of Donaldson, Lufkin & Jenrette Securities Corporation. Mr.
Kaplan is also a director of Allied Waste Industries, Inc., Dominick's
Supermarkets, Inc., PRI Holdings, Inc. and WMC Finance Co., Inc.
Mr. Ressler has served as a Director of the Company since January 1994. In
1990, Mr. Ressler was one of the founding principals of Apollo Advisors. Mr.
Ressler is also a director of Allied Waste Industries, Inc., Dominick's
Supermarkets, Inc., United International Holdings, Inc., PRI Holdings, Inc.
and Vail Resorts, Inc.
Mr. Relyea has served as Chief Executive Officer and a Director of the
Company since December 1995. He has also served as President since August
1995. Mr. Relyea joined the Company in January 1994 as Executive Vice
President and President of the Family Restaurant Division. From 1988 to
January 1994, Mr. Relyea had been Regional Vice President of Jack In The Box
Operations for Foodmaker. Mr. Relyea received an M.B.A. from Pepperdine
University in 1988.
Mr. Burt serves as Executive Vice President and President of El Torito. He
joined the Company on April 8, 1996 in these positions. Prior to joining the
Company, Mr. Burt was the Vice President of Operations at the Krystal Company
from 1995 to 1996, and an Executive Vice President at Taco Cabana from 1994 to
1995. Prior to 1994, Mr. Burt spent 23 years with Foodmaker. Mr. Burt received
his M.B.A. from Pepperdine University in 1988.
Mr. Chamness serves as Executive Vice President and President of Chi-Chi's
and has so served since December 1995 and March 1996, respectively. He joined
the Company at its inception. His previous position was Executive Vice
President of Finance and Administration for the Family Restaurant Division
which he held
K-20
<PAGE>
from October 1995 until June 1996. Mr. Chamness received a B.A. in Business
Economics from UCLA in 1975 and an M.B.A. in Finance and International
Business from UCLA in 1980.
Mr. Trebing serves as Executive Vice President and Chief Financial Officer
and has so served since July 1995. He joined the Company at its inception and
has held the positions of Senior Vice President and Chief Financial Officer,
Senior Vice President of Finance, Vice President of Finance, Vice President
and Controller and Manager of Financial Reporting. Mr. Trebing is a Certified
Public Accountant. Mr. Trebing received a B.A. from California State
University at Fullerton in 1972 and an M.B.A. from the University of Southern
California in 1973.
Mr. Malanga serves as Executive Vice President, Corporate Development. He
joined the Company at its inception as Director of Mergers and Acquisitions.
He was promoted to his current position in October 1995. Mr. Malanga received
a B.S. in Business Administration from the University of Southern California
in 1976.
Ms. DeBrosse serves as a Senior Vice President, Quality Assurance and
Product Safety, Purchasing and Distribution, Public Affairs and has so served
since June 1996. She joined the Company in December 1994 as a Vice President.
Prior to joining the Company, she was Director of Product Development and
Continuous Improvement at Taco Bell from 1991 until 1994 and Director,
Research and Development for Flagstar from 1982 to 1991. Ms. DeBrosse received
a B.S. in Nutritional Sciences from Arizona State University in 1979 and an
M.S. in Agribusiness with Emphasis in Food Science, Quality Assurance and Food
Chemistry from Arizona State University in 1982.
Mr. Doyle serves as Vice President, General Counsel and Secretary and has so
served since October 1995. He joined the Company as Senior Legal Counsel in
1992. Prior to joining the Company, Mr. Doyle spent six years as a business
transactional attorney and a business litigation attorney with Seltzer Caplan
Wilkins & McMahon in San Diego, California. Mr. Doyle received a B.A. in
Political Science and a B.A. in Sociology from the University of California,
Santa Barbara in 1983, and he received a J.D. from Loyola Law School, Los
Angeles, California in 1986.
Ms. Bereczky serves as Vice President, Taxes and has so served since August
1992. She joined the Company in 1987 as Director of Taxes. Ms. Bereczky has
been a Certified Public Accountant since 1981. Ms. Bereczky received a B.A. in
Political Science from the University of California at Santa Barbara in 1978
and an M.B.A. in Taxation from Golden Gate University in 1985.
All directors hold office for a period of one year until their successors
have been duly elected and qualified. Directors receive no compensation for
serving as directors and received no such compensation during the last fiscal
year. Officers serve at the discretion of the Board of Directors.
K-21
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
Summarized below are the principal components of compensation of the
individual serving as the Company's Chief Executive Officer ("CEO") during
fiscal year 1997 and the four most highly compensated executive officers other
than the CEO, with income in excess of $100,000, for each of the last three
completed fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL SALARY COMPENSATION COMPENSATION
POSITION YEAR ($) BONUS ($) ($) ($)(A)
- ------------------ ---- ------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Kevin S. Relyea,....... 1997 400,000 192,000 -- 4,226(b)
President and Chief
Executive Officer 1996 390,385 1,172,057(c) -- 4,145(d)
1995 312,727 149,520 -- 918
William D. Burt,....... 1997 225,000 180,000 -- 3,372(e)
Executive Vice
President 1996(f) 159,635 180,000(g) 86,762(h) 1,822(i)
Roger K. Chamness,..... 1997 275,000 99,000 -- 3,214(j)
Executive Vice
President 1996 256,940 590,856(k) 69,958(l) 2,982(m)
1995 153,086 40,357 -- 493
Michael E. Malanga..... 1997 148,886 51,943 -- 507
Executive Vice
President 1996 142,614 125,695(n) -- 478
1995 128,137 34,645 -- 457
Robert T. Trebing,
Jr.,.................. 1997 185,321 64,654 -- 1,116
Executive Vice
President Chief 1996 174,806 287,031(o) -- 1,020
and Chief Financial
Officer 1995 150,459 43,973 -- 858
</TABLE>
- --------
(a) Unless otherwise indicated, amounts shown represent the value of term life
insurance premiums paid by the Company.
(b) Mr. Relyea received $918 representing the imputed value of life insurance
provided by the Company and $3,308 representing the Company's matching
funds under its Deferred Compensation Plan.
(c) Mr. Relyea received $320,000 pursuant to the Company's 1996 Management
Incentive Compensation Plan bonus program; $548,461 pursuant to the
Company's Divestiture Bonus Plan; and $303,596 in connection with the
cancellation of Mr. Relyea's stock purchase loan with the Company.
(d) Mr. Relyea received $913 representing the imputed value of life insurance
provided by the Company and $3,232 representing the Company's matching
funds under its Deferred Compensation Plan.
(e) Mr. Burt received $1,476 representing the imputed value of life insurance
provided by the Company and $1,896 representing the Company's matching
funds under its Deferred Compensation Plan.
(f) The amount set forth in the table for fiscal 1996 for Mr. Burt represents
less than a full year's compensation. Mr. Burt joined the Company on April
8, 1996.
(g) Represents bonus earned pursuant to the Company's 1996 Management
Incentive Compensation Plan bonus program.
(h) Mr. Burt received $9,000 representing the value of automobile benefits and
$77,762 representing relocation expenses.
(i) Mr. Burt received $577 representing the imputed value of life insurance
provided by the Company and $1,245 representing the Company's matching
funds under its Deferred Compensation Plan.
(j) Mr. Chamness received $918 representing the imputed value of life
insurance provided by the Company and $2,296 representing the Company's
matching funds under its Deferred Compensation Plan.
K-22
<PAGE>
(k) Mr. Chamness received $220,000 pursuant to the Company's 1996 Management
Incentive Compensation Plan bonus program; $241,323 pursuant to the
Company's Divestiture Bonus Plan; and $129,533 in connection with the
cancellation of Mr. Chamness' stock purchase loan with the Company.
(l) Mr. Chamness received $1,600 representing the value of automobile benefits
and $68,358 representing relocation expenses.
(m) Mr. Chamness received $865 representing the imputed value of life
insurance provided by the Company and $2,117 representing the Company's
matching funds under its Deferred Compensation Plan.
(n) Mr. Malanga received $71,604 pursuant to the Company's 1996 Management
Incentive Compensation Plan bonus program; $44,635 pursuant to the
Company's Divestiture Bonus Plan; and $9,456 in connection with the
cancellation of Mr. Malanga's stock purchase loan with the Company.
(o) Mr. Trebing received $87,500 pursuant to the Company's 1996 Management
Incentive Compensation Plan bonus program; $134,765 pursuant to the
Company's Divestiture Bonus Plan; and $64,766 in connection with the
cancellation of Mr. Trebing's stock purchase loan with the Company.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
Severance benefits for Messrs. Relyea, Burt and Chamness are governed by
their respective employment agreements, which agreements are described below.
The maximum salary severance benefits for Messrs. Relyea, Burt and Chamness
are one year from the date of termination or the remaining period of
employment under their respective employment agreements, whichever is greater.
In addition, upon the occurrence of certain events constituting a change of
control, the holders of stock options, including the executive officers named
above, shall be entitled to receive cash equal to the difference between the
price per share paid in connection with such change of control and the
exercise price of the underlying option.
The Company's President and Chief Executive Officer, Kevin S. Relyea,
entered into an Employment Agreement with the Company on January 1, 1996 for
the period from January 1, 1996 though January 1, 1999, providing for annual
compensation of not less than $400,000, to increase to $500,000 upon the
attainment of $40,000,000 in Company EBITDA, and other periodic increases as
determined by the Company's Board. In 1997, the Company's Board elected to (i)
increase Mr. Relyea's annual compensation by five percent (5%) effective
January 1, 1998, and again on January 1, 1999 and (ii) extend his Employment
Agreement with the Company until January 1, 2000.
The Company's Executive Vice President and the President of Chi-Chi's, Roger
K. Chamness, entered into an Employment Agreement with the Company on March 1,
1996 for the period from March 1, 1996 through March 1, 1999, providing for
annual compensation of not less than $275,000 and periodic increases as
determined by the Company's Board. In 1997, the Company's Board elected to (i)
increase Mr. Chamness' annual compensation by five percent (5%) effective
January 1, 1998, and again on January 1, 1999 and (ii) extend his Employment
Agreement with the Company until March 1, 2000.
The Company's Executive Vice President and El Torito's President, William D.
Burt, entered into an Employment Agreement with the Company on April 8, 1996
for the period from April 8, 1996 through April 8, 1999, providing for annual
compensation of not less than $225,000 and periodic increases as determined by
the Company's Board. In 1997, the Company's Board elected to (i) increase Mr.
Burt's annual compensation by five percent (5%) effective January 1, 1998, and
again on January 1, 1999 and (ii) extend his Employment Agreement with the
Company until April 8, 2000.
The employment agreements with each of Messrs. Relyea, Chamness and Burt
also provide that during the terms thereof, such executives will participate
in the Company's Management Incentive Compensation Plan, will be eligible to
participate in the Company's VCU Plan (see discussion below) and will be
entitled to participate in the Company's standard medical, dental, life,
accident, disability, retirement plans, quality review privileges and similar
plans as are generally available to executive employees of the Company from
time to time.
K-23
<PAGE>
A new supplemental bonus plan was implemented on January 1, 1996 called the
Value Creation Units Plan (the "VCU Plan"). The VCU Plan provides participants
with a contingent financial incentive to contribute to the long-term success
of the Company. In 1997 the VCU Plan was amended to, inter alia, (i) add El
Torito Restaurants, Inc. and Chi-Chi's, Inc. as obligors and (ii) provide that
payouts will be calculated based on the improvement in the Company's EBITDA
between year-end 1995 and year-end 1999 and in proportion to the amount and
type of Value Creation Units awarded to each participant. At December 28,
1997, there were 28 participants in the VCU Plan, including Kevin S. Relyea,
William D. Burt, Roger K. Chamness, Michael E. Malanga and Robert T. Trebing,
Jr.
In connection with the Company's decision to pursue the sale of the Family
Restaurant Division in January 1996, the Board adopted a Divestiture Bonus
Plan for certain members of management (the "DBP"). The purpose of the DBP was
to retain and reward key executives who would be required to assist with the
sale of the Family Restaurant Division. The DBP provided certain key
executives with a monetary bonus upon the consummation of the sale of the
Family Restaurant Division (calculated as a percentage of the purchase price
as defined in the DBP). Kevin S. Relyea, Roger K. Chamness, Michael E. Malanga
and Robert T. Trebing, Jr. received such a bonus upon the sale of the Family
Restaurant Division to Flagstar in May 1996. The DBP is no longer in effect.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 27, 1998 the number of shares and
percentage of Common Stock owned by each person known to the Company to be the
beneficial owner of more than 5% of any class of the Company's voting
securities, each director and executive officer of the Company and all
executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
OWNERSHIP(A) OF CLASS
----------------- --------
<S> <C> <C>
Apollo FRI Partners, L.P.(b)................. 909,989(c) 82.77%(c)
2 Manhattanville Rd., Purchase, NY 10577
Green Equity Investors, L.P.(d).............. 160,222 16.21%
11111 Santa Monica Blvd., Suite 2000, Los
Angeles, CA 90025
Kevin S. Relyea.............................. 12,747(e) 1.28%(e)
William D. Burt.............................. 1,500(f) (g)
Roger K. Chamness............................ 3,000(h) (g)
Robert T. Trebing, Jr. ...................... 1,300(i) (g)
Michael E. Malanga........................... 633(j) (g)
Gayle A. DeBrosse............................ 500 (g)
Todd E. Doyle................................ 574(k) (g)
Janie M. Bereczky............................ 330(l) (g)
All Executive Officers and Directors of the
Company as a Group
(11 persons)................................ 20,525 2.07%
</TABLE>
- --------
(a) All shares (other than shares held by Apollo and GEI) are subject to, and
shall be voted in accordance with, the Shareholders' Agreement.
(b) The general partner of Apollo is AIF II. The managing general partner of
AIF II is Apollo Advisors. The general partner of Apollo Advisors is
Apollo Capital Management, Inc. ("Apollo Capital"). Messrs. Copses, Kaplan
and Ressler are officers of Apollo Capital. The directors of Apollo
Capital are Leon Black and John Hannan, each of whom is also an officer of
Apollo Capital. Each of Messrs. Copses, Kaplan and Ressler and the
directors of Apollo Capital disclaim beneficial ownership of any shares
beneficially held by Apollo.
K-24
<PAGE>
(c) Includes 111,111 shares of Common Stock exercisable at $240 per share and
issuable upon exercise of the Warrant.
(d) The general partner of GEI is Leonard Green & Associates, L.P. ("LGP").
Messrs. Green and Sokoloff are managing general partners of LGP. Each of
Messrs. Green and Sokoloff and the general partners of LGP disclaims
beneficial ownership of any shares beneficially held by GEI.
(e) Includes 938 shares of Common Stock covered by options granted to Mr.
Relyea, which are currently exercisable or exercisable within the next 60
days in the following amounts and prices: 469 shares at $160 per share,
235 shares at $40 per share and 234 shares at $100 per share.
(f) Includes 1,172 shares of Common Stock covered by options assigned to Mr.
Burt, which are currently exercisable at "Fair Market Value" as defined in
the Company's 1994 Incentive Stock Option Plan.
(g) Represents less than 1% ownership.
(h) Includes 700 shares of Common Stock covered by options granted to Mr.
Chamness, which are currently exercisable or exercisable within the next
60 days in the following amounts and prices: 150 shares at $160 per share,
475 shares at $40 per share and 75 shares at $100 per share.
(i) Includes 400 shares of Common Stock covered by options granted to Mr.
Trebing, which are currently exercisable or exercisable within the next 60
days in the following amounts and prices: 100 shares at $160 per share,
250 shares at $40 per share and 50 shares at $100 per share.
(j) Includes 148 shares of Common Stock covered by options granted and
assigned to Mr. Malanga, which are currently exercisable or exercisable
within the next 60 days in the following amounts and prices: 77 shares at
"Fair Market Value" as defined in the Company's 1994 Incentive Stock
Option Plan, 35 shares at $160 per share, 18 shares at $40 per share and
18 shares at $100 per share.
(k) Includes 199 shares of Common Stock covered by options granted and
assigned to Mr. Doyle, which are currently exercisable or exercisable
within the next 60 days in the following amounts and prices: 140 shares at
$1 per share, 29 shares at $160 per share, 15 shares at $40 per share and
15 shares at $100 per share.
(l) Includes 110 shares of Common Stock covered by options granted to Ms.
Bereczky, which are currently exercisable or exercisable within the next
60 days in the following amounts and prices: 55 shares at $160 per share,
28 shares at $40 per share and 27 shares at $100 per share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Apollo charged a monthly fee of $100,000 during 1997 and 1996 which Apollo
will continue to earn in the future, and Apollo and GEI each charged a monthly
fee of $50,000 during 1995 for providing certain management services to the
Company. In November 1995, the management services arrangement with GEI was
terminated. For the years ended December 28, 1997, December 29, 1996 and
December 31, 1995, the Company was charged $1.2 million each year in
connection with this arrangement. The Company had management services fees
payable of $3,250,000 and $2,050,000 due to Apollo and GEI as of December 28,
1997 and December 29, 1996, respectively.
On January 27, 1994, the Company entered into the Shareholders' Agreement
and a Registration Rights Agreement with Apollo, GEI and Foodmaker. The
Shareholders' Agreement was terminated as between Apollo, GEI, Foodmaker and
the Company in connection with the Exchange Agreements. See "BUSINESS--Change
in Control."
The Company loaned $150,000 to Mr. Relyea (evidenced by recourse notes which
bore interest at a rate of 7% per annum and were due on May 31, 1999) in
connection with his purchase of Common Stock. In July 1996, the loan to Mr.
Relyea was canceled which resulted in additional income to Mr. Relyea. See "--
Directors and Executive Officers," "Executive Compensation."
The Company loaned $64,000 to Mr. Chamness (evidenced by recourse notes
which bore interest at a rate of 7% per annum and were due on May 19, 1999) in
connection with his purchase of Common Stock. In July 1996, the loan to Mr.
Chamness was canceled which resulted in additional income to Mr. Chamness.
See "--Directors and Executive Officers," "Executive Compensation."
K-25
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
(a)(1) Financial Statements. See Index to Financial Statements on page
F-1. --
(2) Financial Statement Schedule S-1
Schedule II--Valuation and qualifying accounts
(3) Exhibits
</TABLE>
<TABLE>
<C> <S>
2(a) Stock Purchase Agreement dated as of March 1, 1996 by and among Family
Restaurants, Inc., Flagstar Companies, Inc., Flagstar Corporation and
FRD Acquisition Co. (Filed as Exhibit 2.1 to the Company's Form 10-Q
filed with the SEC on May 15, 1996.)
3(a) Fourth Restated Certificate of Incorporation of the Company. (Filed as
Exhibit 4.1 to the Company's Form S-8 filed with the SEC on March 23,
1994.)
3(b) Bylaws of the Company. (Filed as Exhibit 4.2 to the Company's Form S-8
filed with the SEC on March 23, 1994.)
4(a) Indenture Dated as of January 27, 1994 Re: $300,000,000 9-3/4% Senior
Notes Due 2002. (Filed as Exhibit 4(a) to the Company's Form 10-K
filed with the SEC on March 28, 1994.)
4(b) Indenture Dated as of January 27, 1994 Re: $150,000,000 10-7/8% Senior
Subordinated Discount Notes Due 2004. (Filed as Exhibit 4(b) to the
Company's Form 10-K filed with the SEC on March 28, 1994.)
4(c) First Supplemental Indenture, dated as of July 3, 1996, between the
Registrant and IBJ Schroder Bank & Trust Company, a New York Banking
corporation, as Trustee. (Filed as Exhibit 10.1 to the Company's Form
8-K filed with the SEC on July 9, 1996.)
4(d) First Supplemental Indenture, dated as of July 3, 1996, between the
Registrant and Fleet National Bank, as successor by merger to Fleet
National Bank of Massachusetts, formerly known as Shawmut Bank, N.A.,
as Trustee. (Filed as Exhibit 10.2 to the Company's Form 8-K filed
with the SEC on July 9, 1996.)
4(e) Note Agreement Dated as of August 12, 1997 Re: Up to $75,000,000 FRI-
MRD Corporation Senior Discount Notes Due January 24, 2002. (Filed as
Exhibit 4(e) to the Company's Form 10-Q filed with the SEC on November
12, 1997.)
*4(f) Joinder Agreement Dated as of January 14, 1998 Re: FRI-MRD Corporation
Senior Discount Notes due January 24, 2002.
9 Shareholders' Agreement, dated as of January 27, 1994, among the
Company and certain of its Shareholders. (Filed as Exhibit 4.3 to the
Company's Form S-8 filed with the SEC on March 23, 1994.)
10(a) The Company's 1994 Incentive Stock Option Plan. (Filed as Exhibit 10(g)
to the Company's Form 10-K filed with the SEC on March 28, 1994.)
10(b) The Company's Deferred Compensation Plan. (Filed as Exhibit 10(k) to
the Company's Form 10-K filed with the SEC on March 27, 1995.)
10(c) The Company's Severance Plan. (Filed as Exhibit 10(m) to the Company's
Form 10-K filed with the SEC on March 27, 1995.)
10(d) Form of Management Stock Subscription Agreement of the Company. (Filed
as Exhibit 10(bb) to the Company's Form 10- K filed with the SEC on
March 28, 1994.)
10(e) Form of Management Pledge Agreement of the Company. (Filed as Exhibit
10(cc) to the Company's Form 10-K filed with the SEC on March 28,
1994.)
</TABLE>
K-26
<PAGE>
<TABLE>
<C> <S>
10(f) Management Services Agreement, dated as of January 27, 1994, by and
between the Company and Apollo Advisors, L.P. (Filed as Exhibit 10(ff)
to the Company's Form 10-K filed with the SEC on March 28, 1994.)
10(g) Lease Indemnification Agreement, dated as of January 27, 1994, by and
between the Company and W. R. Grace & Co.-Conn. (Filed as Exhibit
10(ii) to the Company's Form 10-K filed with the SEC on March 28,
1994.)
10(h) Tax Sharing Agreement, dated as of January 27, 1994, by and among the
Company, Foodmaker, Inc. and Chi-Chi's, Inc. (Filed as Exhibit 10(ll)
to the Company's Form 10-K filed with the SEC on March 28, 1994.)
10(i) Registration Rights Agreement, dated as of January 27, 1994, by and
among the Company and certain of its shareholders. (Filed as Exhibit
10(mm) to the Company's Form 10-K filed with the SEC on March 28,
1994.)
10(j) Agreement, dated as of January 5, 1996, by and between Kevin S. Relyea
and the Company. (Filed as Exhibit 10(w) to the Company's Form 10-K
filed with the SEC on April 1, 1996.)
10(k) The Company's 1996 Management Incentive Compensation Plan Description.
(Filed as Exhibit 10(r) to the Company's Form 10-K filed with the SEC
on March 31, 1997.)
10(l) Termination of Management Services Agreement between Leonard Green &
Associates, L.P. and the Company, dated as of November 20, 1995.
(Filed as Exhibit 10(s) to the Company's Form 10-K filed with the SEC
on March 31, 1997.)
10(m) Employment Agreement, dated as of January 1, 1996 by and between Kevin
S. Relyea and the Company. (Filed as Exhibit 10(t) to the Company's
Form 10-K filed with the SEC on March 31, 1997.)
10(n) Employment Agreement, dated as of March 1, 1996 by and between Roger K.
Chamness and the Company. (Filed as Exhibit 10(u) to the Company's
Form 10-K filed with the SEC on March 31, 1997.)
10(o) Employment Agreement, dated as of April 8, 1996, by and between William
D. Burt and the Company. (Filed as Exhibit 10(v) to the Company's Form
10-K filed with the SEC on March 31, 1997.)
10(p) Loan and Security Agreement, dated as of January 10, 1997, between
Foothill Capital Corporation and the Company and its subsidiaries
named therein. (Filed as Exhibit 10(w) to the Company's Form 10-K
filed with the SEC on March 31, 1997.)
10(q) General Continuing Guarantee, dated as of January 10, 1997, by the
Company in favor of Foothill Capital Corporation. (Filed as Exhibit
10(x) to the Company's Form 10-K filed with the SEC on March 31,
1997.)
10(r) Form of subsidiary General Continuing Guarantee, dated as of January
10, 1997. (Filed as Exhibit 10(y) to the Company's Form 10-K filed
with the SEC on March 31, 1997.)
10(s) Security Agreement, dated as of January 10, 1997, between Foothill
Capital Corporation and the Company. (Filed as Exhibit 10(z) to the
Company's Form 10-K filed with the SEC on March 31, 1997.)
10(t) Form of subsidiary Security Agreement, dated as of January 10, 1997,
between Foothill Capital Corporation and the subsidiary named therein.
(Filed as Exhibit 10(aa) to the Company's Form 10-K filed with the SEC
on March 31, 1997.)
10(u) Stock Pledge Agreement, dated as of January 10, 1997, between the
Company and Foothill Capital Corporation. (Filed as Exhibit 10(bb) to
the Company's Form 10-K filed with the SEC on March 31, 1997.)
</TABLE>
K-27
<PAGE>
<TABLE>
<C> <S>
10(v) Form of subsidiary Stock Pledge Agreement, dated as of January 10,
1997, between the subsidiary named therein and Foothill Capital
Corporation. (Filed as Exhibit 10(cc) to the Company's Form 10-K
filed with the SEC on March 31, 1997.)
10(w) Trademark Security Agreement, dated as of January 10, 1997, by Chi-
Chi's, Inc. in favor of Foothill Capital Corporation. (Filed as
Exhibit 10(dd) to the Company's Form 10-K filed with the SEC on March
31, 1997.)
10(x) Trademark Security Agreement, dated as of January 10, 1997, by El
Torito Restaurants, Inc. in favor of Foothill Capital Corporation.
(Filed as Exhibit 10(ee) to the Company's Form 10-K filed with the
SEC on March 31, 1997.)
10(y) First Amendment to the Loan and Security Agreement dated as of May 23,
1997 by and among the parties thereto. (Filed as Exhibit 10(gg) to
the Company's Form 10-Q filed with the SEC on August 13, 1997.)
10(z) Amendment Number Two to Loan and Security Agreement dated as of August
12, 1997 by and among the parties thereto. (Filed as Exhibit 10(hh)
to the Company's Form 10-Q filed with the SEC on November 12, 1997.)
10(aa) The Company's Divestiture Bonus Plan for Key Management, dated January
9, 1996. (Filed as Exhibit 10(ff) to the Company's Form 10-K filed
with the SEC on March 31, 1997.)
*10(bb) Distribution Service Agreement, dated as of November 1, 1997, between
El Torito Restaurants, Inc. and The SYGMA Network, Inc. (Portions of
this document have been omitted pursuant to a request for
confidential treatment.)
*10(cc) Distribution Service Agreement, dated as of April 30, 1997, between
Chi-Chi's, Inc. and Sysco Corporation. (Portions of this document
have been omitted pursuant to a request for confidential treatment.)
*10(dd) Family Restaurants, Inc., FRI-MRD Corporation, Chi-Chi's, Inc. and El
Torito Restaurants, Inc. Amended and Restated Value Creation Units
Plan and Sample Value Creation Units Agreement.
*21(a) List of Subsidiaries.
*21(b) Names Under Which Subsidiaries Do Business.
*23 Consent of KPMG Peat Marwick LLP.
*27 Financial Data Schedule.
99(a) Press Release, dated May 23, 1996. (Filed as Exhibit 99.1 to the
Company's Form 8-K filed with the SEC on May 30, 1996.)
99(b) Press Release, dated July 3, 1996. (Filed as Exhibit 99.1 to the
Company's Form 8-K filed with the SEC on July 9, 1996.)
</TABLE>
- --------
*Filed herewith.
(b) Reports on Form 8-K
None.
K-28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FAMILY RESTAURANTS, INC.
/s/ Robert T. Trebing, Jr.
By: _________________________________
Robert T. Trebing, Jr.
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Kevin S. Relyea Director, President and March 30, 1998
____________________________________ Chief Executive Officer
Kevin S. Relyea (Principal Executive
Officer)
/s/ Peter P. Copses Director March 30, 1998
____________________________________
Peter P. Copses
/s/ David B. Kaplan Director March 30, 1998
____________________________________
David B. Kaplan
/s/ Antony P. Ressler Director March 30, 1998
____________________________________
Antony P. Ressler
/s/ Robert T. Trebing, Jr. Executive Vice President and March 30, 1998
____________________________________ Chief Financial Officer
Robert T. Trebing, Jr. (Principal Financial and
Accounting Officer)
</TABLE>
K-29
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report covering the registrant's last fiscal year has been or will
be sent to security holders, other than a copy of this Annual Report on Form
10-K.
No proxy statement, form of proxy or other proxy solicitation materials with
respect to any annual or other meeting of security holders were sent in 1997,
and none will be sent with respect to 1997, to security holders.
K-30
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FAMILY RESTAURANTS, INC.
Independent Auditors' Report............................................. K-32
Consolidated Balance Sheets as of December 28, 1997 and December 29,
1996.................................................................... K-33
Consolidated Statements of Operations for the Years Ended December 28,
1997, December 29, 1996
and December 31, 1995................................................... K-34
Consolidated Statements of Common Stockholders' Equity (Deficit) for the
Years Ended December 28, 1997, December 29, 1996 and December 31, 1995.. K-35
Consolidated Statements of Cash Flows for the Years Ended December 28,
1997, December 29, 1996 and December 31, 1995........................... K-36
Notes to Consolidated Financial Statements............................... K-38
</TABLE>
K-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Family Restaurants, Inc.:
We have audited the accompanying consolidated balance sheets of Family
Restaurants, Inc. and its subsidiaries as of December 28, 1997 and December
29, 1996, and the related consolidated statements of operations, common
stockholders' equity (deficit) and cash flows for the years ended December 28,
1997, December 29, 1996 and December 31, 1995. In connection with our audits
of the consolidated financial statements, we also audited the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
the consolidated financial statements and financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Family
Restaurants, Inc. and its subsidiaries at December 28, 1997 and December 29,
1996, and the results of their operations and their cash flows for the years
ended December 28, 1997, December 29, 1996 and December 31, 1995 in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information shown therein.
KPMG Peat Marwick LLP
Orange County, California
March 5, 1998
K-32
<PAGE>
FAMILY RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.......................... $ 32,518 $ 33,820
Receivables........................................ 3,944 5,043
Inventories........................................ 4,569 4,537
Other current assets............................... 4,086 3,212
--------- ---------
Total current assets............................. 45,117 46,612
Property and equipment, net.......................... 183,601 196,872
Reorganization value in excess of amounts allocable
to identifiable assets, net......................... 36,529 37,930
Other assets......................................... 24,521 26,192
--------- ---------
$ 289,768 $ 307,606
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Current portion of long-term debt, including
capitalized lease obligations..................... $ 2,694 $ 3,927
Accounts payable................................... 13,959 19,000
Self-insurance reserves............................ 32,515 34,972
Other accrued liabilities.......................... 58,573 70,696
Income taxes payable............................... 3,788 3,541
--------- ---------
Total current liabilities........................ 111,529 132,136
Other long-term liabilities.......................... 4,478 4,746
Long-term debt, including capitalized lease
obligations, less current portion................... 199,955 165,325
Stockholders' equity (deficit):
Common stock--authorized 1,500,000 shares, par
value $.01, 997,277 shares issued................. 10 10
Additional paid-in capital......................... 157,317 157,317
Accumulated deficit................................ (182,138) (150,545)
Less treasury stock, at cost (8,992 shares)........ (1,383) (1,383)
--------- ---------
Total stockholders' equity (deficit)............. (26,194) 5,399
--------- ---------
$ 289,768 $ 307,606
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
K-33
<PAGE>
FAMILY RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Sales................................... $ 463,724 $724,229 $1,134,359
--------- -------- ----------
Product cost............................ 123,803 200,379 322,194
Payroll and related costs............... 162,807 273,536 419,185
Occupancy and other operating expenses.. 129,428 181,730 275,164
Depreciation and amortization........... 22,583 34,475 57,836
General and administrative expenses..... 30,186 41,742 56,245
Loss on disposition of properties, net.. 3,885 8,600 12,067
Provision for divestitures and write-
down of long-lived assets.............. 2,640 0 44,500
Restructuring costs..................... 0 6,546 4,392
--------- -------- ----------
Total costs and expenses.............. 475,332 747,008 1,191,583
--------- -------- ----------
Operating loss.......................... (11,608) (22,779) (57,224)
Interest expense, net................... 19,476 36,725 65,277
Gain on sale of division................ 0 62,601 0
--------- -------- ----------
Income (loss) before income tax
provision and extraordinary item....... (31,084) 3,097 (122,501)
Income tax provision.................... 509 890 1,208
--------- -------- ----------
Income (loss) before extraordinary item. (31,593) 2,207 (123,709)
Extraordinary gain on extinguishment of
debt................................... 0 134,833 0
--------- -------- ----------
Net income (loss)....................... $ (31,593) $137,040 $ (123,709)
========= ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
K-34
<PAGE>
FAMILY RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 28, 1997
($ IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
ADDITIONAL RECEIVABLE TREASURY
COMMON PAID-IN FROM ACCUMULATED STOCK,
STOCK CAPITAL STOCKHOLDERS DEFICIT AT COST TOTAL
------ ---------- ------------ ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 25,
1994................... $10 $159,554 $(2,947) $(163,876) $ 0 $ (7,259)
Net loss.............. 0 0 0 (123,709) 0 (123,709)
Payments and
cancellation of notes
receivable from
stockholders......... 0 (1,303) 2,078 0 0 775
Purchase of treasury
stock................ 0 0 0 0 (1,383) (1,383)
--- -------- ------- --------- ------- ---------
Balance at December 31,
1995................... 10 158,251 (869) (287,585) (1,383) (131,576)
Net income............ 0 0 0 137,040 0 137,040
Cancellation of notes
receivable from
stockholders......... 0 (934) 869 0 0 (65)
--- -------- ------- --------- ------- ---------
Balance at December 29,
1996................... 10 157,317 0 (150,545) (1,383) 5,399
Net loss.............. 0 0 0 (31,593) 0 (31,593)
--- -------- ------- --------- ------- ---------
Balance at December 28,
1997................... $10 $157,317 $ 0 $(182,138) $(1,383) $ (26,194)
=== ======== ======= ========= ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
K-35
<PAGE>
FAMILY RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
Cash flows from operating activities:
Cash received from customers........... $ 464,780 $ 727,849 $ 1,133,206
Cash received from franchisees and
licensees............................. 2,074 2,762 7,897
Cash paid to suppliers and employees... (465,069) (711,462) (1,084,758)
Interest received...................... 2,119 4,176 266
Interest paid.......................... (16,747) (38,392) (45,198)
Restructuring costs.................... 0 (6,546) (4,392)
Income taxes paid...................... (262) (244) (938)
--------- --------- -----------
Net cash provided by (used in)
operating activities................ (13,105) (21,857) 6,083
--------- --------- -----------
Cash flows from investing activities:
Proceeds from disposal of property and
equipment............................. 1,492 25,115 20,425
Proceeds from sale of FRD, net......... 0 121,342 0
Proceeds from sale of notes receivable,
net................................... 3,514 32,116 0
Capital expenditures................... (13,588) (9,848) (38,022)
Mandatory lease buyback, net........... (2,690) 0 0
Lease termination payments............. (2,891) (3,398) 0
Capitalized opening costs.............. (532) (235) (2,155)
Other.................................. (1,936) (68) 137
--------- --------- -----------
Net cash provided by (used in)
investing activities................ (16,631) 165,024 (19,615)
--------- --------- -----------
Cash flows from financing activities:
Repurchases of notes................... 0 (32,513) 0
Net proceeds from issuance of notes.... 33,947 0 0
Proceeds from (repayment of) working
capital borrowings, net............... 0 (79,815) 20,215
Payment of debt issuance costs......... (2,418) (278) 0
Reductions of long-term debt, including
capitalized lease obligations......... (3,095) (5,111) (7,794)
Decrease in restricted cash and
collateral deposit.................... 0 0 1,850
Purchase of treasury stock............. 0 0 (1,383)
Payments of notes receivable from
stockholders.......................... 0 0 775
--------- --------- -----------
Net cash provided by (used in)
financing activities................ 28,434 (117,717) 13,663
--------- --------- -----------
Net increase (decrease) in cash and cash
equivalents............................. (1,302) 25,450 131
Cash and cash equivalents at beginning of
period.................................. 33,820 8,370 8,239
--------- --------- -----------
Cash and cash equivalents at end of
period.................................. $ 32,518 $ 33,820 $ 8,370
========= ========= ===========
</TABLE>
K-36
<PAGE>
FAMILY RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
($ IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Reconciliation of Net Income (Loss) to
Net Cash Provided by (Used in)
Operating Activities
Net income (loss)...................... $(31,593) $ 137,040 $(123,709)
-------- --------- ---------
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........ 22,583 34,475 57,836
Amortization of debt issuance costs.. 1,084 2,125 6,726
Loss on disposition of properties.... 3,885 8,600 12,067
Provision for divestitures and write-
down of long-lived assets........... 2,640 0 44,500
Gain on sale of division............. 0 (62,601) 0
Extraordinary gain on extinguishment
of debt............................. 0 (134,833) 0
Accretion of interest on notes....... 2,845 9,025 13,454
Decrease in receivables.............. 304 1,661 708
(Increase) decrease in inventories... (32) 1,176 1,976
(Increase) decrease in other current
assets.............................. (530) 2,890 (3,382)
Increase (decrease) in accounts
payable............................. (5,041) (4,792) 1,403
Increase (decrease) in self-insurance
reserves............................ (2,457) (382) 1,664
Decrease in other accrued
liabilities......................... (7,040) (17,507) (7,430)
Increase in income taxes payable..... 247 1,266 270
-------- --------- ---------
Total adjustments.................. 18,488 (158,897) 129,792
-------- --------- ---------
Net cash provided by (used in)
operating activities.................. $(13,105) $ (21,857) $ 6,083
======== ========= =========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
See Note 6 for discussion of repurchases of the Notes.
DISCLOSURE OF ACCOUNTING POLICY:
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
See accompanying notes to consolidated financial statements.
K-37
<PAGE>
FAMILY RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 28, 1997
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Family Restaurants, Inc. (together with its subsidiaries, the "Company") was
incorporated in Delaware in 1986 and is primarily engaged in the operation of
full-service restaurants through its subsidiaries. At December 28, 1997, the
Company operated 275 restaurants in 30 states, with approximately 65% of its
restaurants located in California, Ohio, Pennsylvania, Michigan, Illinois and
Indiana. Additionally, as of December 28, 1997, the Company was the franchisor
and licensor of two restaurants in the United States and 23 restaurants
outside the United States.
Fiscal year
The Company reports results of operations based on 52 or 53 week periods
ending on the last Sunday in December. The fiscal years ended December 28,
1997 and December 29, 1996 included 52 weeks, and the fiscal year ended
December 31, 1995 included 53 weeks.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and all its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Estimations
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories
Inventories consist primarily of food and liquor and are stated at the lower
of cost or market. Costs are determined using the first-in, first-out (FIFO)
method.
Property and equipment
Property and equipment are stated at cost and are depreciated on a straight-
line basis over their estimated useful lives (buildings principally over 25 to
35 years and furniture, fixtures and equipment over 3 to 10 years). Leasehold
improvements are amortized on a straight-line basis over the shorter of their
estimated useful lives or the terms of the related leases. Property under
capitalized leases is amortized over the terms of the leases using the
straight-line method.
Losses on disposition of properties are recognized when a commitment to
divest a restaurant property is made by the Company and include estimated
carrying costs through the expected date of disposal.
Advertising
Production costs of commercials and programming are charged to operations
when aired. The costs of other advertising, promotion and marketing programs
are charged to operations in the year incurred.
K-38
<PAGE>
FAMILY RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Franchise and license fees
Initial franchise and license fees are recognized when all material services
have been performed and conditions have been satisfied. Initial fees for the
periods presented are insignificant. Monthly fees for all franchise and license
arrangements are accrued as earned based on the respective monthly sales. Such
fees totaled $2,215,000 for 1997, $2,802,000 for 1996 and $6,036,000 for 1995
and are included as an offset to general and administrative expenses.
The Company previously hedged its foreign currency royalties through forward
exchange contracts. These contracts reduced the exposure to currency movements
affecting the royalty receivable. Each contract's duration typically ended when
the receivable was expected to be paid. The future value of each contract and
the related currency position were subject to off-setting market risk. On
December 4, 1995, these contracts were terminated, resulting in a realized gain
of $2,405,000, which is included as a reduction to general and administrative
expenses in the consolidated financial statements.
Reorganization value
Reorganization value in excess of amounts allocable to identifiable assets is
amortized using the straight-line method over 30 years. Accumulated
amortization of reorganization value amounted to $5,496,000 at December 28,
1997 and $4,095,000 at December 29, 1996. During 1995, the Company determined
that an impairment of the portion of this asset related to its traditional
dinnerhouse restaurants had occurred and wrote off $2,049,000.
Impairment of long-lived assets
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which generally requires the assessment of certain long-lived assets for
possible impairment when events or circumstances indicate the carrying value of
these assets may not be recoverable.
The Company evaluates property and equipment for impairment by comparison of
the carrying value of the assets to estimated undiscounted cash flows (before
interest charges) expected to be generated by the asset over its estimated
useful life. In addition, the Company's evaluation considers data such as
continuity of personnel, changes in the operating environment, name
identification, competitive information and market trends. Finally, the
evaluation considers changes in management's strategic direction or market
emphasis. When the foregoing considerations suggest that a deterioration of the
financial condition of the Company or any of its assets has occurred, the
Company measures the amount of an impairment, if any, based on the estimated
fair value of each of its assets.
As a result of a continued review of operating results, the Company
identified 18 unprofitable Chi-Chi's restaurants which may either take too long
to recover profitability or may not recover at all, despite current marketing
and cost control programs. In connection with this analysis, the Company
analyzed the carrying value of the long-lived assets of these restaurants and
recorded a write-down of long-lived assets of $2.6 million during the second
quarter of 1997 to reduce the assets' carrying value to their estimated fair
market value. The Company is actively marketing these restaurants for sale, and
the restaurants continue in operation.
During the third quarter of 1995, the Company closed seven Chi-Chi's
restaurants and identified additional restaurants to be sold or having impaired
asset value. Approximately 32 marginally profitable or unprofitable restaurants
were offered for sale. In conjunction with this divestment program, the Company
analyzed the carrying value of the Chi-Chi's long-lived assets to determine if
any impairment had occurred. In connection with this analysis, the Company
recorded a charge for divestitures and writedowns of long-lived assets of
$41.9 million.
K-39
<PAGE>
FAMILY RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income taxes
The Company accounts for income taxes using the principles specified in
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (see Note 9).
Reclassifications
Certain amounts as previously reported have been reclassified to conform to
the 1997 presentation.
NOTE 2--RECEIVABLES:
A summary of receivables follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
($ IN
THOUSANDS)
<S> <C> <C>
Trade, principally credit cards............................... $2,057 $2,027
License and franchise fees and related receivables............ 341 195
Interest on FRD Notes......................................... 186 370
Notes receivable.............................................. 127 926
Other......................................................... 1,233 1,525
------ ------
$3,944 $5,043
====== ======
</TABLE>
NOTE 3--SALES OF RESTAURANTS:
On March 1, 1996, the Company entered into a definitive agreement (the "Sale
Agreement") to sell its family restaurant division which operated full-service
family restaurants (the "Family Restaurant Division") to an indirect wholly-
owned subsidiary of Flagstar Companies, Inc. (now known as Advantica
Restaurant Group, Inc.) ("Flagstar"). On May 23, 1996, the Company completed
the sale of the Family Restaurant Division in exchange for $125 million cash,
$150 million principal amount of 12 1/2% Senior Notes due in 2004 (the "FRD
Notes"), and the assumption of $31.5 million of long-term debt, primarily
consisting of capitalized lease obligations. Based on the subsequent
completion of a closing balance sheet, the purchase price was increased and
such increase was satisfied by the issuance of $6.9 million in additional FRD
Notes. The Company recorded a gain of $62.6 million on the sale of the Family
Restaurant Division, which gain included the effect of the increase in
purchase price of $6.9 million discussed above. Cash proceeds from the sale
were used to pay indebtedness outstanding under the Old Credit Facility (see
Note 6) of $82 million, help fund the repurchases of the Notes and for general
corporate purposes. As of December 28, 1997, the Company had sold or exchanged
$153.65 million aggregate principal amount of the FRD Notes. The remaining
balance of $3.25 million is restricted until the fourth anniversary of the
sale in accordance with the sale agreement with Flagstar to secure potential
future indemnity claims. The remaining FRD Notes are carried at their fair
value which approximates their cost (see Note 5).
During the fourth quarter of 1995, the Company determined that its
traditional dinnerhouse restaurants would be held for sale. The net assets of
these restaurants were written down to their estimated fair value (based in
part on a previously received offer in late 1995), less estimated selling
costs, of $12,908,000, resulting in a loss of $3,565,000 (including the write-
off of reorganization value of $2,049,000 associated with these restaurants,
which is included in loss on disposition of properties in the accompanying
consolidated statement of operations for the year ended December 31, 1995).
During 1996, the net losses associated with the sale of the traditional
dinnerhouse restaurants totalled $4,076,000, which is included in loss on
disposition of properties in the accompanying consolidated statement of
operations.
K-40
<PAGE>
FAMILY RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--PROPERTY AND EQUIPMENT:
A summary of property and equipment follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Land................................................... $ 26,890 $ 26,729
Buildings and improvements............................. 150,223 152,350
Furniture, fixtures and equipment...................... 73,218 69,342
Projects under construction............................ 5,684 4,638
-------- --------
256,015 253,059
Accumulated depreciation and amortization.............. (72,414) (56,187)
-------- --------
$183,601 $196,872
======== ========
</TABLE>
Property under capitalized leases in the amount of $20,880,000 at December
28, 1997 and $21,323,000 at December 29, 1996 is included in buildings and
improvements. Accumulated amortization of property under capitalized leases
amounted to $8,871,000 at December 28, 1997 and $6,894,000 at December 29,
1996. Capitalized leases primarily relate to the buildings on certain
restaurant properties; the land portions of these leases are accounted for as
operating leases.
Depreciation and amortization relating to property and equipment was
$20,994,000 for 1997, $30,253,000 for 1996 and $45,766,000 for 1995, of which
$2,236,000, $4,357,000 and $7,578,000, respectively, was related to
amortization of property under capitalized leases.
A majority of the capitalized and operating leases have original terms of 25
years, and substantially all of these leases expire in the year 2008 or later.
Most leases have renewal options. The leases generally provide for payment of
minimum annual rent, real estate taxes, insurance and maintenance and, in most
cases, contingent rent, calculated as a percentage of sales, in excess of
minimum rent. The total amount of contingent rent under capitalized leases for
the years ended December 28, 1997, December 29, 1996 and December 31, 1995 was
$934,000, $2,425,000 and $5,491,000, respectively. Total rental expense for
all operating leases comprised the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C>
Minimum rent.................................... $35,521 $45,063 $56,577
Contingent rent................................. 1,235 2,058 3,775
Less: Sublease rent............................. (6,434) (6,293) (5,815)
------- ------- -------
$30,322 $40,828 $54,537
======= ======= =======
</TABLE>
K-41
<PAGE>
FAMILY RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 28, 1997, the present value of capitalized lease payments and
the future minimum lease payments on noncancellable operating leases were:
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
DUE IN LEASES LEASES
------ ----------- ---------
($ IN THOUSANDS)
<S> <C> <C>
1998................................................. $ 3,430 $ 33,350
1999................................................. 3,164 32,886
2000................................................. 2,909 32,427
2001................................................. 2,584 29,931
2002................................................. 2,419 27,334
Later years.......................................... 6,713 108,647
------- --------
Total minimum lease payments......................... 21,219 $264,575
========
Interest............................................. (6,624)
-------
Present value of minimum lease payments.............. $14,595
=======
</TABLE>
The future lease payments summarized above include commitments for leased
properties included in the Company's divestiture program.
NOTE 5--OTHER ASSETS:
A summary of other assets follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
($ IN
THOUSANDS)
<S> <C> <C>
Liquor licenses............................................ $ 5,910 $ 5,977
Debt issuance costs........................................ 4,918 3,931
Notes receivable........................................... 9,898 9,239
FRD Notes.................................................. 3,250 6,500
Other...................................................... 545 545
------- -------
$24,521 $26,192
======= =======
</TABLE>
Debt issuance costs are amortized over the terms of the respective loan
agreements.
K-42
<PAGE>
FAMILY RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--LONG-TERM DEBT, INCLUDING CAPITALIZED LEASE OBLIGATIONS:
Long-term debt, including capitalized lease obligations, is comprised of the
following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
9 3/4% Senior Notes..................................... $103,456 $119,034
10 7/8% Senior Subordinated Discount Notes.............. 30,900 30,606
15% Senior Discount Notes 48,514 0
Capitalized lease obligations........................... 14,595 16,795
Mortgage notes, 12 1/4%-12 1/2%, due 1998............... 169 353
Other................................................... 1,753 2,464
-------- --------
199,387 169,252
Deferred gain on debt exchange.......................... 3,262 0
-------- --------
202,649 169,252
Amounts due within one year............................. 2,694 3,927
-------- --------
$199,955 $165,325
======== ========
</TABLE>
On January 27, 1994, the Company sold $300.0 million principal amount of 9
3/4% Senior Notes due in full in 2002 (the "Senior Notes") and $150.0 million
principal amount ($109.0 million in proceeds) of 10 7/8% Senior Subordinated
Discount Notes due in full in 2004 (the "Discount Notes" and, together with
the Senior Notes, the "Notes"), and the Company and certain of its
subsidiaries entered into a $150.0 million senior secured revolving credit
facility with a $100.0 million sub-limit for standby letters of credit, which
was to be used for general corporate purposes including working capital, debt
service and capital expenditure requirements (the "Old Credit Facility").
On January 10, 1997, the Company entered into a five-year, $35 million
credit facility with Foothill Capital Corporation (the "Foothill Credit
Facility"), which replaced the Old Credit Facility, to provide for the ongoing
working capital needs of the Company. The Foothill Credit Facility provides
for up to $15 million in revolving cash borrowings and up to $35 million in
letters of credit (less the outstanding amount of revolving cash borrowings).
The Foothill Credit Facility is secured by substantially all of the real and
personal property of the Company and contains customary restrictive covenants,
including the maintenance of certain financial ratios. The Company is in
compliance with all financial ratios for the year ended December 28, 1997.
Standby letters of credit are issued under the Foothill Credit Facility
primarily to provide security for future amounts payable by the Company under
its workers' compensation insurance program ($18,381,000 of such letters of
credit were outstanding as of December 28, 1997). No revolving cash borrowings
were outstanding as of December 28, 1997.
The Senior Notes require semiannual interest payments on February 1 and
August 1 of each year and will mature on February 1, 2002. The Senior Notes
will not be redeemable at the option of the Company prior to February 1, 1999.
Thereafter, such notes may be redeemed at prices starting at 102.786% and
declining ratably to 100% at February 1, 2001. Cash interest payments on the
Discount Notes began on August 1, 1997 and will continue to be paid on
February 1 and August 1 of each year, and such notes will mature on February
1, 2004. The Discount Notes will not be redeemable at the option of the
Company prior to February 1, 1999. Thereafter, such notes may be redeemed at
prices starting at 104.078% and declining ratably to 100% at February 1, 2002.
On July 3, 1996, the Company repurchased $151.0 million aggregate principal
amount of the Senior Notes and $108.6 million aggregate principal amount of
the Discount Notes in exchange for (or from the proceeds from the sale of)
$133.5 million aggregate principal amount of the FRD Notes. On December 19,
1996, the Company repurchased $30.0 million aggregate principal amount of the
Senior Notes for $18.6 million. In separate
K-43
<PAGE>
FAMILY RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
transactions, the Company repurchased (i) an additional $8.5 million aggregate
principal amount of the Discount Notes in the third quarter of 1996 and (ii)
$2.0 million aggregate principal amount of the Discount Notes in the fourth
quarter of 1996. The Company recognized an extraordinary gain of $134.8
million as a result of these repurchases.
On August 12, 1997, FRI-MRD Corporation (a wholly-owned subsidiary of the
Company) ("FRI-MRD") issued new senior discount notes (the "Senior Discount
Notes") in the face amount of $61 million at a price of approximately 75% of
par. The Senior Discount Notes are due on January 24, 2002 and accrete at a
rate of 15% per annum until July 31, 1999, and thereafter, interest will be
payable in cash semi-annually at the rate of 15% per annum. The $61 million of
Senior Discount Notes were issued to an existing holder of the Company's
Senior Notes in exchange for $15.6 million of Senior Notes plus approximately
$34 million of cash, and are part of an agreement pursuant to which FRI-MRD
had the ability to issue up to a maximum of $75 million of Senior Discount
Notes. The gain of $3,548,000 realized on the exchange of Senior Notes has
been deferred and classified as an element of long-term debt in accordance
with the guidelines of Emerging Issues Task Force Issue No. 96-19 because the
present value of the cash flows of the Senior Discount Notes was not at least
10% different from the present value of the cash flows of the Senior Notes
exchanged. The deferred gain is being amortized as a reduction of interest
expense over the life of the Senior Discount Notes. In January 1998, FRI-MRD
issued the remaining $14 million in face value of the Senior Discount Notes
available under such agreement to the same purchaser at a price of 83% of par.
FRI-MRD received approximately $11.6 million in cash as a result of this
subsequent sale. Proceeds from the sales of the Senior Discount Notes will be
used to fund the Company's capital expenditure programs and for general
corporate purposes.
The Company continues to be highly leveraged and has significant debt
service requirements. Although management believes that its current sources of
cash should be sufficient to meet its operating and debt service requirements
for the foreseeable future, there can be no assurance that the Company will be
able to repay or refinance the Notes, or that FRI-MRD will be able to repay or
refinance the Senior Discount Notes, at their respective maturities.
The mortgage notes were issued to a group of institutional lenders and are
collateralized by mortgages covering five restaurants having a net book value
of approximately $6,689,000 at December 28, 1997.
Maturities of long-term debt, including capitalized lease obligations,
during the four years subsequent to December 27, 1998 are as follows:
$2,141,000 in 1999, $2,083,000 in 2000, $1,954,000 in 2001 and $166,439,000 in
2002.
K-44
<PAGE>
FAMILY RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The recorded amounts of the Company's cash and cash equivalents,
receivables, accounts payable, self-insurance reserves, other accrued
liabilities and certain financial instruments included in other assets at
December 28, 1997 and December 29, 1996 approximate fair value. The fair value
of the Company's long-term debt, excluding capitalized lease obligations, is
estimated as follows:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
RECORDED FAIR RECORDED FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Senior Notes............................... $103,456 $82,765 $119,034 $86,895
Discount Notes............................. 30,900 22,866 30,606 11,742
Senior Discount Notes...................... 48,514 50,630 0 0
Mortgage notes............................. 169 165 353 347
Other...................................... 1,753 1,527 2,464 2,096
</TABLE>
The fair values of the Notes are based on an average market price of these
instruments as of the end of fiscal 1997 and 1996. The fair value of the
Senior Discount Notes is based on the subsequent issuance of the remaining $14
million in face value at a price of 83% of par. The fair value of the mortgage
notes and other debt was estimated using a discount rate which the Company
believes would be currently available to it for debt with similar terms and
average maturities.
The Company does not maintain investments or commitments for which the
application of SFAS 119, "Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments," would cause a material effect.
NOTE 8--OTHER ACCRUED LIABILITIES:
A summary of other accrued liabilities follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
Wages, salaries and bonuses................................ $ 16,251 $ 22,249
Carrying costs of closed properties........................ 12,407 10,500
Reserve for divestitures................................... 0 10,004
Interest................................................... 5,773 5,038
Property taxes............................................. 2,993 3,110
Sales tax.................................................. 2,612 2,132
Utilities.................................................. 1,996 1,313
Accrued rent............................................... 452 537
Other...................................................... 16,089 15,813
-------- --------
$ 58,573 $ 70,696
======== ========
</TABLE>
Carrying costs of closed properties represent the estimated future costs
associated with the Company's closed and subleased restaurants which consists
primarily of the net present value of lease subsidies which are mainly
comprised of the excess of future lease payments for which the Company is
liable, over amounts estimated to be received from related subleases.
K-45
<PAGE>
FAMILY RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--INCOME TAXES:
The Company reported a loss for tax purposes in 1997, 1996 and 1995.
Accordingly, the income tax provisions for each year primarily reflect certain
state, local and foreign taxes. On a tax return basis, the Federal regular
operating loss carryforwards amounted to approximately $203.6 million ($200.6
million of alternative minimum tax operating loss carryforwards) and expire in
2003 through 2013. The Company had approximately $711,000 of tax credit
carryforwards which expire in 2003 and 2004.
Upon consummation of the acquisition of the Company on January 27, 1994, the
Company's net operating loss carryovers and other tax attributes were reduced
significantly for Federal income tax purposes. In addition, because the
consummation of the acquisition of the Company triggered an ownership change
of the Company for Federal income tax purposes, the Company's use of its
remaining net operating loss carryovers for regular and alternative minimum
Federal income tax purposes is subject to an annual limitation in an amount
equal to the product of (i) the long-term tax-exempt rate prevailing on
January 27, 1994 and (ii) the value of the Company's stock, increased to
reflect the cancellation of indebtedness pursuant to the prepackaged joint
plan of reorganization of the Company and REG-M Corp. (but without taking into
account contributions to capital pursuant to the acquisition of the Company).
The Company's annual limit is approximately $5.3 million. The amount of NOL
subject to the annual limit is approximately $22.2 million.
At December 28, 1997, the Company and its subsidiaries had tax credit
carryforwards of approximately $2.1 million not utilized by W. R. Grace & Co.-
Conn. ("Grace"). In accordance with the 1986 acquisition from Grace, the
Company must reimburse Grace for 75% of the benefit of these tax credits if
they are utilized in future Company tax returns. Further, El Torito
Restaurants, Inc. (a wholly owned subsidiary of the Company) has approximately
$12.0 million of tax depreciation deductions not claimed in Grace tax returns
as a result of a tax sharing agreement. The Company will also reimburse Grace
for 75% of any tax savings generated by these deductions.
Further, as a result of the acquisition of Chi-Chi's, the Company has net
operating loss and credit carryforwards not used by Chi-Chi's of $53.2 million
and $6.8 million, respectively. The net operating losses expire beginning in
2004 through 2009 and the credit carryovers expire in various years from 1998
through 2009. The acquisition of Chi-Chi's, as well as the 1992 acquisition of
a previous franchisee by Chi-Chi's, triggered ownership changes for Federal
income tax purposes which result in separate annual limitations on the
availability of these losses and credits.
A reconciliation of income tax expense to the amount of income tax benefit
that would result from applying the Federal statutory rate (35% for 1997, 1996
and 1995) to loss before income taxes is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------
DEC. 28, DEC. 29, DEC. 31,
1997 1996 1995
-------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
Provision (benefit) for income taxes at
statutory rate............................... $(10,879) $ 48,276 $(42,875)
State taxes, net of Federal income tax
benefit...................................... 219 249 332
Foreign taxes................................. 0 92 270
Nondeductible goodwill........................ 490 1,242 3,312
Change in deferred tax asset which is subject
to a full valuation reserve and other........ 10,679 (48,969) 40,169
-------- -------- --------
$ 509 $ 890 $ 1,208
======== ======== ========
</TABLE>
At December 28, 1997 and December 29, 1996, the Company's deferred tax asset
was $134,717,000 and $124,838,000, respectively, and deferred tax liability
was $17,456,000 and $17,969,000, respectively. The major
K-46
<PAGE>
FAMILY RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
components of the Company's net deferred taxes of $117,261,000 at December 28,
1997 and $106,869,000 at December 29, 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
($ IN THOUSANDS)
<S> <C> <C>
Depreciation........................................... $ (17,456) $ (17,969)
Net operating loss and credit carryforwards............ 103,909 91,176
Capitalized leases..................................... 817 719
Carrying costs and other reserves...................... 5,120 8,787
Self-insurance reserves................................ 12,915 14,700
Straight-line rent..................................... 1,811 1,872
Reorganization costs................................... 4,700 4,913
Other.................................................. 5,445 2,671
--------- ---------
117,261 106,869
Valuation allowance.................................... (117,261) (106,869)
--------- ---------
$ 0 $ 0
========= =========
</TABLE>
The increase in the valuation allowance for 1997 resulted primarily from the
normal occurrence of temporary differences and the current year tax loss.
NOTE 10--BENEFIT PLANS:
The Company maintains certain incentive compensation and related plans for
executives and key operating personnel, including restaurant and field
management. Total expenses for these plans were $4,062,000, $10,374,000 and
$10,151,000 for 1997, 1996 and 1995, respectively.
The Company maintains a savings plan pursuant to Section 401(k) of the
Internal Revenue Code, which allows administrative and clerical employees who
have satisfied the service requirements to defer from 2% to 12% of their pay
on a pre-tax basis. The Company contributes an amount equal to 20% of the
first 4% of compensation that is deferred by the participant. The Company's
contributions under this plan were $156,000, $164,000 and $288,000 in 1997,
1996 and 1995, respectively. The Company also maintains an unfunded, non-
qualified deferred compensation plan, which was created in 1994 for key
executives and other members of management who were then excluded from
participation in the qualified savings plan. This plan allows participants to
defer up to 50% of their salary on a pre-tax basis. The Company contributes an
amount equal to 20% of the first 4% contributed by the employee. The Company's
contributions under the non-qualified deferred compensation plan were $37,000,
$38,000 and $67,000 in 1997, 1996 and 1995, respectively. In each plan, a
participant's right to Company contributions vests at a rate of 25% per year
of service. The Company has no defined benefit plans.
NOTE 11--RELATED PARTY TRANSACTIONS:
Foodmaker, Inc. ("Foodmaker") provided distribution services through May
1997 to a portion of the Company's restaurants, principally those operated
under the Chi-Chi's name. Distribution sales to those restaurants for the
years ended December 28, 1997, December 29, 1996 and December 31, 1995
aggregated $21,844,000, $63,785,000 and $76,423,000, respectively. Due to the
termination of distribution sales, there were no accounts payable due to
Foodmaker at December 28, 1997. The Company had accounts payable of $2,301,000
due to Foodmaker at December 29, 1996.
Apollo FRI Partners, L.P. ("Apollo") charged a monthly fee of $100,000
during 1997 and 1996 which Apollo will continue to earn in the future, and
Apollo and Green Equity Investors, L.P. ("GEI") each charged a
K-47
<PAGE>
FAMILY RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
monthly fee of $50,000 during 1995 for providing certain management services
to the Company. In November 1995, the management services arrangement with GEI
was terminated. For the years ended December 28, 1997, December 29, 1996 and
December 31, 1995, the Company was charged $1.2 million each year in
connection with this arrangement. The Company had management services fees
payable of $3,250,000 and $2,050,000 due to Apollo and GEI at December 28,
1997 and December 29, 1996, respectively.
NOTE 12--COMMON STOCK:
Certain officers and employees of the Company were granted the right to
purchase up to 40,900 shares of Common Stock (constituting up to 4.1% of the
Common Stock outstanding immediately following such purchases) at $160 per
share, the same per share price paid by Apollo and GEI in January 1994. The
Employee Stock Purchase was consummated on January 27, 1994 with respect to
certain officers (15,625 shares of Common Stock) and on May 19, 1994 and July
31, 1994 with respect to the other participants (22,552 shares of Common
Stock). No more than fifty percent of the purchase price was authorized to be
financed through interest-bearing recourse notes payable to the Company. In
July 1996, the Company canceled all such interest-bearing recourse notes. The
Company has repurchased 8,992 shares of Common Stock due to employee
terminations, leaving 28,905 shares currently owned by management stockholders
and terminated employees. The individuals who purchased Common Stock were also
granted options to purchase 20,822 shares of Common Stock in the future at an
exercise price initially set at $160 per share. The Company also granted
options to purchase approximately 30,000 shares of Common Stock to
approximately 800 other employees. All these options expire in 2004 and 2005
and become exercisable at a rate of 25% on the grant date and 25% on each of
the next three anniversaries of the grant date. Approximately 44,500 options
have expired due to terminations.
NOTE 13--CONTINGENCIES:
The Company is involved in various litigation matters incidental to its
business. The Company does not believe that any of the claims or actions filed
against it will have a material adverse effect upon the consolidated financial
position or results of operations of the Company.
K-48
<PAGE>
SCHEDULE II
FAMILY RESTAURANTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ----------- ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for
uncollectible
receivables:
For the year 1997..... $879 $ 78 $300 $(206)(1) $1,051
For the year 1996..... 997 0 0 (118)(1) 879
For the year 1995..... 813 184 0 0 997
</TABLE>
- --------
(1) Represents write-off of uncollectible receivables against allowance and
includes transfers to other accounts.
K-49
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 29, 1998 OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 33-14051
----------------
FAMILY RESTAURANTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 33-0197361
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
18831 VON KARMAN AVENUE, IRVINE, CALIFORNIA 92612
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 757-7900
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [_]
Number of shares of outstanding common stock as of May 8, 1998 is 988,285.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FAMILY RESTAURANTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 29, DECEMBER 28,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents........................... $ 33,861 $ 32,518
Receivables......................................... 4,145 3,944
Inventories......................................... 4,308 4,569
Other current assets................................ 3,551 4,086
--------- ---------
Total current assets.............................. 45,865 45,117
Property and equipment, net........................... 181,262 183,601
Reorganization value in excess of amount allocable to
identifiable assets, net............................. 36,179 36,529
Other assets.......................................... 24,260 24,521
--------- ---------
$ 287,566 $ 289,768
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Current portion of long-term debt, including
capitalized lease obligations...................... $ 2,609 $ 2,694
Accounts payable.................................... 15,633 13,959
Self-insurance reserves............................. 30,560 32,515
Other accrued liabilities........................... 52,323 58,573
Income taxes payable................................ 3,789 3,788
--------- ---------
Total current liabilities......................... 104,914 111,529
Other long-term liabilities........................... 4,460 4,478
Long-term debt, including capitalized lease
obligations, less current portion.................... 212,596 199,955
Stockholders' deficit:
Common stock--authorized 1,500,000 shares, par value
$.01 per share, 997,277 shares issued.............. 10 10
Additional paid-in capital.......................... 157,317 157,317
Accumulated deficit................................. (190,348) (182,138)
Less treasury stock, at cost (8,992 shares)......... (1,383) (1,383)
--------- ---------
Total stockholders' deficit....................... (34,404) (26,194)
--------- ---------
$ 287,566 $ 289,768
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
Q-2
<PAGE>
FAMILY RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTERS
ENDED
------------------
MARCH MARCH
29, 1998 30, 1997
-------- --------
<S> <C> <C>
Sales...................................................... $113,306 $114,978
-------- --------
Product costs.............................................. 30,763 30,365
Payroll and related costs.................................. 40,206 40,867
Occupancy and other operating expenses..................... 30,848 32,750
Depreciation and amortization.............................. 5,339 5,570
General and administrative expenses........................ 7,118 7,478
Opening costs.............................................. 620 0
Loss on disposition of properties, net..................... 668 1,467
-------- --------
Total costs and expenses................................. 115,562 118,497
-------- --------
Operating loss............................................. (2,256) (3,519)
Interest expense, net...................................... 5,827 4,406
-------- --------
Loss before income tax provision........................... (8,083) (7,925)
Income tax provision....................................... 127 176
-------- --------
Net loss................................................... $ (8,210) $ (8,101)
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
Q-3
<PAGE>
FAMILY RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE QUARTERS
ENDED
--------------------
MARCH 29, MARCH 30,
1998 1997
--------- ---------
<S> <C> <C>
Increase in Cash and Cash Equivalents
Cash flows from operating activities:
Cash received from customers, franchisees and
licensees............................................. $ 113,690 $ 115,019
Cash paid to suppliers and employees................... (112,043) (115,076)
Interest paid, net..................................... (6,967) (6,336)
Income taxes paid...................................... (126) (159)
--------- ---------
Net cash used in operating activities................ (5,446) (6,552)
--------- ---------
Cash flows from investing activities:
Proceeds from disposal of property and equipment....... 44 15
Capital expenditures................................... (3,398) (1,843)
Mandatory lease buyback, net........................... 0 (2,818)
Lease termination payments............................. (211) (2,151)
Opening costs.......................................... (276) 0
Other.................................................. 74 (1,034)
--------- ---------
Net cash used in investing activities................ (3,767) (7,831)
--------- ---------
Cash flows from financing activities:
Reductions of long-term debt, including capitalized
lease obligations..................................... (972) (892)
Net proceeds from issuance of notes.................... 11,620 0
Payment of debt issuance costs......................... (92) (1,305)
--------- ---------
Net cash provided by (used in) financing activities.. 10,556 (2,197)
--------- ---------
Net increase (decrease) in cash and cash equivalents..... 1,343 (16,580)
Cash and cash equivalents at beginning of period......... 32,518 33,820
--------- ---------
Cash and cash equivalents at end of period............... $ 33,861 $ 17,240
========= =========
Reconciliation of net loss to net cash used in operating
activities:
Net loss................................................. $ (8,210) $ (8,101)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 5,339 5,570
Amortization of debt issuance costs.................... 297 251
Openings costs......................................... 620 0
Loss on disposition of properties...................... 668 1,467
Accretion of interest.................................. 1,908 294
Decrease in receivables, inventories and other current
assets................................................ 251 1,053
Decrease in accounts payable, self-insurance reserves,
other accrued liabilities and income taxes payable.... (6,319) (7,086)
--------- ---------
Net cash used in operating activities.................... $ (5,446) $ (6,552)
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
Q-4
<PAGE>
FAMILY RESTAURANTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Company. Family Restaurants, Inc. (together with its subsidiaries, the
"Company") was incorporated in Delaware in 1986 and is primarily engaged in
the operation of full-service restaurants through its subsidiaries. At March
29, 1998, the Company operated 273 restaurants in 30 states, with
approximately 65% of its restaurants located in California, Ohio,
Pennsylvania, Michigan, Illinois and Indiana. Additionally, as of March 29,
1998, the Company was the franchisor and licensor of two restaurants in the
United States and 24 restaurants outside the United States.
2. Financial Statements. The Condensed Consolidated Financial Statements in
this Form 10-Q have been prepared in accordance with Securities and Exchange
Commission Regulation S-X. Reference is made to the Notes to the Consolidated
Financial Statements for the Year Ended December 28, 1997 included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 28,
1997 (the "Form 10-K") for information with respect to the Company's
significant accounting and financial reporting policies, as well as other
pertinent information. The Company believes that all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results of the interim periods presented have been made. The results of
operations for the quarter ended March 29, 1998 are not necessarily indicative
of those for the full year.
3. Long-Term Debt. On August 12, 1997, FRI-MRD Corporation (a wholly-owned
subsidiary of the Company) ("FRI-MRD") issued new senior discount notes (the
"Senior Discount Notes") in the face amount of $61 million at a price of
approximately 75% of par. The Senior Discount Notes are due on January 24,
2002 and accrete at a rate of 15% per annum until July 31, 1999, and
thereafter, interest will be payable in cash semi-annually at the rate of 15%
per annum. The $61 million of Senior Discount Notes were issued to an existing
holder of the Company's 9-3/4% Senior Notes due 2002 (the "Senior Notes") in
exchange for $15.6 million of Senior Notes plus approximately $34 million of
cash, and are part of an agreement pursuant to which FRI-MRD had the ability
to issue up to a maximum of $75 million of Senior Discount Notes. The gain of
$3,548,000 realized on the exchange of Senior Notes has been deferred and
classified as an element of long-term debt in accordance with the guidelines
of Emerging Issues Task Force Issue No. 96-19 because the present value of the
cash flows of the Senior Discount Notes was not at least 10% different from
the present value of the cash flows of the Senior Notes exchanged. The
deferred gain is being amortized as a reduction of interest expense over the
life of the Senior Discount Notes. On January 14 and 15, 1998, FRI-MRD issued
the remaining $14 million in face amount of the Senior Discount Notes
available under such agreement to the same purchaser at a price of 83% of par.
FRI-MRD received approximately $11.6 million in cash as a result of this
subsequent sale. Proceeds from the sales of the Senior Discount Notes have
been and will continue to be used to fund the Company's capital expenditure
programs and for general corporate purposes.
4. Opening Costs. Opening costs are incurred in connection with the opening
or remodeling of a restaurant and are principally related to stocking the
restaurant and training its staff. Through the year ended December 28, 1997,
the Company's policy had been to capitalize such opening costs and amortize
them over one year. In the second quarter of 1998, the American Institute of
Certified Public Accountants is expected to issue a Statement of Position
("SOP"), "Reporting on the Costs of Start-Up Activities," which specifies that
all costs of start-up activities, including restaurant opening costs, should
be expensed as incurred. Although this SOP is to be effective for fiscal years
beginning after December 15, 1998, early adoption is allowed, and the Company
has elected to adopt the provisions of the proposed SOP in the quarter ended
March 29, 1998.
Accordingly, $344,000 of unamortized opening costs at December 28, 1997
(classified as other current assets) has been expensed in the accompanying
condensed consolidated statement of operations for the quarter ended March 29,
1998, along with $276,000 of opening costs incurred during the quarter. No
opening costs were incurred in the quarter ended March 30, 1997.
Q-5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain information and statements included in this Management's Discussion
and Analysis of Financial Condition and Results of Operations, including,
without limitation, statements containing the words "believes," "anticipates,"
"expects" and words of similar import, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 and
involve known and unknown risks and uncertainties that could result in actual
results of the Company or the restaurant industry differing materially from
expected results expressed or implied by such forward-looking statements.
Although it is not possible to itemize all of the factors and specific events
that could affect the outlook of a restaurant company operating in a
competitive environment, factors that could significantly impact expected
results include (i) the development of successful marketing strategies for
Chi-Chi's and El Torito, (ii) the effect of national and regional economic
conditions, (iii) the availability of adequate working capital, (iv)
competitive products and pricing, (v) changes in legislation, (vi) demographic
changes, (vii) the ability to attract and retain qualified personnel, (viii)
changes in business strategy or development plans, (ix) business disruptions,
(x) changes in consumer preferences, tastes and eating habits and (xi)
increases in food and labor costs. The Company disclaims any obligation to
update any such factors or to publicly announce the result of any revisions to
any of the forward-looking statements contained herein to reflect future
events or developments.
The following should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" presented in
the Form 10-K.
As used herein, "comparable restaurants" means restaurants operated by the
Company on January 1, 1997 and that continued in operation through the end of
the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
A. Liquidity
The Company has been relying and will continue to rely primarily on
internally generated funds, supplemented if necessary by working capital
advances available under the Foothill Credit Facility (as defined below), for
its liquidity. In addition, FRI-MRD raised approximately $45.6 million in cash
from the issuance of the Senior Discount Notes to supplement its liquidity
needs. The Company's viability has been and will continue to be dependent upon
its ability to generate sufficient cash flow to meet its obligations on a
timely basis, and to comply with the terms of its financing agreements.
Operating Cash Flow. For the first quarter of 1998, the Company reported
EBITDA (defined as earnings (loss) before opening costs, gain (loss) on
disposition of properties, provision for divestitures and write-down of long-
lived assets, restructuring costs, interest, taxes, depreciation and
amortization) of $4.4 million, compared to $3.5 million for the same period in
1997. The $0.9 million improvement was due to the continuing impact of El
Torito and Chi-Chi's cost reduction and reengineering strategies, which have
improved operating margins, and positive comparable store sales at Chi-Chi's.
This improved EBITDA is the continuation of the trend that began in 1996 when
new management was installed at both El Torito and Chi-Chi's. Since 1995, the
divisional EBITDA of the Company's ongoing operations is set forth in the
following table.
<TABLE>
<CAPTION>
DIVISIONAL
EBITDA
----------------
EL CHI-
FISCAL YEAR ENDED TORITO CHI'S
----------------- ------- --------
($ IN THOUSANDS)
<S> <C> <C>
December 31, 1995 (a).................................... $13,508 $(10,455)
December 29, 1996........................................ 11,956 (4,278)
December 28, 1997........................................ 17,627 36
</TABLE>
- --------
(a) Includes 53 weeks of operations and, in accordance with Company policy at
that time, excludes certain unallocated corporate overhead.
Q-6
<PAGE>
The Company has included information concerning EBITDA herein because it
understands 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, operating income
(loss) as an indicator of operating performance or to cash flows from
operating activities as a measure of liquidity.
Working Capital Deficiency. The Company operates with a substantial working
capital deficiency because (i) restaurant operations are conducted primarily
on a cash (and cash equivalent) basis with a low level of accounts receivable,
(ii) rapid turnover allows a limited investment in inventories and (iii) cash
from sales is usually received before related accounts payable for food,
beverages and supplies become due. The Company had a working capital
deficiency of $59.0 million on March 29, 1998.
Credit Facility. The Company has a $35 million credit facility with Foothill
Capital Corporation (the "Foothill Credit Facility") to provide for the
ongoing working capital needs of the Company. The Foothill Credit Facility
provides for up to $15 million in revolving cash borrowings and up to $35
million in letters of credit (less the outstanding amount of revolving cash
borrowings). The Foothill Credit Facility is secured by substantially all of
the real and personal property of the Company, contains customary restrictive
covenants, including the maintenance of certain financial ratios, and expires
on January 10, 2002. The Company is in compliance with all financial ratios
for the quarter ended March 29, 1998. Letters of credit are issued under the
Foothill Credit Facility primarily to provide security for future amounts
payable under the Company's workers' compensation insurance program ($15.9
million of such letters of credit were outstanding as of May 8, 1998). No
revolving cash borrowings were outstanding as of May 8, 1998.
Other. On August 12, 1997, FRI-MRD issued the Senior Discount Notes in the
face amount of $61 million to an existing holder of the Company's Senior Notes
in exchange for $15.6 million of Senior Notes plus approximately $34 million
of cash. On January 14 and 15, 1998, FRI-MRD issued the remaining $14 million
in face amount of the Senior Discount Notes to the same purchaser for
approximately $11.6 million in cash. Proceeds from the sales of the Senior
Discount Notes have been and will continue to be used to fund the Company's
capital expenditure programs and for general corporate purposes. The Company
is currently considering additional sources of cash, such as the sale of non-
core assets.
The Company continues to be highly leveraged and has significant debt
service requirements. Although management believes that its current sources of
cash should be sufficient to meet its operating and debt service requirements
for the foreseeable future, there can be no assurance that the Company will be
able to repay or refinance its Senior Notes and its 10-7/8% Senior
Subordinated Discount Notes due 2004, or that FRI-MRD will be able to repay or
refinance the Senior Discount Notes, at their respective maturities.
B. Capital Expenditures
Net cash used in investing activities was $3.8 million for the first quarter
of 1998, including $3.4 million for capital expenditures, as compared to net
cash used in investing activities of $7.8 million for the same period in 1997.
Capital expenditures of approximately $30 million are planned for fiscal
1998, including approximately $6 million devoted to normal improvements of the
Company's restaurants. The Company is continuing its remodeling of both El
Torito and Chi-Chi's restaurants and anticipates spending approximately $13
million to $14 million for this purpose in fiscal 1998. In fiscal 1998, the
Company also anticipates opening up to seven new El Torito restaurants,
including its newly developed quick-service casual-style restaurant, "El
Torito Express Grill." The Company also plans to upgrade El Torito's in-store
POS technology during fiscal 1998.
By May 8, 1998, the Company had completed the remodeling of eight additional
El Torito restaurants, primarily in the Los Angeles/Orange County market, and
six additional Chi-Chi's restaurants in various markets. The Company has
announced plans for an aggressive remodel program for the Chi-Chi's chain over
the next three years. This program could cost up to $50 million.
Q-7
<PAGE>
Included in 1998 capital spending are continuing expenditures to replace the
Company's mainframe computer software applications with new software to be run
in a client/server environment. The new software includes work flow
capabilities allowing for improved processes and wider access to data. In
addition, acquisition of the new software will insure that the Company's
computer systems are year 2000 compliant. The Company expects to spend
approximately $1.6 million on the new software and related hardware and
installation costs in 1998. The project is expected to be completed before
year-end 1998. The Company is requesting year 2000 compliance reports from
significant vendors and service providers. If the computer systems of a
significant vendor or service provider were not year 2000 compliant, it could
have a material adverse effect on the Company.
RESULTS OF OPERATIONS.
The Company's total sales of $113,306,000 for the first quarter of 1998
decreased by $1,672,000 or 1.5% as compared to the same period in 1997. As
shown below, this decrease was due to restaurants divested or closed in 1997
and 1998, partially offset by increased sales of comparable restaurants.
<TABLE>
<CAPTION>
FIRST QUARTER
SALES DECREASE
----------------
($ IN THOUSANDS)
<S> <C>
Decrease in Sales of Restaurants Divested or Closed......... $(1,757)
Increase in Sales of Comparable Restaurants................. 85
-------
Total..................................................... $(1,672)
=======
</TABLE>
Sales for comparable restaurants of $111,631,000 for the first quarter of
1998 increased by $85,000 or 0.1% as compared to the same period in 1997. As
shown below, this increase was due to increased sales for comparable Chi-Chi's
restaurants which, while continuing to reflect a competitive operating
environment for restaurants, more than offset decreased sales for comparable
El Torito restaurants.
<TABLE>
<CAPTION>
FIRST QUARTER
SALES INCREASE
---------------
AMOUNT PERCENT
------ -------
($ IN
THOUSANDS)
<S> <C> <C>
Comparable Chi-Chi's.......................................... $ 701 1.2%
Comparable El Torito.......................................... (616) (1.2)
----- ----
Total....................................................... $ 85 0.1%
===== ====
</TABLE>
El Torito comparable sales in the first quarter were down 1.2% as compared
to the same period in 1997. Sales were impacted by severe weather during six
weeks of the quarter. Especially hard-hit was the St. Louis market and
southern Orange County, California, where sales declines accounted for over
75% of the unfavorable sales variance in the first quarter. The "Getaway to
Mexico at El Torito" advertising campaign continued with a focus on the
Yucatan region in the first quarter via promotional television and radio
advertising. A shift to lower media weights and reduced spending levels for
advertising in the first quarter of 1998, along with the non-comparable
calendar alignment of marketing events in 1998 versus 1997, may have also
adversely affected the first quarter comparable sales results.
Comparable Chi-Chi's sales in the first quarter of 1998 were up 1.2% as
compared to the same period in 1997. This was the first quarter of positive
comparable sales since Chi-Chi's was merged into the Company in January 1994
and continues the improving comparable sales trends reported each quarter
during fiscal 1997. Sales were buoyed by print advertising distributed in
January 1998 and an accompanying system-wide employee incentive contest which
were formulated to stimulate trial of the new Chi-Chi's menu introduced in
December 1997. The new menu expanded the product offerings to appeal to a
greater segment of the population by adding grilled meats and barbeque items,
related to Mexican cuisine, but not considered traditional Mexican dishes, as
well as new Mexican combination entrees. Additionally, the first Chi-Chi's
television and radio campaign of 1998 began in the second week of March
featuring the Outrageous Burrito and other Mexican grill items.
Q-8
<PAGE>
Product cost of $30,763,000 for the first quarter of 1998 increased by
$398,000 or 1.3% as compared to the same period in 1997. The increase is
primarily due to the impact of (i) higher commodity prices, especially related
to produce and cheese, and (ii) higher food costs at Chi-Chi's associated with
new menu items, which more than offset the impact of the eight restaurants
sold or closed since the beginning of 1997 and the effects of the El Torito
and Chi-Chi's cost reduction strategies. As a percentage of sales, product
cost increased to 27.2% in the first quarter of 1998 as compared to 26.4% in
the same period of 1997.
Payroll and related costs of $40,206,000 for the first quarter of 1998
decreased by $661,000 or 1.6% as compared to the same period in 1997. The
decrease is due to the impact of the eight restaurants sold or closed since
the beginning of 1997. As a percentage of sales, payroll and related costs of
35.5% in the first quarter of 1998 remained the same as compared to the same
period in 1997. Savings realized from the El Torito and Chi-Chi's cost
reduction strategies which have focused on improving labor scheduling and
efficiencies were offset by the impact of the minimum wage increases
nationally on September 1, 1997 and on March 1, 1997 and March 1, 1998 in
California.
The Company is subject to Federal and state laws governing matters such as
minimum wages, overtime and other working conditions. Approximately half of
the Company's employees are paid at rates related to the minimum wage.
Therefore, increases in the minimum wage or decreases in the allowable tip
credit (tip credits reduce the minimum wage that must be paid to tipped
employees in certain states) increase the Company's labor costs. This is
especially true in California, where there is no tip credit. Effective October
1, 1996, the Federal minimum wage was increased from $4.25 to $4.75, and
effective September 1, 1997, it was further increased to $5.15. However, a
provision of the new measure effectively freezes the minimum wage for tipped
employees at current levels by increasing the allowable tip credit in those
states which allow for a tip credit. Furthermore, California voters approved a
proposition on November 5, 1996 that increased the state's minimum wage to
$5.00 on March 1, 1997 and further increased the state's minimum wage to $5.75
on March 1, 1998. In response to the minimum wage increases on October 1,
1996, March 1, 1997 and March 1, 1998, the Company raised menu prices at its
El Torito restaurants in an effort to recover the higher payroll costs. Chi-
Chi's also raised menu prices in October and December 1997 as a result of the
cumulative impact of these minimum wage increases. At the request of President
Clinton, the Congress is considering further increases in the Federal minimum
wage over the next two years. In addition, the California legislature is
considering another minimum wage increase which would be effective in 1999.
Occupancy and other operating expenses of $30,848,000 for the first quarter
of 1998 decreased by $1,902,000 or 5.8% as compared to the same period in
1997. The decrease for the first quarter is due, in part, to the impact of the
eight restaurants sold or closed since the beginning of 1997. As a percentage
of sales, occupancy and other operating expenses decreased to 27.2% in the
first quarter of 1998 as compared to 28.5% in the same period in 1997. This
decrease primarily reflects (i) the impact of El Torito and Chi-Chi's cost
reduction strategies and (ii) a decrease in media expense in both El Torito
and Chi-Chi's in the first quarter of 1998 as compared to the same period of
1997.
Depreciation and amortization of $5,339,000 for the first quarter of 1998
decreased by $231,000 or 4.2% as compared to the same period in 1997 due to
the impact of (i) the eight restaurants sold or closed since the beginning of
1997 and (ii) the write-down of certain long-lived assets in the second
quarter of 1997.
General and administrative expenses of $7,118,000 for the first quarter of
1998 decreased by $360,000 or 4.8% as compared to the same period of 1997. As
a percentage of sales, general and administrative expenses decreased to 6.3%
in the first quarter of 1998 as compared to 6.5% in the same period of 1997
primarily reflecting (i) higher royalty and license payments, which are
recorded as an offset to general and administrative expenses, and (ii) lower
litigation-related expenses. Management continues to closely evaluate the
Company's general and administrative cost structure for savings opportunities.
The Company reported a loss on disposition of properties of $0.7 million in
the first quarter of 1998 as compared to a loss of $1.5 million for the first
quarter in 1997. These amounts reflect losses associated with restaurant
divestments and closures in such periods.
Q-9
<PAGE>
Interest expense, net for the first quarter of 1998 of $5,827,000 increased
by $1,421,000 or 32.3% as compared to the same period in 1997. The first
quarter increase was primarily the result of the issuance of the Senior
Discount Notes in August 1997 and January 1998 and the accretion of interest
thereon, partially offset by the elimination of cash interest expense
associated with the $15.6 million of Senior Notes received as part of the
exchange on August 12, 1997.
SELECTED DIVISION OPERATING DATA.
The Company primarily operates full-service Mexican restaurants in two
divisions under the El Torito, Chi-Chi's, Casa Gallardo and other names. At
March 29, 1998 the Company's El Torito restaurant division operated 94 full-
service restaurants and the Company's Chi-Chi's restaurant division operated
179 full-service restaurants.
Q-10
<PAGE>
The following table sets forth certain information regarding the Company,
its El Torito and Chi-Chi's restaurant divisions, and the various operations
divested in 1996.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
---------------------------------
MARCH 29, MARCH 30, MARCH 31,
1998 1997 1996
--------- --------- ---------
($ IN THOUSANDS,
EXCEPT AVERAGE CHECK AMOUNT)
<S> <C> <C> <C>
EL TORITO RESTAURANT DIVISION
Restaurants Open at End of Period:
Owned/operated........................... 94 97 98
Franchised and Licensed.................. 10 7 5
Sales...................................... $ 51,809 $ 53,600 $ 54,434
Restaurant Level Cashflow.................. 7,087 7,234 5,848
Divisional EBITDA(a)....................... 4,313 4,249 2,874
Percentage decrease in comparable
restaurant sales.......................... (1.2)% (1.5)% (3.1)%
Average check.............................. $ 9.92 $ 9.55 $ 9.43
CHI-CHI'S RESTAURANT DIVISION
Restaurants Open at End of Period:
Owned/operated........................... 179 182 199
Franchised and Licensed.................. 16 18 21
Sales...................................... $ 61,497 $ 61,378 $ 74,753
Restaurant Level Cashflow.................. 4,128 3,478 (607)
Divisional EBITDA(a)....................... 102 (690) (4,512)
Percentage increase (decrease) in
comparable restaurant sales............... 1.2 % (12.7)% (10.9)%
Average check.............................. $ 7.84 $ 7.52 $ 7.44
ONGOING OPERATIONS
Restaurants Open at End of Period:
Owned/operated........................... 273 279 297
Franchised and Licensed.................. 26 25 26
Sales...................................... $113,306 $114,978 $129,187
Divisional EBITDA(a)....................... 4,415 3,559 (1,638)
DIVESTED OPERATIONS(B)
Restaurants Open at End of Period:
Owned/operated........................... 0 0 367
Franchised and Licensed.................. 0 0 261
Sales...................................... $ 0 $ 0 $129,865
Divisional EBITDA(a)....................... 0 0 11,948
TOTAL COMPANY
Restaurants Open at End of Period:
Owned/operated........................... 273 279 664
Franchised and Licensed.................. 26 25 287
Sales...................................... $113,306 $114,978 $259,052
EBITDA(c).................................. 4,371 3,518 10,431
</TABLE>
- --------
(a) Divisional EBITDA with respect to any operating division is defined as
earnings (loss) before opening costs, gain (loss) on disposition of
properties, interest, taxes, depreciation and amortization.
(b) Divested Operations in 1996 includes the results of the Family Restaurant
Division until it was divested on May 23, 1996 and the traditional
dinnerhouse restaurants that were divested by year-end 1996.
(c) EBITDA is defined as earnings (loss) before opening costs, gain (loss) on
disposition of properties, provision for divestitures and write-down of
long-lived assets, restructuring costs, interest, taxes, depreciation and
amortization. The Company has included information concerning EBITDA
herein because it understands 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, operating income (loss) as an indicator of operating
performance or to cash flows from operating activities as a measure of
liquidity.
Q-11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various litigation matters incidental to its
business. The Company does not believe that any of the existing claims or
actions will have a material adverse effect upon the consolidated financial
position or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
2(a) Stock Purchase Agreement dated as of March 1, 1996 by and among
Family Restaurants, Inc., Flagstar Companies, Inc., Flagstar
Corporation and FRD Acquisition Co. (Filed as Exhibit 2.1 to
the Company's Form 10-Q filed with the SEC on May 15, 1996.)
3(a) Fourth Restated Certificate of Incorporation of the Company.
(Filed as Exhibit 4.1 to the Company's Form S-8 filed with the
SEC on March 23, 1994.)
3(b) Bylaws of the Company. (Filed as Exhibit 4.2 to the Company's
Form S-8 filed with the SEC on March 23, 1994.)
4(a) Indenture Dated as of January 27, 1994
Re: $300,000,000 9-3/4% Senior Notes Due 2002. (Filed as
Exhibit 4(a) to the Company's Form 10-K filed with the SEC on
March 28, 1994.)
4(b) Indenture Dated as of January 27, 1994
Re: $150,000,000 10 7/8% Senior Subordinated Discount Notes Due
2004. (Filed as Exhibit 4(b) to the Company's Form 10-K filed
with the SEC on March 28, 1994.)
4(c) First Supplemental Indenture, dated as of July 3, 1996, between
the Registrant and IBJ Schroder Bank & Trust Company, a New
York Banking corporation, as Trustee. (Filed as Exhibit 10.1 to
the Company's Form 8-K filed with the SEC on July 9, 1996.)
4(d) First Supplemental Indenture, dated as of July 3, 1996, between
the Registrant and Fleet National Bank, as successor by merger
to Fleet National Bank of Massachusetts, formerly known as
Shawmut Bank, N.A., as Trustee. (Filed as Exhibit 10.2 to the
Company's Form 8-K filed with the SEC on July 9, 1996.)
4(e) Note Agreement Dated as of August 12, 1997
Re: Up to $75,000,000 FRI-MRD Corporation Senior Discount Notes
Due January 24, 2002. (Filed as Exhibit 4(e) to the Company's
Form 10-Q filed with the SEC on November 12, 1997.)
4(f) Joinder Agreement Dated as of January 14, 1998
Re: FRI-MRD Corporation Senior Discount Notes due January 24,
2002. (Filed as Exhibit 4(f) to the Company's Form 10-K filed
with the SEC on March 30, 1998.)
*27 Financial Data Schedule.
</TABLE>
- --------
* Filed herewith.
(b) Reports on Form 8-K.
None.
Q-12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Family Restaurants, Inc.
(Registrant)
/s/ Robert T. Trebing, Jr.
By: _________________________________
Robert T. Trebing, Jr.
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 8, 1998
Q-13
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of Section 145 of the Delaware General Corporation Law
("DGCL") empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
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 corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person acted
in any of the capacities set forth above, against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with
the defense or settlement of such action or suit 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 corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of Chancery
or such other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
Section 145, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith; that indemnification
provided for by Section 145 shall not be deemed exclusive of any other rights
to which the indemnified party may be entitled; that indemnification provided
for by Section 145 shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, employee or
agent and shall inure to the benefit of such person's heirs, executors and
administrators; and empowers the corporation to purchase and maintain
insurance on behalf of a director or officer of the corporation against any
liability asserted against him and incurred by him in any such capacity, or
arising out of his status as such, whether or not the corporation would have
the power to indemnify him against such liabilities under Section 145. Section
Seven of Article VIII (Article V, Section 6 in the Company Certificate) of FRI
Bylaws provides that FRI shall indemnify its directors and officers to the
fullest extent permitted by the DGCL.
FRI also provides liability insurance for its directors and officers which
provides for coverage against loss from claims made against directors and
officers in their capacity as such, including, subject to certain exceptions,
liabilities under the federal securities laws. In certain employment
agreements, FRI or its subsidiaries have also agreed to indemnify certain
officers against loss from claims made against such officers in connection
with the performance of their duties under their employment agreements. Such
indemnification is generally to the same extent as provided in the FRI By-
laws.
Section 102(b)(7) of the DGCL provides that a certificate of incorporation
may contain a provision eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director provided that such provision shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders,
II-1
<PAGE>
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
or (iv) for any transaction from which the director derived an improper
personal benefit.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. See Exhibit Index.
ITEM 22. UNDERTAKINGS
The undersigned, FRI, hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the Proxy Statement/Prospectus any facts or events
arising after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
Provided, however, that paragraphs (1)(i) and (1)(ii) above do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by FRI with or furnished to
the SEC pursuant to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference in the Registration Statement.
(2) That for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
The undersigned, FRI, hereby undertakes that, for purposes of determining
any liability under the Securities Act, each filing of the Registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the Registration Statement 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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of FRI
pursuant to the provisions described under Item 20, or otherwise, FRI has been
advised that, in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by FRI of expenses incurred or paid by a
director, officer or controlling person of FRI 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, FRI
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-2
<PAGE>
FRI hereby undertakes as follows: that prior to any public reoffering of the
securities registered hereunder through use of a prospectus which is a part of
this Registration Statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), the issuer undertakes that such
reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
items of the applicable form.
FRI undertakes that every prospectus: (i) that is filed pursuant to the
immediately preceding paragraph, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offering
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
FRI hereby undertakes to respond to requests for information that is
incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or
13 of this Form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the effective date of the Registration Statement through the date of
responding to the request.
FRI hereby undertakes to supply by means of a post-effective amendment all
information concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the Registration
Statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, FRI has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Irvine, State of
California this 1st day of July, 1998.
FAMILY RESTAURANTS, INC.
(Registrant)
/s/ Kevin S. Relyea
By:
----------------------------------
Kevin S. Relyea
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Robert T. Trebing, Jr. and Kevin S.
Relyea, or either of them, as such signatory's true and lawful attorneys-in
fact and agents, with full power of substitution and resubstitution, for such
signatory and in such signatory's name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and to file the same, with all
exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the foregoing, as fully
as to all intents and purposes as such signatory might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or their or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on this 1st day of July, 1998.
(I)PRINCIPAL EXECUTIVE OFFICER
/s/ Kevin S. Relyea
--------------------------------- President and Chief
Kevin S. Relyea Executive Officer
(II)PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
/s/ Robert T. Trebing, Jr.
--------------------------------- Executive Vice President and
Robert T. Trebing, Jr. Chief Financial Officer
(III)A MAJORITY OF THE BOARD OF DIRECTORS
/s/ Peter P. Copses
--------------------------------- Director
Peter P. Copses
--------------------------------- Director
David B. Kaplan
/s/ Antony P. Ressler
--------------------------------- Director
Antony P. Ressler
/s/ Kevin S. Relyea
--------------------------------- Director
Kevin S. Relyea
II-4
<PAGE>
EXHIBIT INDEX
Exhibits required by Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
*2.1 Agreement and Plan of Merger, dated as of June 9, 1998, by and among
Family Restaurants, Inc., FRI-Sub, Inc. and Koo Koo Roo, Inc.
included as Annex A to the Proxy Statement/Prospectus included as
part of this Registration Statement.
*3.1 Form of Restated Certificate of Incorporation of FRI to be filed in
connection with the Merger.
*3.2 Form of Certificate of Amendment to the Certificate of Incorporation
of FRI to be filed following the Merger.
*3.3 Form of Amended and Restated By-Laws of FRI to become operative in
connection with the Merger.
4.1 Indenture Dated as of January 27, 1994 Re: $300,000,000 9 3/4% Senior
Notes Due 2002. (Filed as Exhibit 4(a) to FRI's From 10-K filed with
the SEC on March 28, 1994.)
4.2 Indenture Dated as of January 27, 1994 Re: $150,000,000 10 7/8% Senior
Subordinated Discount Notes Due 2004. (Filed as Exhibit 4(b) to FRI's
Form 10-K filed with the SEC on March 28, 1994.)
4.3 First Supplemental Indenture, dated as of July 3, 1996, between FRI
and IBJ Schroder Bank & Trust Company, a New York Banking
corporation, as Trustee. (Filed as Exhibit 10.1 to FRI's Form 8-K
filed with the SEC on July 9, 1996.)
4.4 First Supplemental Indenture, dated as of July 3, 1996, between the
Registrant and Fleet National Bank, as successor by merger to Fleet
National Bank of Massachusetts, formerly known as Shawmut Bank, N.A.,
as Trustee. (Filed as Exhibit 10.2 to FRI's Form 8-K filed with the
SEC on July 9, 1996.)
4.5 Note Agreement Dated as of August 12, 1997 Re: Up to $75,000,000 FRI-
MRD Corporation Senior Discount Notes Due January 24, 2002. (Filed as
Exhibit 4(e) to FRI's Form 10-Q filed with the SEC on November 12,
1997.)
4.6 Joinder Agreement Dated as of January 14, 1998 Re: FRI-MRD Corporation
Senior Discount Notes due January 24, 2002. (Filed as Exhibit 4(f) to
FRI's Form 10-K filed with the SEC on March 31, 1998.)
*4.7 First Amendment Dated as of June 9, 1998 to the Note Agreement Dated
August 12, 1997.
*4.8 Note Agreement Dated as of June 9, 1998 Re: $24,000,000 FRI-MRD
Corporation Senior Secured Discount Notes Due January 24, 2002.
+5.1 Opinion of Skadden, Arps, Slate, Meagher and Flom LLP as to the
legality of the shares being issued (including consent).
+8.1 Opinion of Latham & Watkins regarding the federal income tax
consequences of the Merger to KKR stockholders (including consent).
*10.1 Stock Purchase Agreement Dated June 9, 1998 by and between FRI-MRD
Corporation and KKR.
*10.2 Bridge Loan Agreement Dated June 9, 1998 among The Hamlet Group, Inc.
as borrower, KKR, H.H.K. of Virginia, Inc. and H.H. of Maryland,
Inc., as Guarantors and FRI-MRD Corporation as Lender.
10.3 FRI's 1994 Incentive Stock Option Plan. (Filed as Exhibit 10(g) to
FRI's Form 10-K filed with the SEC on March 28, 1994.)
10.4 FRI's Deferred Compensation Plan. (Filed as Exhibit 10(k) to FRI's
Form 10-K filed with the SEC on March 27, 1995.)
10.5 FRI's Severance Plan. (Filed as Exhibit 10(m) to FRI's Form 10-K filed
with the SEC on March 27, 1995.)
10.6 Form of Management Stock Subscription Agreement of FRI. (Filed as
Exhibit 10(bb) to FRI's Form 10-K filed with the SEC on March 28,
1994.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.7 Form of Management Pledge Agreement of FRI. (filed as Exhibit 10(cc)
to FRI's Form 10-K filed with the SEC on March 28, 1994.)
10.8 Management Services Agreement, dated as of January 27, 1994, by and
between FRI and Apollo Advisors, L.P. (Filed as Exhibit 10(ff) to
FRI's Form 10-K filed with the SEC on March 28, 1994.)
10.9 Lease Indemnification Agreement, dated as of January 27, 1994, by and
between FRI and W. R. Grace & Co.-Conn. (Filed as Exhibit 10(ii) to
FRI's Form 10-K filed with the SEC on March 28, 1994.)
10.10 Tax Sharing Agreement, dated as of January 27, 1994, by and among FRI,
Foodmaker, Inc. and Chi-Chi's, Inc. (Filed as Exhibit 10(ll) to FRI's
Form 10-K filed with the SEC on March 28, 1994.)
10.11 Registration Rights Agreement, dated as of January 27, 1994, by and
among FRI and certain of its shareholders. (Filed as Exhibit 10(mm)
to FRI's Form 10-K filed with the SEC on March 28, 1994.)
10.12 Agreement, dated as of January 5, 1996, by and between Kevin S. Relyea
and FRI. (Filed as Exhibit 10(w) to FRI's Form 10-K filed with the
SEC on April 1, 1996.)
10.13 FRI's 1996 Management Incentive Compensation Plan Description. (Filed
as Exhibit 10(r) to FRI's Form 10-K filed with the SEC on March 31,
1997.)
10.14 Termination of Management Services Agreement between Leonard Green &
Associates, L.P. and FRI, dated as of November 20, 1995. (Filed as
Exhibit 10(s) to FRI's Form 10-K filed with the SEC on March 31,
1997.)
10.15 Employment Agreement, dated as of January 1, 1996 by and between Kevin
S. Relyea and FRI. (Filed as Exhibit 10(t) to FRI's Form 10-K filed
with the SEC on March 31, 1997.)
10.16 Employment Agreement, dated as of March 1, 1996 by and between Roger
K. Chamness and FRI. (Filed as Exhibit 10(u) to FRI's Form 10-K filed
with the SEC on March 31, 1997.)
10.17 Employment Agreement, dated as of April 8, 1996, by and between
William D. Burt and FRI. (Filed as Exhibit 10(v) to FRI's Form 10-K
filed with the SEC on March 31, 1997.)
10.18 Loan and Security Agreement, dated as of January 10, 1997, between
Foothill Capital Corporation and FRI and its subsidiaries named
therein. (Filed as Exhibit 10(w) to FRI's Form 10-K filed with the
SEC on March 31, 1997.)
10.19 General Continuing Guarantee, dated as of January 10, 1997, by FRI in
favor of Foothill Capital Corporation. (Filed as Exhibit 10(x) to
FRI's Form 10-K filed with the SEC on March 31, 1997.)
10.20 Form of subsidiary General Continuing Guarantee, dated as of January
10, 1997. (Filed as Exhibit 10(y) to FRI's Form 10-K filed with the
SEC on March 31, 1997.)
10.21 Security Agreement, dated as of January 10, 1997, between Foothill
Capital Corporation and FRI. (Filed as Exhibit 10(z) to FRI's Form
10-K filed with the SEC on March 31, 1997.)
10.22 Form of subsidiary Security Agreement, dated as of January 10, 1997,
between Foothill Capital Corporation and the subsidiary named
therein. (Filed as Exhibit 10(aa) to FRI's Form 10-K filed with the
SEC on March 31, 1997.)
10.23 Stock Pledge Agreement, dated as of January 10, 1997, between FRI and
Foothill Capital Corporation. (Filed as Exhibit 10(Beneficially
Owned) to the Company's Form 10-K filed with the SEC on March 31,
1997.)
10.24 Form of subsidiary Pledge Agreement, dated as of January 10, 1997,
between the subsidiary named therein and Foothill Capital
Corporation. (Filed as Exhibit 10(cc) to FRI's Form 10-K filed with
the SEC on March 31, 1997.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.25 Trademark Security Agreement, dated as of January 10, 1997, by Chi-
Chi's, Inc. in favor of Foothill Capital Corporation. (Filed as
Exhibit 10(dd) to FRI's Form 10-K filed with the SEC on March 31,
1997.)
10.26 Trademark Security Agreement, dated as of January 10, 1997, by El
Torito Restaurants, Inc. in favor of Foothill Capital Corporation.
(Filed as Exhibit 10(ee) to FRI's Form 10-K filed with the SEC on
March 31, 1997.)
10.27 First Amendment to the Loan and Security Agreement dated as of May 23,
1997 by and among the parties thereto. (Filed as Exhibit 10(gg) to
FRI's Form 10-Q filed with the SEC on August 13, 1997.)
10.28 Amendment Number Two to Loan and Security Agreement dated as of August
12, 1997 by and among the parties thereto. (Filed as Exhibit 10(hh)
to FRI's Form 10-Q filed with the SEC on November 12, 1997.)
*10.29 Amendment Number Three to Loan and Security Agreement, dated as of
June 30, 1998 by and among the parties thereto.
*10.30 Amendment Number Four to Loan and Security Agreement dated as of June
9, 1998 by and among the parties thereto.
*10.31 Form of General Continuing Guaranty, dated , 1998, by The Hamlet
Group, Inc.
*10.32 Form of Amendment Number One to General Continuing Guaranty and
Security Agreement, dated as of , 1998, between Foothill and
FRI.
*10.33 Form of Amendment Number One to Security Agreement, dated ,
1998, between Foothill and FRI-MRD.
*10.34 Form of Amendment Number One to Stock Pledge Agreement, dated ,
1998, between Foothill Capital Corporation and FRI-MRD.
*10.35 Form of General Continuing Guaranty, dated , 1998, by Koo Koo Roo,
Inc.
*10.36 Form of Security Agreement, dated , 1998, between Foothill Capital
Corporation and Koo Koo Roo, Inc.
10.37 Distribution Service Agreement, dated as of November 1, 1997, between
El Torito Restaurants, Inc. and The SYGMA Network, Inc. (Filed as
Exhibit 10(bb) to FRI's Form 10-K filed with the SEC on March 30,
1998.)
10.38 Distribution Service Agreement, dated as of April 30, 1997, between
Chi-Chi's, Inc. and Sysco Corporation. (Filed as Exhibit 10(cc) to
FRI's Form 10-K filed with the SEC on March 30, 1998.)
10.39 Family Restaurants, Inc., FRI-MRD Corporation, Chi-Chi's, Inc. and El
Torito Restaurants, Inc. Amended and Restated Value Creation Units
Plan and Sample Value Creation Units Agreement. (Filed as Exhibit
10(dd) to FRI's Form 10-K filed with the SEC on March 30, 1998.)
+10.40 Koo Koo Roo Enterprises, Inc. 1998 Stock Incentive Plan
*23.1 Consent of KPMG Peat Marwick LLP relating to the audited consolidated
financial statements of FRI.
*23.2 Consent of BDO Seidman LLP relating to the audited consolidated
financial statements of KKR.
+23.3 Consent of Skadden, Arps, Slate, Meagher and Flom LLP (included in
Exhibit 5.1).
+23.4 Consent of Latham & Watkins (included in Exhibit 8.1).
*24 Power of Attorney (included on signature page).
*99.1 Form of proxy card to be used in soliciting holders of KKR Common
Stock.
</TABLE>
- --------
* Filed herewith.
+ To be filed by amendment.
<PAGE>
EXHIBIT 2.1
----------------------------------------
AGREEMENT AND PLAN OF MERGER
by and among
FAMILY RESTAURANTS, INC.
FRI-SUB, INC.
and
KOO KOO ROO, INC.
Dated as of June 9, 1998
----------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
DEFINITIONS....................................................................................... 1
SECTION 1.1 Definitions........................................................................ 1
-----------
ARTICLE II
THE MERGER........................................................................................ 9
SECTION 2.1 The Merger......................................................................... 9
----------
SECTION 2.2 Effects of the Merger.............................................................. 9
---------------------
SECTION 2.3 Certificate of Incorporation and By-Laws........................................... 10
----------------------------------------
SECTION 2.4 Directors.......................................................................... 10
---------
SECTION 2.5 Officers........................................................................... 10
--------
SECTION 2.6 Conversion of Shares............................................................... 10
--------------------
SECTION 2.7 Stock Plans........................................................................ 11
-----------
SECTION 2.8 Warrants........................................................................... 12
--------
SECTION 2.9 Tax Treatment...................................................................... 13
-------------
ARTICLE III
EXCHANGE OF SHARES................................................................................ 13
SECTION 3.1 Surrender of Certificates.......................................................... 13
-------------------------
SECTION 3.2 No Dividends....................................................................... 14
------------
SECTION 3.3 Return to FRI...................................................................... 15
-------------
SECTION 3.4 Dissenting Shares.................................................................. 15
-----------------
SECTION 3.5 No Further Transfer................................................................ 15
-------------------
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FRI AND MERGER-SUB.............................................. 16
SECTION 4.1 Organization, Standing and Qualification........................................... 16
----------------------------------------
SECTION 4.2 Capitalization..................................................................... 16
--------------
SECTION 4.3 Authorization of Agreement and Other Documents..................................... 17
----------------------------------------------
SECTION 4.4 No Violation....................................................................... 18
------------
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
SECTION 4.5 Absence of Certain Changes......................................................... 19
--------------------------
SECTION 4.6 Insurance.......................................................................... 20
---------
SECTION 4.7 Financial Statements; Full Disclosure.............................................. 21
-------------------------------------
SECTION 4.8 Suppliers; Franchisees............................................................. 21
----------------------
SECTION 4.9 Intellectual Property.............................................................. 22
---------------------
SECTION 4.10 Litigation........................................................................ 22
----------
SECTION 4.11 Labor Matters..................................................................... 22
-------------
SECTION 4.12 Taxes............................................................................. 24
-----
SECTION 4.13 Employee Benefit Plans; ERISA..................................................... 25
-----------------------------
SECTION 4.14 Change in Control................................................................. 27
-----------------
SECTION 4.15 Governmental Consents............................................................. 27
---------------------
SECTION 4.16 Title to Properties............................................................... 27
-------------------
SECTION 4.17 Environmental Matters............................................................. 28
---------------------
SECTION 4.18 Books and Records................................................................. 28
-----------------
SECTION 4.19 Contracts; No Defaults............................................................ 29
----------------------
SECTION 4.20 Form S-4; KKR Proxy Statement..................................................... 29
-----------------------------
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF KKR............................................................. 30
SECTION 5.1 Organization, Standing and Qualification.......................................... 30
----------------------------------------
SECTION 5.2 Capitalization.................................................................... 31
--------------
SECTION 5.3 Authorization of Agreement and Other Documents.................................... 31
----------------------------------------------
SECTION 5.4 No Violation...................................................................... 32
------------
SECTION 5.5 Absence of Certain Changes........................................................ 33
--------------------------
SECTION 5.6 Insurance......................................................................... 34
---------
SECTION 5.7 Financial Statements; Full Disclosure............................................. 35
-------------------------------------
SECTION 5.8 Suppliers; Franchisees............................................................ 35
----------------------
SECTION 5.9 Intellectual Property............................................................. 36
---------------------
SECTION 5.10 Litigation........................................................................ 36
----------
SECTION 5.11 Labor Matters..................................................................... 36
-------------
SECTION 5.12 Taxes............................................................................. 38
-----
SECTION 5.13 Employee Benefit Plans; ERISA..................................................... 39
-----------------------------
SECTION 5.14 Change in Control................................................................. 41
-----------------
SECTION 5.15 Governmental Consents............................................................. 41
---------------------
SECTION 5.16 Title to Properties............................................................... 41
-------------------
SECTION 5.17 Environmental Matters............................................................. 42
---------------------
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 5.18 Books and Records................................................................. 43
-----------------
SECTION 5.19 Contracts; No Defaults............................................................ 43
----------------------
SECTION 5.20 Form S-4; Proxy Statement......................................................... 45
-------------------------
ARTICLE VI
COVENANTS OF FRI.................................................................................. 45
SECTION 6.1 Sale of the Hamlet Shares to FRI-MRD............................................... 45
------------------------------------
SECTION 6.2 Loan to KKR........................................................................ 45
-----------
SECTION 6.3 Conduct of Business Pending Merger................................................. 46
----------------------------------
SECTION 6.4 No Solicitation.................................................................... 48
---------------
SECTION 6.5 Amendment of Certificate and Bylaws;
------------------------------------
Recapitalization.................................................................. 49
----------------
SECTION 6.6 Nasdaq National Market Quotation................................................... 49
--------------------------------
SECTION 6.7 Indemnification and Insurance...................................................... 49
-----------------------------
SECTION 6.8 Employee Benefits; Severance....................................................... 51
----------------------------
SECTION 6.9 Filing of Form S-8................................................................. 51
------------------
ARTICLE VII
COVENANTS OF KKR.................................................................................. 51
SECTION 7.1 Sale of the Hamlet Shares to FRI-MRD............................................... 51
------------------------------------
SECTION 7.2 Loan to KKR........................................................................ 52
-----------
SECTION 7.3 Conduct of Business Pending Merger................................................. 52
----------------------------------
SECTION 7.4 No Solicitation.................................................................... 55
---------------
SECTION 7.5 KKR Stockholder Approval........................................................... 55
------------------------
SECTION 7.6 Affiliates......................................................................... 55
----------
SECTION 7.7 Employee Benefit Matters........................................................... 56
------------------------
ARTICLE VIII
MUTUAL COVENANTS.................................................................................. 56
SECTION 8.1 Access to Information.............................................................. 56
---------------------
SECTION 8.2 Preparation of Form S-4 and the
-------------------------------
KKR Proxy Statement.............................................................. 57
-------------------
SECTION 8.3 Reasonable Efforts................................................................. 57
------------------
SECTION 8.4 Brokers or Finders................................................................. 57
------------------
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 8.5 Notification of Certain Matters.................................................... 58
-------------------------------
SECTION 8.6 Further Information................................................................ 58
-------------------
SECTION 8.7 Fees and Expenses.................................................................. 58
-----------------
SECTION 8.8 Accountants' Letters............................................................... 59
--------------------
SECTION 8.9 Public Announcements............................................................... 60
--------------------
ARTICLE IX
CONDITIONS........................................................................................ 60
SECTION 9.1 Conditions to Each Party's Obligation to
----------------------------------------
Effect the Merger................................................................ 60
-----------------
SECTION 9.2 Conditions of Obligations of FRI................................................... 61
--------------------------------
SECTION 9.3 Conditions of Obligations of KKR................................................... 62
--------------------------------
ARTICLE X
TERMINATION AND AMENDMENT......................................................................... 63
SECTION 10.1 Termination....................................................................... 63
-----------
SECTION 10.2 Effect of Termination............................................................. 64
---------------------
SECTION 10.3 Amendment......................................................................... 64
---------
SECTION 10.4 Extension; Waiver................................................................. 64
-----------------
ARTICLE XI
MISCELLANEOUS..................................................................................... 65
SECTION 11.1 Notices........................................................................... 65
-------
SECTION 11.2 Descriptive Headings.............................................................. 66
--------------------
SECTION 11.3 Counterparts...................................................................... 66
------------
SECTION 11.4 Entire Agreement; Assignment...................................................... 66
----------------------------
SECTION 11.5 Governing Law..................................................................... 66
-------------
SECTION 11.6 Specific Performance.............................................................. 66
--------------------
SECTION 11.7 Parties in Interest............................................................... 66
-------------------
SECTION 11.8 Attorneys' Fees................................................................... 67
---------------
SECTION 11.9 Survival of Representations and Warranties........................................ 67
------------------------------------------
SECTION 11.10 Obligation of FRI................................................................ 67
-----------------
SECTION 11.11 Validity......................................................................... 67
--------
</TABLE>
iv
<PAGE>
EXHIBITS
Exhibit 1.1 - Terms of Permitted Transactions
Exhibit 2.1 - Form of Certificate of Merger
Exhibit 6.1 - Form of Hamlet Stock Purchase Agreement
Exhibit 6.2 - Form of Bridge Loan Agreement
Exhibit 6.5A1 - Forms of FRI Amended Certificate of Incorporation
Exhibit 6.5A2 - Form of FRI Amended Bylaws
Exhibit 6.5B - Form of further Amendment to FRI Certificate of Incorporation
Exhibit 7.6 - Form of Rule 145 Affiliate Agreement
Exhibit 8.8 - Form of Joint Press Release
Exhibit 9.2(c) - Form of KKR's Officer's Certificate
Exhibit 9.2(d) - Form of Opinion of Counsel to KKR
Exhibit 9.3(c) - Reconstituted Board of Directors of FRI
Exhibit 9.3(d) - Form of FRI's Officer's Certificate
Exhibit 9.3(e) - Form of Opinion of Counsel to FRI
v
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of June 9, 1998,
---------
by and among Family Restaurants, Inc., a Delaware corporation ("FRI"), FRI-Sub,
---
Inc., a Delaware corporation and indirect wholly owned subsidiary of FRI
("Merger-Sub") and Koo Koo Roo, Inc., a Delaware corporation ("KKR").
- ------------ ---
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. The following definitions when used herein
-----------
shall have the following meanings:
"Acquisition Proposal" means with respect to any Person, any offer or proposal
--------------------
for, or any indication of interest in, the acquisition of a material equity
interest in, or substantial portion of the assets of, any such Person, including
by way of a merger, consolidation or other business combination involving such
Person, or any of its Subsidiaries; provided, however, that, as used in this
Agreement, the term "Acquisition Proposal" shall not apply to (i) any Permitted
Transaction or (ii) in the case of KKR, the primary issuance, in a single
transaction or series of related transactions, of equity securities that results
in gross proceeds to KKR of not more than $20 million.
"Adjusted KKR Shares" means the sum of (a) the aggregate number of KKR Common
-------------------
Shares outstanding immediately prior to the Effective Time on a fully diluted,
as converted basis (assuming the exercise or conversion of (i) all options and
warrants with an exercise price of less than $5.00, (ii) all other securities
convertible into or exchange able for KKR Common Shares, including without
limitation, the KKR Preferred Shares (assuming such Preferred Shares are
converted as provided for in Section 2.6(b) hereof) and (iii) all other rights
to purchase or receive KKR Common Shares and (b) the aggregate number of KKR
Common Shares that would be required to be issued, assuming KKR elected to issue
additional KKR Common Shares rather than pay cash, pursuant to Section 4.6 of
the Hamlet Purchase Agreement assuming that the Fair Market Value (as such term
is defined in the Hamlet Purchase Agreement) of a KKR Common Share on the
Valuation Date (as such term is defined in the Hamlet Purchase Agreement) is
calculated based on the average closing price of the KKR Common Shares on the
Nasdaq National Market for the ten trading days immediately preceding (but not
including) the Effective Date.
<PAGE>
"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.
"Applicable Agreement" means with respect to any Person, any bond, debenture,
--------------------
note or any other evidence of indebtedness, indenture, mortgage, deed of trust,
lease, contract, agreement, license or instrument to which such Person or any of
its Subsidiaries is a party or by which any of their respective properties or
assets is bound.
"Applicable Employment Law" means any Applicable Law governing or respecting
-------------------------
employment or the termination thereof, employment practices, terms and
conditions of employment, wages, hours of work, occupational safety and health,
immigration, family and medical leave, or discriminatory, wrongful or tortious
conduct in connection with the employment relationship.
"Applicable Law" means any law, statute, ordinance, judgment, injunction,
--------------
decree, writ, regulation, notice requirement, rule or order of any court or
Governmental Authority, and any other governmental restrictions or requirements,
including (without limitation) pursuant to any permit or license.
"Audit" means any audit, assessment of Taxes, other examination by any Tax
-----
Authority or proceeding or appeal of such proceeding relating to Taxes.
"Benefit Plan" means each bonus, deferred compensation, incentive compensation,
------------
stock purchase, stock option, employment, consulting, severance or termination
pay, hospitalization or other medical, life or other insurance, supplemental
unemployment benefits, profit-sharing, pension or retirement plan, program,
agreement or arrangement, and each other "employee benefit plan" (within the
meaning of Section 3(3) of ERISA), whether formal or informal, written or oral
and whether legally binding or not, that is sponsored, maintained or contributed
to or was sponsored, maintained or contributed to at any time by a Person, any
Subsidiary or any ERISA Affiliate of any Person or Subsidiary within the last
six years, for the benefit of any employee, former employee, consultant,
officer, or director of such Person, other than any Multiemployer Plan.
2
<PAGE>
"Certificate" means a certificate that immediately prior to the Effective Time
-----------
represented KKR Shares.
"Certificate of Merger" means the certificate of merger providing for the Merger
---------------------
in substantially the form attached as Exhibit 2.1 hereto.
"Charter Documents" means with respect to any Person, the articles or
-----------------
certificate of incorporation and by-laws, partnership agreement or other
organizational documents of such Person.
"Closing" shall have the meaning given in Section 2.1.
-------
"COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1985, as
-----
amended.
"Code" means the Internal Revenue Code of 1986 and the regulations promulgated
----
thereunder, in each case as amended from time to time, and any successor
statute, law or regulations.
"Commission" means the Securities and Exchange Commission.
----------
"Common Merger Consideration" shall have the meaning given in Section 2.6.
---------------------------
"Credit Facility" means the Loan and Security Agreement by and among FRI and its
---------------
Subsidiaries, and Foothill Capital Corporation, dated as of January 10, 1997, as
amended, a copy of which has been provided to KKR.
"DGCL" means the Delaware General Corporation Law.
----
"Dissenting Shares" shall have the meaning given in Section 3.5.
-----------------
"Documents" means this Agreement and all other agreements or instruments
---------
attached as exhibits hereto.
"DOL" means the United States Department of Labor or any similar state agency.
---
"EEOC" means the United States Equal Employment Opportunity Commission or any
----
similar state agency.
3
<PAGE>
"Effective Time" means the date and time the Merger becomes effective in
--------------
accordance with the DGCL.
"Environmental Claim" means any claim, action, cause of action, investigation or
-------------------
notice (written or oral) by any Person alleging potential liability (including,
without limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries, or penalties) arising out of or resulting from (a) the
presence, or release into the environment, of any Materials of Environmental
Concern at any location, whether or not owned or operated by such Persons or any
of its Subsidiaries, or (b) any violation of any Environmental Law.
"Environmental Law" means any Applicable Law relating to pollution or the
-----------------
protection of human health or the environment or to emissions, discharges,
releases or threatened releases of any Materials of Environmental Concern into
the environment (including without limitation ambient air, surface water, ground
water, or land), or otherwise relating to the manufacture, processing,
distribution, generation, treatment, storage, disposal, transport or handling of
any Materials of Environmental Concern.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended,
-----
and the rules and regulations promulgated thereunder.
"ERISA Affiliate" means with respect to any Person, any other Person that is a
---------------
member of such Person's controlled group, or under common control with such
Person, within the meaning of the Code, and includes any trade or business
whether or not incorporated, that together with such Person would be deemed a
"single employer" within the meaning of Section 4001 of ERISA.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and the
------------
rules and regulations promulgated by the Commission thereunder.
"Exchange Agent" means a bank or trust company that FRI shall designate, subject
--------------
to the prior approval of KKR, which approval shall not be unreasonably withheld,
for purposes of exchanging KKR Shares in accordance herewith.
"Expenses" means all reasonable out-of-pocket expenses and fees (including,
--------
without limitation, fees and expenses payable to Libra Investments, Inc. for
arranging or providing financial advice with respect to the Merger and all
reasonable fees and expenses of counsel, accountants, experts and consultants to
FRI) actually incurred by FRI or on its behalf in connection with the
consummation of the transactions contem-
4
<PAGE>
plated by this Agreement and the other Documents; provided, that the amount of
--------
such Expenses shall not exceed $2 million.
"Financial Statements" means (i) with respect to FRI, the financial statements,
--------------------
together with the notes thereto, contained in the FRI SEC Documents and (ii)
with respect to KKR, the financial statements, together with the notes thereto,
contained in the KKR SEC Documents.
"Form S-4" means the registration statement on Form S-4 to be filed with the
--------
Commission in connection with the issuance of FRI Shares in the Merger,
including any amendment or supplement thereto.
"FRI Dividend" means a number of FRI Shares such that, immediately following the
------------
FRI dividend, the ratio (rounded to two places) of (a) the number of Adjusted
KKR Shares to (b) the sum of (i) the number of Adjusted KKR Shares and (ii) the
aggregate number of FRI Shares outstanding on a fully diluted basis equals .33.
"FRI-MRD" means FRI-MRD Corporation, a Delaware corporation and a wholly owned
-------
subsidiary of FRI.
"FRI SEC Documents" means all forms, reports and documents filed by, or required
-----------------
under Applicable Law to be filed by, FRI or any of its Subsidiaries with the
Commission since December 31, 1996, including all exhibits thereto.
"FRI Shares" means shares of common stock, par value $.01 per share, of FRI.
----------
"FRI Subsidiaries" means the Subsidiaries of FRI, each of which is identified on
----------------
Schedule 4.1 hereof.
"GAAP" means United States generally accepted accounting principles,
----
consistently applied.
"Governmental Authority" means any Federal, state, local or foreign court or
----------------------
governmental, administrative or regulatory authority or agency.
"Hamlet Purchase Agreement" means that certain Asset Purchase Agreement by and
-------------------------
between Hamburger Hamlet Restaurants Inc., Hamburger Hamlets Inc., Hamburger
Hamlet of Sunset, Inc., Davilew Corporation, Valley Hamlet Corporation,
Hamburger Hamlet of Brentwood, Inc., Hamburger Hamlet of Pasadena, Inc.,
Hamburger Hamlet of
5
<PAGE>
Hollywood, Inc., Hamburger Hamlet of Sepulveda, Inc., Hamburger Hamlet of Palm
Springs, Inc., Hamburger Hamlet of Georgetown Square, Inc., 109 South Saint
Asaph Street, Inc., Hamburger Hamlet of Agoura Hills, Inc., Hamburger Hamlet of
Gaithersburg, Inc., Hamburger Hamlet of Crystal City, Inc., Hamburger Hamlet of
Valencia, Inc. and Koo Koo Roo, Inc., dated March 21, 1997.
"Hamlet Shares" means all of the issued and outstanding shares of capital stock
-------------
of The Hamlet Group, Inc., a California corporation.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
-------
amended.
"Intellectual Property" means with respect to any Person, all trademarks,
---------------------
service marks, trade names, fictitious business names, copyrights, patents,
patent applications, inventions, know-how and trade secrets, in each case owned,
used or licensed by, or required to permit the operation of, such Person or any
of its Subsidiaries.
"IRS" means the Internal Revenue Service.
---
"KKR Common Shares" means the shares of common stock, par value $.01 per share,
-----------------
of KKR.
"KKR Notes" means the $12 million aggregate principal amount of 13% Senior Notes
---------
due August 15, 2000, of KKR.
"KKR Preferred Shares" means the shares of Series A Convertible Preferred Stock,
--------------------
par value $.01 per share, and Series B Convertible Preferred Stock, par value
$.01 per share, of KKR.
"KKR SEC Documents" means all forms, reports and documents filed by, or required
-----------------
under Applicable Law to be filed by, KKR or any of the KKR Subsidiaries with the
Commission since December 31, 1996, including all exhibits thereto.
"KKR Proxy Statement" means the proxy statement of KKR relating to the annual or
-------------------
special meeting of stockholders of KKR at which such stockholders will be asked
to approve and adopt this Agreement and the Merger.
"KKR Shares" means the KKR Common Shares and the KKR Preferred Shares.
----------
6
<PAGE>
"KKR Subsidiaries" means the Subsidiaries of KKR, each of which is identified on
----------------
Schedule 5.1 hereof.
"Lien" means any mortgage, pledge, lien, encumbrance, charge or adverse claim,
----
or a security interest of any kind (including, without limitation, any
conditional sale or other title retention agreement or any lease in the nature
thereof).
"Material Adverse Change" means with respect to any Person, the occurrence of
-----------------------
any event or condition that has, or could reasonably be expected to have, a
Material Adverse Effect.
"Material Adverse Effect" means with respect to any Person, a material adverse
-----------------------
effect on (i) the financial position, results of operations, revenues, assets,
liabilities, or business of such Person and its Subsidiaries, taken as a whole,
(ii) the ability of such Person or any of its Affiliates to perform its material
obligations hereunder or under any other Document or (iii) the validity or
enforceability of this Agreement or any other Document; provided, that, in the
--------
case of KKR, a fluctuation or fluctuations in the trading price of the KKR
Common Shares occurring other than as a result of KKR's willful misconduct
cannot, in and of itself, constitute a Material Adverse Effect.
"Materials of Environmental Concern" shall mean any regulated quantity of
----------------------------------
asbestos in any form, urea formaldehyde, lead-based paint, PCBs, radon gas,
crude oil or any fraction thereof, all regulated forms of natural gas, petroleum
products or by-products, any regulated radioactive substance, any regulated
toxic, infectious, reactive, corrosive, ignitable or flammable chemical or
chemical compound and any other regulated hazardous substance, material or waste
(as defined in or for purposes of any Environmental Law), whether solid, liquid
or gas.
"Merger" means the merger of Merger-Sub with and into KKR.
------
"Merger Consideration" means the Common Merger Consideration and the Preferred
--------------------
Merger Consideration.
"Multiemployer Plan" means with respect to any Person, on any date, a
------------------
multiemployer plan defined as such in Section 3(37) of ERISA to which
contributions have been made at any time during the six-year period ending on or
prior to such date, by such Person or any of its ERISA Affiliates and that is
covered by Title IV of ERISA.
"NASD" means the National Association of Securities Dealers, Inc.
----
7
<PAGE>
"NLRB" means the National Labor Relations Board or any similar state agency.
----
"OSHA" means the United States Occupational Safety and Health Administration or
----
any similar state agency.
"Permitted Liens" shall have the meaning given thereto in the Credit Facility.
---------------
"Permitted Transactions" shall mean the transactions contemplated by this
----------------------
Agreement including, without limitation, the declaration of the FRI Dividend
pursuant to Section 6.5, and in the case of KKR, any transaction between KKR or
any KKR Subsidiary, on the one hand, and any other Person, on the other,
providing for (a) the bona fide, arms length sale to such Person of (i) all of
the capital stock of, or substantially all of the assets of, Arrosto Coffee
Company, Inc. or Color Me Mine, Inc., or (ii) owned and operated stores of Color
Me Mine, Inc. or (b) payments to landlords in connection with obtaining consents
to the transactions contemplated hereby (and the amendment of leases to require
such payments), in each case substantially on the terms attached hereto as
Exhibit 1.1.
"Person" means any individual, partnership, corporation, limited liability
------
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or agency or political subdivision thereof, or other
entity.
"PBGC" means the Pension Benefit Guaranty Corporation.
----
"Preferred Merger Consideration" shall have the meaning given in Section 2.6.
------------------------------
"Proceeding" means an action, claim, suit or proceeding (including, without
----------
limitation, an investigation or partial proceeding, such as a deposition).
"Securities Act" means the Securities Act of 1933, as amended, and the rules and
--------------
regulations promulgated by the Commission thereunder.
"Subsidiary" means with respect to any Person, (a) a corporation a majority of
----------
whose capital stock with voting power, under ordinary circumstances, to elect
directors is at the time, directly or indirectly, owned by such Person, by a
subsidiary of such Person, or by such Person and one or more subsidiaries of
such Person, (b) a partnership in which such Person or a subsidiary of such
Person is a general partner of such partnership, or (c) any other Person (other
than a corporation) in which such Person, a subsidiary of such Person or such
Person and one or more subsidiaries of such Person, directly or indirectly, has
8
<PAGE>
(i) at least a majority ownership interest or (ii) the power to elect or direct
the election of the directors or other governing body of such Person.
"Surviving Corporation" shall have the meaning given in Section 2.1.
---------------------
"Taxes" means all Federal, state, local and foreign taxes, and other assessments
-----
of a similar nature (whether imposed directly or through withholding), including
any interest, additions to tax, or penalties applicable thereto.
"Tax Authority" means the Internal Revenue Service and any other domestic or
-------------
foreign governmental authority responsible for the administration of any Taxes.
"Tax Returns" means all Federal, state, local and foreign tax returns,
-----------
declarations, statements, reports, schedules, forms and information returns and
any amended Tax Return relating to Taxes.
"ULP" means an unfair labor practice as defined in the National Labor Relations
---
Act or other Applicable Law.
"WARN Act" means the Worker Adjustment and Retraining Notification Act of 1988,
--------
and any successor statute or law thereto.
ARTICLE II
THE MERGER
SECTION 2.1 The Merger. Upon the terms and subject to the conditions
----------
hereof, and in accordance with the relevant provisions of the DGCL (i) Merger-
Sub shall be merged with and into KKR and (ii) the Certificate of Merger shall
be duly prepared, executed and filed by KKR, as the surviving corporation (the
"Surviving Corporation") in the Merger, as promptly as practicable following the
- ----------------------
satisfaction or waiver of the conditions set forth in Article IX hereof, but in
no event later than two business days thereafter, unless the parties hereto
shall otherwise agree. Following the Merger, the Surviving Corporation shall
continue under the name Koo Koo Roo, Inc. and the separate corporate existence
of Merger-Sub shall cease. Immediately prior to the filing of the Certificate
of Merger, a closing (the "Closing") shall take place at the offices of Skadden,
-------
Arps, Slate, Meagher & Flom LLP, 300 South Grand Avenue, Los Angeles,
California, or such other place and at such time as the parties shall agree.
9
<PAGE>
SECTION 2.2 Effects of the Merger. The Merger shall have the effects
---------------------
set forth in Sections 259, 260 and 261 of the DGCL.
SECTION 2.3 Certificate of Incorporation and By-Laws. Subject to
----------------------------------------
Section 6.7, the Certificate of Incorporation and the By-laws of Merger-Sub, in
each case as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation and By-laws of the Surviving Corporation until
duly amended in accordance with applicable law.
SECTION 2.4 Directors. The persons identified on Schedule 2.4 shall
---------
be the initial directors of the Surviving Corporation and shall hold office
until their respective successors are duly elected and qualified in accordance
with the Certificate of Incorporation and By-laws of the Surviving
Corporation, or their earlier death, resignation or removal.
SECTION 2.5 Officers. The persons identified on Schedule 2.5 shall
--------
be the initial officers of the Surviving Corporation and shall serve as the
officers of the Surviving Corporation at the pleasure of the Board of Directors
of the Surviving Corporation.
SECTION 2.6 Conversion of Shares. At the Effective Time, by virtue
--------------------
of the Merger and without any action on the part of the holders thereof:
(a) Subject to Section 3.2, each issued KKR Common Share outstanding
at the Effective Time, other than (i) KKR Common Shares to be cancelled in
accordance with Section 2.6(c) hereof and (ii) Dissenting Shares, if any, shall
automatically be converted into and become the right to receive one FRI Share
(the "Common Merger Consideration").
---------------------------
(b) Subject to Section 3.2, each issued KKR Preferred Share
outstanding at the Effective Time, other than (i) KKR Preferred Shares to be
canceled in accordance with Section 2.6(c) hereof and (ii) Dissenting Shares, if
any, shall automatically be converted into the right to receive the number of
FRI Shares that the holder of such KKR Preferred Share would have been entitled
to receive pursuant to Section 2.6(a) had such holder converted such KKR
Preferred Share into KKR Common Shares immediately prior to the Effective Time
in accordance with the terms of the Certificate of Designation of KKR relating
to such KKR Preferred Share (the "Preferred Merger Consideration").
------------------------------
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(c) Each share of capital stock of KKR that is held in the treasury
of KKR and each share of capital stock of KKR held by FRI or any FRI Subsidiary
shall be canceled and retired and cease to exist and no consideration shall be
issued in exchange therefor.
(d) The issued and outstanding shares of capital stock of Merger-Sub
shall be converted into and become, in the aggregate, 1,000 fully paid and
nonassessable shares of common stock of the Surviving Corporation, which
thereafter will constitute all of the issued and outstanding capital stock of
the Surviving Corporation.
SECTION 2.7 Stock Plans.
-----------
(a) Prior to the Effective Time, the Board of Directors of KKR and the
Board of Directors of FRI (or, if appropriate, a committee thereof) shall adopt
appropriate resolutions and take all other actions necessary, including, without
limitation, amending the KKR Stock Plans (as defined below), to provide that
effective at the Effective Time, the KKR Stock Awards Plan, as amended, The Koo
Koo Roo, Inc. Directors' Stock Option Plan, as amended, the 1997 Stock Option
Plan for Restaurant Employees and Management and all other stock-based
compensatory arrangements identified on Schedule 2.7, if any (the "KKR Stock
---------
Plans"), and all outstanding, unexercised stock options (the "KKR Options")
- ----- -----------
heretofore granted pursuant to the KKR Stock Plans, shall be assumed by FRI and
upon the occurrence of the Effective Time, and without any action by the holder
thereof, such KKR Options shall be converted automatically into options (the
"Roll-over Options") to purchase FRI Shares, on the same terms and conditions as
- ------------------
were applicable under the KKR Stock Plans, in an amount and at an exercise price
as provided below:
(i) the number of FRI Shares to be the subject of the Roll-over Option
shall be equal to the number of KKR Common Shares remaining (as of
immediately prior to the Effective Time) subject to the original KKR
Option; and
(ii) the exercise price per FRI Share under the Roll-over Option shall
be equal to the exercise price per KKR Share under the original KKR Option.
The adjustment provided in this Section 2.7 with respect to any options which
are "incentive stock options" as defined in section 422 of the Code shall be and
is intended to be effected in a manner which is consistent with section 424(a)
of the Code. After the Effective Time, each Roll-over Option shall be
exercisable and shall, if not accelerated,
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<PAGE>
vest upon the same terms and conditions as were applicable to the related KKR
Option immediately prior to the Effective Time (except that, (x) with regard to
such Roll-over Option, any references to KKR shall be deemed, as appropriate, to
include FRI and (y) the vesting of options outstanding under the plans
identified on Schedule 2.7 may be accelerated at the Effective Time).
(b) FRI shall take all corporate action necessary to reserve for
issuance a sufficient number of FRI Shares for delivery pursuant to the KKR
Stock Plans assumed in accordance with this Section 2.7. As soon as practicable
after the Effective Time, (i) FRI shall deliver to the participants in the KKR
Stock Plans appropriate notice setting forth such participants' rights pursuant
thereto including, without limitation, the undertakings made in this Section 2.7
and (ii) shall file and use commercially reasonable efforts to obtain the
effectiveness of a registration statement on Form S-8 (or appropriate successor
form) (the "Form S-8") with respect to the FRI Shares subject to Roll-over
--------
Options and maintain the current status of such registration statement and the
related prospectus(es) for so long as such assumed options remain outstanding.
(c) The Board of Directors of each of FRI and KKR shall, prior to the
Effective Time, as appropriate, take appropriate action to approve the deemed
cancellation of the KKR Options and the deemed grant of the Roll-over Options
for purposes of Section 16(b) of the Exchange Act.
SECTION 2.8 Warrants.
--------
(a) Prior to the Effective Time, the Board of Directors of KKR and the
Board of Directors of FRI (or, if appropriate, a committee thereof) shall adopt
appropriate resolutions and take all other actions necessary, including, without
limitation, amending any applicable warrant agreements, to provide that
effective at the Effective Time, all warrants to purchase KKR Common Shares
issued pursuant to the warrant agreements and arrangements set forth on Schedule
2.8 (the "KKR Warrants"), shall be assumed by FRI and upon the occurrence of the
------------
Effective Time, and without any action by the holder thereof, such KKR Warrants
shall be converted automatically into warrants (the "Roll-over Warrants") to
------------------
purchase FRI Shares, on the same terms and conditions as were applicable under
the KKR Warrants, in an amount and at an exercise price as provided below:
(i) the number of FRI Shares to be the subject of the Roll-over
Warrant shall be equal to the number of KKR Common Shares remaining (as of
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<PAGE>
immediately prior to the Effective Time) subject to the original KKR
Warrant; and
(ii) the exercise price per FRI Share under the Roll-over Warrant
shall be equal to the exercise price per KKR Share under the original KKR
Warrant.
After the Effective Time, each Roll-over Warrant shall be exercisable and shall,
if not accelerated, vest upon the same terms and conditions (if any) as were
applicable to the related KKR Warrant immediately prior to the Effective Time
(except that, with regard to such Roll-over Warrant, any references to KKR shall
be deemed, as appropriate, to include FRI).
(b) FRI shall take all corporate action necessary to reserve for
issuance a sufficient number of FRI Shares for delivery pursuant to the KKR
Warrants assumed in accordance with this Section 2.8.
(c) The Board of Directors of each of FRI and KKR shall, prior to the
Effective Time, as appropriate, take appropriate action to approve the deemed
cancellation of the KKR Warrants and the deemed grant of the Roll-over Warrants
for purposes of Section 16(b) of the Exchange Act.
SECTION 2.9 Tax Treatment. It is intended that the Merger shall
-------------
constitute a tax-free reorganization within the meaning of Section 368(a) of the
Code.
ARTICLE III
EXCHANGE OF SHARES
SECTION 3.1 Surrender of Certificates.
-------------------------
(a) At the Effective Time, FRI shall provide to the Exchange Agent,
in trust for the benefit of the holders of KKR Shares for exchange in accordance
with this Article III, certificates representing the aggregate number of FRI
Shares issuable pursuant to Section 2.6 of this Agreement. As soon as
practicable after the Effective Time, FRI shall cause to be mailed, by first
class mail, to each holder of record of KKR Shares immediately prior to the
Effective Time, a form letter of transmittal for return to the Exchange Agent
and instructions for use in effecting the surrender of Certificates in exchange
for certificates representing FRI Shares and cash in lieu of fractional share
interests, if applicable. Upon surrender of a Certificate to the Exchange
13
<PAGE>
Agent, together with such letter of transmittal, duly completed and executed,
the holder of KKR Shares formerly represented by such Certificate shall be
entitled to receive and shall receive in exchange therefor the Merger
Consideration for each KKR Share formerly represented by such Certificate, and
the Certificate so surrendered shall be canceled.
(b) Until surrendered as contemplated by this Article III, from and
after the Effective Time, FRI shall be entitled to treat each Certificate which
has not been surrendered for exchange (other than Certificates represented by
Dissenting Shares, if any), as evidencing the ownership of the number of full
FRI Shares into which the KKR Shares represented by the Certificate shall have
been converted pursuant to Section 2.6, notwithstanding the failure to surrender
the Certificate. If a certificate representing FRI Shares is to be issued or a
cash payment in lieu of fractional share interests is to be made to a person
other than the one in whose name the Certificate surrendered in exchange
therefor is registered, it shall be a condition to such issuance or payment that
such Certificate so surrendered be properly endorsed (or accompanied by an
appropriate instrument of transfer) and accompanied by evidence reasonably
satisfactory to the Exchange Agent that any applicable stock transfer or other
taxes required by reason of payment to a person other than the registered holder
of such Certificate have been paid or provided for.
(c) If any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the registered holder of such
lost, stolen or destroyed Certificate in form and substance reasonably
acceptable to FRI and the Exchange Agent and, if requested by FRI, accompanied
by a bond in a reasonable amount satisfactory to FRI and the Exchange Agent, the
Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate the Merger Consideration and cash in lieu of fractional share
interests deliverable in respect thereof pursuant to this Agreement.
(d) FRI shall be entitled to deduct and withhold from the
consideration otherwise payable pursuant to this Agreement to any holder of
Certificates such amounts, if any, as it is required to deduct and withhold with
respect to the making of such payment under the Code, or any applicable
provision of state, local or foreign law.
SECTION 3.2 No Dividends. Notwithstanding anything herein to the
------------
contrary, no dividends or other distributions declared or made after the
Effective Time with respect to FRI Shares with a record date after the Effective
Time shall be paid to the
14
<PAGE>
holder of FRI Shares represented by any unsurrendered Certificate until such
holder shall surrender such Certificate. Dividends or other distributions with a
record date after the Effective Time payable in respect of FRI Shares held by
the Exchange Agent, if any, shall be held in trust for the benefit of such
holders, without interest, until the time such Certificates are duly surrendered
in accordance with the terms hereof.
SECTION 3.3 Return to FRI. Any FRI Shares exchanged for Certificates
-------------
within twelve months after the Effective Time and any dividends and
distributions held by the Exchange Agent for payment or delivery to the holders
of unsurrendered Certificates and unclaimed at the end of such twelve-month
period shall be redelivered or repaid by the Exchange Agent to FRI (which
thereafter shall act as the Exchange Agent), after which time any holder of
Certificates who has not theretofore delivered or surrendered such Certificates
to the Exchange Agent, subject to Applicable Law, may thereafter surrender such
Certificates to FRI in exchange for the Merger Consideration and for payment of
any such dividends or distributions. Notwithstanding the foregoing, none of the
Exchange Agent, the Surviving Corporation or any other party hereto shall be
liable to a holder of KKR Shares for any Merger Consideration or dividends or
distributions properly delivered to a public official pursuant to applicable
escheat or similar laws.
SECTION 3.4 Dissenting Shares. If appraisal rights are available
-----------------
under the DGCL to holders of any KKR Shares in connection with the Merger, any
issued and outstanding KKR Shares entitled thereto that have not been voted for
approval of this Agreement and the transactions contemplated hereby and with
respect to which appraisal shall have been properly demanded in accordance with
Section 262 of the DGCL ("Dissenting Shares") shall not be converted into the
-----------------
right to receive the Merger Consideration and each holder thereof shall have
only such rights as are provided in Section 262 of the DGCL unless and until
such holder withdraws his demand for such appraisal in accordance with Section
262(e) of the DGCL or otherwise loses his right to such appraisal. If a holder
of Dissenting Shares shall properly withdraw his demand for appraisal or shall
otherwise lose his right to such appraisal, then, as of the Effective Time or
the occurrence of such event, whichever last occurs, such holder's Dissenting
Shares shall cease to be Dissenting Shares and shall be converted into and
represent the right to receive the Merger Consideration without interest
thereon. Prior to the Effective Time, KKR shall give FRI prompt notice of any
written demands for appraisal or withdrawals of demands for appraisal received
by KKR pursuant to Section 262 of the DGCL and, except with the prior written
consent of FRI, which may be given or withheld in its sole discretion, shall not
settle or offer to settle any such demands. Any payment in respect of
Dissenting Shares shall be made solely from the funds of KKR.
15
<PAGE>
SECTION 3.5 No Further Transfer. Following the Effective Time, there
-------------------
shall be no further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of capital stock of KKR that were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged for the Merger Consideration as provided in
this Article III.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FRI AND MERGER-SUB
FRI and Merger-Sub hereby represent and warrant to KKR as follows:
SECTION 4.1 Organization, Standing and Qualification.
----------------------------------------
(a) FRI and each of the FRI Subsidiaries (i) is a corporation or
other legal entity duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization; (ii) has all requisite power and
authority to own or lease, and operate its properties and assets, and to carry
on its business as now conducted and as proposed to be conducted; (iii) is duly
qualified or licensed to do business as a foreign corporation or other legal
entity and is in good standing in all jurisdictions in which it owns or leases
property or in which the conduct of its business requires it to so qualify or be
licensed, where the failure to qualify could, singly or in the aggregate,
reasonably be expected to have a Material Adverse Effect on FRI; and (iv) has
obtained all licenses, permits, franchises and other governmental authorizations
necessary to the ownership or operation of its properties or the conduct of its
business except for such failures to obtain that could not, singly or in the
aggregate, reasonably be expected to have a Material Adverse Effect on FRI.
Each FRI Subsidiary along with its jurisdiction of organization is identified on
Schedule 4.1.
(b) Except as set forth on Schedule 4.1(b), none of FRI or any of the
FRI Subsidiaries owns, directly or indirectly, any of the capital stock or other
equity securities of any other Person other than (i) the FRI Subsidiaries and
(ii) less than 100 shares of capital stock of a publicly traded corporation
whose principal business includes the operation of restaurants. All of the
issued and outstanding shares of capital stock of the FRI Subsidiaries are duly
authorized, have been validly issued, fully paid and nonassessable, are free of
preemptive and similar rights, and, except as set forth on Schedule 4.1(b), are,
and as of the Closing will be, owned by FRI or a FRI Subsidiary
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<PAGE>
free and clear of all Liens other than Permitted Liens and Liens granted in
connection with, and securing obligations under, the Credit Facility.
SECTION 4.2 Capitalization.
--------------
(a) As of the date hereof, the total authorized capital stock of FRI
consists of 1,500,000 shares of common stock, par value $.01 per share, 988,285
shares of which are issued and outstanding and 500,000 shares of preferred
stock, par value $.01 per share, none of which are issued and outstanding.
Immediately following the Effective Time, the authorized capital stock of FRI
will consist of not less than 300 million shares of common stock, par value $.01
per share, and not less than 50 million shares of preferred stock, with the
exact amount determined by the FRI Board of Directors.
(b) Each share of FRI capital stock that is issued and outstanding
(i) has been duly authorized and validly issued, and (ii) is fully paid and
nonassessable and free of preemptive and similar rights. Each of the FRI Shares
to be issued as Merger Consideration will, as of the Closing Date, (i) be duly
authorized and validly issued, and (ii) be fully paid and nonassessable and free
of preemptive and similar rights.
(c) Except as set forth in this Agreement or as set forth on Schedule
4.2(c), there are no outstanding (i) securities convertible into or exchangeable
for any capital stock of FRI or any FRI Subsidiary, (ii) options, warrants or
other rights to purchase or subscribe for capital stock of FRI or any FRI
Subsidiary or securities convertible into or exchangeable for capital stock of
FRI or any FRI Subsidiary, (iii) contracts, commitments, agreements,
understandings, arrangements, calls or claims of any kind relating to the
issuance of any capital stock of FRI or any FRI Subsidiary, any such convertible
or exchangeable securities or any such options, warrants or rights or (iv)
commitments or obligations to purchase or redeem any shares of capital stock of
any class or equity securities of FRI or any FRI Subsidiary, any such
convertible or exchangeable securities or any such options, warrants or other
rights.
(d) Schedule 4.2(d) sets forth and describes all indebtedness for
borrowed money (including capitalized lease obligations) of FRI and the FRI
Subsidiaries outstanding on the date hereof. Except as set forth on FRI's
Schedules to this Agreement or disclosed in the FRI SEC Documents, neither FRI
nor any of the FRI Subsidiaries has, or immediately following the Closing will
have, any material liabilities of any nature, absolute, accrued, contingent or
otherwise, other than liabilities incurred after the date hereof in a manner not
prohibited by Section 6.3 hereof.
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SECTION 4.3 Authorization of Agreement and Other Documents.
----------------------------------------------
(a) The execution and delivery of this Agreement and the other
Documents to which FRI or any FRI Subsidiary is a party, and the performance of
their respective obligations hereunder or thereunder and the consummation of the
transactions contemplated hereby and thereby, have been duly authorized and no
other proceedings on the part of FRI, any of the FRI Subsidiaries or any of
their respective stockholders or Affiliates are necessary to authorize this
Agreement, the Merger or the other Documents. This Agreement is and, as of the
Effective Time, each of the Documents to which FRI or any of the FRI
Subsidiaries is a party will be, a valid and binding obligation of FRI or such
FRI Subsidiary, as the case may be, enforceable in accordance with its terms,
except to the extent that enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance or other similar
laws affecting enforcement of creditors' rights generally, and by general
principles of equity (regardless of whether enforcement is considered in a
proceeding at law or in equity).
(b) FRI and each of the FRI Subsidiaries has full power and authority
to execute and deliver each of the Documents to which it is a party, and to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby.
SECTION 4.4 No Violation.
------------
(a) Neither FRI nor any of the FRI Subsidiaries is (i) in violation
of its respective Charter Documents, or (ii) in default in the performance of
any obligation, agreement or condition contained in an Applicable Agreement,
which default could, singly or in the aggregate, be reasonably expected to have
a Material Adverse Effect on FRI.
(b) The execution and delivery of and the performance by FRI and each
FRI Subsidiary of its obligations under each Document to which it is a party,
will not (i) constitute a breach or violation under the Charter Documents of FRI
or any of the FRI Subsidiaries; (ii) conflict with, violate, constitute a breach
or violation of or a default (with the passage of time or otherwise) under,
require the consent of any Person under, give to others any rights of
termination, amendment, acceleration, redemption, repurchase or cancellation of,
or result in the imposition of a Lien on any of the properties or assets of FRI
or any of the FRI Subsidiaries or an acceleration of indebtedness pursuant to,
any Applicable Agreement; or (iii) constitute a violation of any Applicable Law,
except (A) in the case of clause (ii) above, consents that have already
18
<PAGE>
been obtained or consents identified on Schedule 4.4(b) that FRI will use
commercially reasonable efforts to obtain on or prior to the time required or
(B) in the case of clauses (ii) and (iii) above, such conflicts, breaches,
violations, defaults, terminations, amendments, accelerations, redemptions,
repurchases or creation of Liens which, singly or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect on FRI.
(c) The businesses of FRI and each of the FRI Subsidiaries are not
being and FRI has not received, any notice from any authority or Person that
such businesses have been or are being, conducted in violation of any Applicable
Law, except for possible violations which either singly or in the aggregate have
not resulted and could not reasonably be expected in the future to result in a
Material Adverse Effect.
SECTION 4.5 Absence of Certain Changes. Except (i) as and to the
--------------------------
extent set forth on Schedule 4.5, (ii) as disclosed in the FRI SEC Documents
filed on or prior to the date hereof, (iii) for the transactions contemplated by
this Agreement or (iv) for Permitted Transactions, since December 28, 1997,
neither FRI nor any of the FRI Subsidiaries has:
(a) suffered any Material Adverse Change;
(b) paid, discharged or otherwise satisfied any material claims,
liabilities or obligations (absolute, accrued, contingent or otherwise) other
than the payment, discharge or satisfaction in the ordinary course of business,
consistent with past practice of liabilities and obligations (i) reflected or
reserved against in the Financial Statements or (ii) incurred after December 28,
1997, in the ordinary course of business, consistent with past practice;
(c) permitted or allowed any of its material property or assets
(real, personal or mixed, tangible or intangible) to be subjected to any Liens,
except Permitted Liens;
(d) sold, transferred, or otherwise disposed of any of its properties
or assets (real, personal or mixed, tangible or intangible), except in the
ordinary course of business, consistent with past practice;
(e) granted (i) any increase in the compensation or benefits payable
or to become payable to any officer or director or general group of employees
(including any such increase pursuant to any bonus, pension, profit sharing or
other plan
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<PAGE>
or commitment) or (ii) other than in the ordinary course of business and
consistent with past practice, any increase in the compensation or benefits
payable or to become payable to any employee;
(f) made any change in severance policy or practices;
(g) made any single expenditure capitalized in accordance with FRI's
current accounting policies or acquired any property or assets (other than new
materials and supplies) for a cost in excess of $100,000;
(h) declared, paid or set aside for payment any dividend or other
distribution in respect of its capital stock or redeemed, purchased or otherwise
acquired, directly or indirectly, any shares of capital stock or other
securities of FRI or any of the FRI Subsidiaries;
(i) made any material change in any method of tax or financial
accounting or accounting practice or made or changed any material election for
Federal income tax purposes;
(j) paid, loaned or advanced any amount to, or sold, transferred or
leased any properties or assets (real, personal or mixed, tangible or
intangible) to, or entered into any agreement or arrangement with, any of its
officers, directors or greater than 5% stockholders or any Affiliate or
associate of any of its officers, directors or greater than 5% stockholders
except for (x) directors' fees, and compensation to officers at rates not
exceeding the rates of compensation paid during the fiscal year ended December
28, 1997 and (y) customary advances for travel and similar business expenses; or
(k) agreed, whether in writing or otherwise, to take any action
described in this Section.
SECTION 4.6 Insurance. FRI and the FRI Subsidiaries maintain, with
---------
reputable insurers, insurance in such amounts, including deductible
arrangements, and of such a character as is usually maintained by reasonably
prudent managers of companies engaged in the same or similar business. Except
as set forth in Schedule 4.6, all such policies are in full force and effect,
all premiums with respect thereto covering all periods up to and including the
Effective Time will have been paid, and no notice of cancellation or termination
has been received with respect to any such policy other than notices received
after the date of this Agreement, (copies of which FRI shall promptly
20
<PAGE>
deliver to KKR); provided, that FRI shall timely replace each such policy that
--------
has been cancelled or terminated. Except as set forth in Schedule 4.6, such
policies will not be materially affected by, or terminate or lapse by reason of,
the transactions contemplated by this Agreement and the other Documents. All of
such policies have been issued by reputable insurance companies actively engaged
in the insurance business.
SECTION 4.7 Financial Statements; Full Disclosure.
-------------------------------------
(a) The Financial Statements of FRI present fairly the financial
position of FRI and its consolidated Subsidiaries as of the dates thereof and
the results of their respective operations for the periods then ended. Except
as otherwise disclosed in the footnotes thereto, the audited Financial
Statements of FRI have been prepared in accordance with GAAP and with Regulation
S-X. Except as otherwise disclosed in the footnotes thereto, the unaudited
Financial Statements of FRI have been prepared in a manner consistent with the
audited Financial Statements of FRI and in accordance with GAAP for interim
financial information and with Regulation S-X and include all adjustments
(consisting of normal recurring accruals) that are necessary for a fair
presentation.
(b) FRI has timely filed all FRI SEC Documents, each of which
complied in all material respects with all applicable requirements of the
Securities Act and the Exchange Act as of the dates so filed. None of the FRI
SEC Documents (as of their respective filing dates) contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading. None of
the FRI Subsidiaries is required to file any forms, reports or other documents
with the Commission.
(c) No representation or warranty by FRI or any of the FRI
Subsidiaries in any of the Documents, and no statement contained in any written
materials furnished by or on behalf of FRI or any of the FRI Subsidiaries to
KKR, contains or will contain any untrue statement of a material fact, or omits
or will omit to state any material fact necessary to make the statements herein
or therein, in light of the circumstances under which they were made or will be
made, not misleading.
SECTION 4.8 Suppliers; Franchisees. Except as set forth on Schedule
----------------------
4.8, (a) to the best knowledge of FRI, there has not been any material adverse
change in the business relationship of FRI or any FRI Subsidiary with any of its
material suppliers; (b) there is no default by FRI, any of the FRI Subsidiaries
or, to the best knowledge of
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FRI, any other party under any agreement between FRI or any of the FRI
Subsidiaries and any of their respective franchisees; and (c) to the best
knowledge of FRI, there has not been an adverse change in the business
relationship of FRI or any of the FRI Subsidiaries with any of its franchisees
which in any such event could, singly or in the aggregate, be reasonably
expected to have a Material Adverse Effect on FRI.
SECTION 4.9 Intellectual Property. FRI and the FRI Subsidiaries own,
---------------------
or are licensed to use, all of their Intellectual Property necessary to carry on
its business as now conducted and as proposed to be conducted. There are no
Proceedings pending or, to the best knowledge of FRI, threatened concerning any
of such items of Intellectual Property and to the best knowledge of FRI there is
no basis for any such Proceeding. The use of such Intellectual Property does
not conflict with, infringe upon, or violate any proprietary or other rights of
any other Person, except such conflicts, infringements or violations that could
not singly or in the aggregate be reasonably expected to have a Material Adverse
Effect on FRI.
SECTION 4.10 Litigation. There is no Proceeding or series of related
----------
Proceedings against or affecting FRI or any of the FRI Subsidiaries or any of
their properties or assets pending, or to the best knowledge of FRI, threatened,
that could, singly or in the aggregate, be reasonably expected to have a
Material Adverse Effect on FRI. Neither FRI nor any of the FRI Subsidiaries is
subject to any judgment, injunction, decree, writ, interpretation or order of
any Governmental Authority that could, singly or in the aggregate, be reasonably
expected to have a Material Adverse Effect on FRI.
SECTION 4.11 Labor Matters.
-------------
(a) Except as set forth on Schedule 4.11:
(i) there is no labor strike, dispute, slowdown, work stoppage or
lockout pending or, to the best knowledge of FRI, threatened against or
affecting FRI or any FRI Subsidiary that, singly or in the aggregate, could be
reasonably expected to have a Material Adverse Effect on FRI and, during the
past five years, there has not been any such action;
(ii) no union claims to represent the employees of FRI or any FRI
Subsidiary;
(iii) neither FRI nor any FRI Subsidiary is a party to or bound by
any collective bargaining or similar agreement with any labor organization, or
work rules
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or practices agreed to with any labor organization or employee association
applicable to employees of FRI or any FRI Subsidiary;
(iv) neither the employees of FRI nor any FRI Subsidiary are
represented by any labor organization, and neither FRI nor any FRI Subsidiary
has any knowledge of any current union organizing activities among the employees
of FRI or any FRI Subsidiary, nor to their best knowledge does any question
concerning representation exist concerning such employees;
(v) there are no written personnel policies, rules or procedures
applicable to employees of FRI or any FRI Subsidiary;
(vi) FRI and the FRI Subsidiaries are not engaged in any ULP; and
there is no ULP charge or complaint against FRI or any FRI Subsidiary pending
or, to the best knowledge of FRI, threatened before the NLRB;
(vii) there is no grievance or arbitration proceeding arising out of
any collective bargaining agreement or other grievance procedure relating to FRI
or any FRI Subsidiary;
(viii) no charges with respect to or relating to FRI or any FRI
Subsidiary are pending before the EEOC; and there are no pending or, to the best
knowledge of FRI, threatened wage and hour claims filed against FRI or any of
the FRI Subsidiaries with any Governmental Authority;
(ix) to the knowledge of FRI and the FRI Subsidiaries, no Governmental
Authority responsible for the enforcement of Applicable Employment Laws intends
to conduct an investigation with respect to or relating to FRI or any of the FRI
Subsidiaries and no such investigation is in progress;
(x) there are no pending OSHA citations relating to FRI or any of the
FRI Subsidiaries and, to the best knowledge of FRI, OSHA has not threatened to
file any citation;
(xi) there is no pending investigation of, or complaint pending
against, FRI or any of the FRI Subsidiaries by the Office of Federal Contract
Compliance Programs or any similar state agency;
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(xii) there are no Proceedings pending or, to the best knowledge of
FRI, threatened against, and no Person has alleged breach of any express or
implied contract of employment or of any Applicable Employment Law by, FRI or
any FRI Subsidiary; and
(xiii) there are no employment contracts or severance agreements
with any employees of FRI or the FRI Subsidiaries.
(b) Since the enactment of the WARN Act, FRI and its Subsidiaries
have not effectuated (i) a "plant closing" (as defined in the WARN Act)
affecting any site of employment or one or more facilities or operating units
within any site of employment or facility of FRI or any FRI Subsidiary, or (ii)
a "mass layoff" (as defined in the WARN Act) affecting any site of employment or
facility of FRI or any FRI Subsidiary; nor has FRI or any FRI Subsidiary been
affected by any transaction or engaged in layoffs or employment terminations
sufficient in number to trigger application of any similar state or local law.
SECTION 4.12 Taxes. Except as otherwise disclosed in Schedule 4.12:
-----
(a) Each of FRI and the FRI Subsidiaries have timely filed (or have
had timely filed on their behalf) or will timely file or cause to be timely
filed, all Tax Returns required by applicable law to be filed by any of them
prior to or as of the Effective Time. All such Tax Returns and amendments
thereto are or will be true, complete and correct. The most recent financial
statements contained in the FRI SEC Documents provide an adequate accrual for
the payment of Taxes for the periods covered by such reports.
(b) Each of FRI and the FRI Subsidiaries have paid (or have had paid
on their behalf), or where payment is not yet due, have established (or have had
established on their behalf and for their sole benefit and recourse), or will
establish or cause to be established on or before the Effective Time, an
adequate accrual on the books and records of FRI and the FRI Subsidiaries for
the payment of, all Taxes due with respect to any fiscal quarter ending prior to
or as of the Effective Time.
(c) No Audit by a Tax Authority is pending or, to the best knowledge
of FRI, threatened with respect to any Tax Returns filed by, or Taxes due from,
FRI or the FRI Subsidiaries. No deficiency or adjustment for any Taxes has been
threatened, proposed, asserted or assessed against FRI or the FRI Subsidiaries
other than those that could not be reasonably expected to have a Material
Adverse Effect. There are no liens for Taxes upon the assets of FRI or the FRI
Subsidiaries, except liens for current
24
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Taxes not yet due for which adequate reserves have been established in
accordance with GAAP.
(d) Neither FRI nor the FRI Subsidiaries has given or been requested
to give any waiver of statutes of limitations relating to the payment of Taxes
or have executed powers of attorney with respect to Tax matters, which will be
outstanding as of the Effective Time. Subsection (d) of Schedule 4.12 sets
forth all open tax years with respect to FRI and the FRI Subsidiaries.
(e) Neither FRI nor the FRI Subsidiaries is a party to, is bound by
any tax sharing, tax indemnity, cost sharing, or similar agreement or policy
relating to Taxes.
(f) Neither FRI nor the FRI Subsidiaries has entered into agreements
that would result in the disallowance of any tax deductions pursuant to section
280G of the Code.
SECTION 4.13 Employee Benefit Plans; ERISA.
-----------------------------
(a) Schedule 4.13 sets forth a true and complete list of the Benefit
Plans of FRI and the FRI Subsidiaries.
(b) FRI has made available to KKR, with respect to all Benefit Plans
of FRI and the FRI Subsidiaries, true, complete and correct copies of the
following: all plan documents and the most recent summary plan descriptions and
any subsequent summaries of material modifications or other material employee
communications discussing any employee benefit provided thereunder; forms 5500
as filed with the IRS for the most recent three plan years; all trust agreements
with respect to the Benefit Plans of FRI and the FRI Subsidiaries; copies of any
contracts with service providers and insurers providing benefits for
participants or liability insurance or bonding for the sponsors, administrators
or trustees of any Benefit Plan of FRI and the FRI Subsidiaries; the two most
recent annual audits and accountings of plan assets for all funded plans; the
most recent IRS determination letter for all plans qualified under Code section
401(a); all handbooks, manuals, and similar documents governing material
employment policies, practices and procedures and each Form S-8 and each
prospectus related thereto filed or used in the past three years.
(c) With respect to each Benefit Plan of FRI and the FRI
Subsidiaries: (i) each Benefit Plan has been administered in compliance in all
material respects, with its terms including, but not limited to, any provisions
relating to contributions thereunder, and is in compliance in all material
respects with the applicable
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provisions of ERISA, the Code and all other Applicable Laws (including, without
limitation, provisions relating to funding, filing, termination, reporting,
disclosure and continuation coverage obligations pursuant to Title V of COBRA);
(ii) no Benefit Plan which is an "employee pension benefit plan" (as defined in
Section 3(2) of ERISA) has been the subject of a "reportable event" (as defined
in Section 4043 of ERISA) and to the knowledge of FRI, there have been no
"prohibited transactions" (as described in section 4975 of the Code or in Part 4
of Subtitle B of Title I of ERISA) with respect to any Benefit Plan of FRI and
the FRI Subsidiaries; (iii) there are no Proceedings (other than routine claims
for benefits) pending or to the knowledge of FRI threatened with respect to any
Benefit Plan, the assets of any trust thereunder, or the Benefit Plan sponsor or
the Benefit Plan administrator with respect to the design or operation of any
Benefit Plan; (iv) each Benefit Plan which is intended to be "qualified" within
the meaning of section 401(a) of the Code is so qualified, and any trust created
pursuant to any such Benefit Plan is exempt from federal income tax under
section 501(a) of the Code and the IRS has issued each such Benefit Plan a
favorable determination letter which to FRI's knowledge is currently applicable;
(v) FRI is not aware of any circumstance or event which would jeopardize the
tax-qualified status of any such Benefit Plan or the tax-exempt status of any
related trust, or would cause the imposition of any material liability, penalty
or tax under ERISA or the Code with respect to any Benefit Plan; (vi) no
unsatisfied liabilities to participants, the IRS, DOL, the PBGC or to any other
Person have been incurred as a result of the termination of any Benefit Plan;
and (vii) there has been no event with respect to a Benefit Plan which would
require disclosure under Sections 4062(c), 4063(a) or 4041(e) of ERISA.
(d) Neither FRI nor the FRI Subsidiaries maintains or is obligated to
contribute to or has ever maintained or been obligated to contribute to a
Multiemployer Plan or any "multiple employer plan" (within the meaning of
section 413(c) of the Code).
(e) All reports and information required to be filed with the DOL,
IRS and PBGC and with plan participants and their beneficiaries with respect to
each Benefit Plan of FRI and the FRI Subsidiaries have been filed.
(f) Except as set forth on Schedule 4.13(f) and except to the extent
required by COBRA and any similar state law, neither FRI nor the FRI
Subsidiaries maintain any retiree life and/or retiree health insurance plans
which provide for continuing benefits or coverage for any employee or any
beneficiary of an employee after such employee's termination of employment.
(g) Except as set forth on Schedule 4.13(g), the consummation of the
transactions contemplated by this Agreement will not, either alone or in
combination
26
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with another event, (viii) entitle any employee of FRI or any FRI Subsidiary to
severance pay, unemployment compensation or any other payment, (ix) accelerate
the time of payment or vesting, or increase the amount of compensation due to
any such employee, or (x) result in any liability under Title IV of ERISA.
(h) Except as contemplated herein, FRI and its Subsidiaries have no
commitment or obligation to (i) create or incur material liability with respect
to or cause to exist any other employee benefit plan, program or arrangement,
(ii) enter into any material contract or agreement to provide compensation or
benefits to any individual or (iii) modify or terminate any Benefit Plan, other
than with respect to a modification or termination required by ERISA or the
Code.
SECTION 4.14 Change in Control. Except as set forth on Schedule 4.14,
-----------------
neither FRI nor any of the FRI subsidiaries is a party to any Applicable
Agreement set forth on Schedules 4.11 or referred to in Section 4.19(a) that
contains a "change of control," "potential change in control" or similar
provision that is triggered by the transactions contemplated hereby. Except as
set forth on Schedule 4.14 or as otherwise contemplated by this Agreement, the
consummation of the transactions contemplated by this Agreement will not (either
alone or upon the occurrence of any additional acts or events) result in any
payment (whether of severance pay or otherwise) becoming due from FRI or the FRI
Subsidiaries to any Person.
SECTION 4.15 Governmental Consents. Except as set forth on Schedule
---------------------
4.15, no consent, approval or authorization of, or filing, registration or
qualification with, any Governmental Authority is required in connection with,
or as a condition to, the execution, delivery or performance of this Agreement
or any of the other Documents by FRI and the FRI Subsidiaries except (i)
filings, registrations or qualifications, if any, required to be made or
obtained on or before the Effective Time under (A) the Securities Act, (B) the
Exchange Act, (C) state securities or state corporation laws, (D) the HSR Act or
(E) any Applicable Law governing the sale of alcoholic beverages, each of which
FRI shall use commercially reasonable efforts to make or obtain on or before the
Effective Time and (ii) where failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not,
singly or in the aggregate, be reasonably expected to have a Material Adverse
Effect on FRI.
SECTION 4.16 Title to Properties. FRI and each of the FRI Subsidiaries
-------------------
(a) has legal and valid title to all the real properties and other assets
(tangible, intangible or mixed) it reflects in its Financial Statements as
owned, free and clear of all Liens, except for Permitted Liens and Liens set
forth on Schedule 4.16 and (b) enjoys peaceful and undisturbed possession under
all leases to which it is a party as lessee. All of the leases to which FRI or
any FRI Subsidiary is a party are legal, valid and binding and in
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full force and effect, and, except as set forth on Schedule 4.16, no default by
FRI, any FRI Subsidiary or, to the best knowledge of FRI, any other party
thereto has occurred or is continuing thereunder. No property or asset, the
value of which is reflected in the balance sheets included in the Financial
Statements of FRI, is held under any lease or under any conditional sale or
other title retention agreement. Except for such assets, plants and facilities
as are immaterial in the aggregate to the business of FRI and the FRI
Subsidiaries taken as a whole, all tangible assets, plants and facilities of
each of FRI and the FRI Subsidiaries are in good condition and repair and are
adequate for the uses to which they are being put.
SECTION 4.17 Environmental Matters.
---------------------
(a) To the best knowledge of FRI, each of FRI and the FRI
Subsidiaries is in substantial compliance with the provisions of all
Environmental Laws, which compliance includes, but is not limited to, the
possession by FRI or the FRI Subsidiaries, as appropriate, of all licenses,
permits and other governmental authorizations required under applicable
Environmental Laws, and compliance with the terms and conditions thereof, where
the failure to comply with their terms and conditions could, singly or in the
aggregate, have a Material Adverse Effect on FRI. Except where the failure to
comply could not, singly or in the aggregate, have a Material Adverse Effect on
FRI, neither FRI nor any of the FRI Subsidiaries has received any communication
(written or oral), whether from a Governmental Authority, citizens group,
employee or otherwise, that alleges that FRI or any of the FRI Subsidiaries is
not in compliance with the provisions of all Environmental Laws, and there are
no currently existing circumstances known to FRI that, if not corrected, could
prevent such compliance in the future.
(b) There is no Environmental Claim pending or, to the best knowledge
of FRI, threatened against FRI or any of the FRI Subsidiaries or against any
Person whose liability for any Environmental Claim FRI or any of the FRI
Subsidiaries has retained or assumed either contractually or by operation of law
and, to the best knowledge of FRI, there is no basis for any such claim that
could, singly or in the aggregate, have a Material Adverse Effect on FRI.
(c) Without in any way limiting the generality of the foregoing, to
the best knowledge of FRI, (a) there are no Materials of Environmental Concern
present in any soil or groundwater at any property owned or operated by FRI or
any FRI Subsidiaries, (b) there are no underground storage tanks present at any
such property, and (c) no polychlorinated biphenyls (PCBs) or PCB-containing
items are used or stored at any such property.
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(d) True, complete and correct copies of the written reports, and all
parts thereof, of all environmental audits or assessments which have been
conducted at any property owned or operated by FRI or any FRI Subsidiary (within
the past five (5) years) have been made available to KKR.
SECTION 4.18 Books and Records. The books of account, minute books,
-----------------
stock record books, and other records of FRI and the FRI Subsidiaries, all of
which have been made available to KKR, are complete and correct and have been
maintained in accordance with sound business practices and the requirements of
Section 13(b)(2) of the Exchange Act (regardless of whether or not FRI and the
FRI Subsidiaries are subject to that Section), including the maintenance of an
adequate system of internal controls. The minute books of FRI and the FRI
Subsidiaries contain accurate and complete records of all meetings held of, and
corporate action taken by, the stockholders, the Boards of Directors, and
committees of the Boards of Directors of FRI and the FRI Subsidiaries, and no
meeting of any such stockholders, Board of Directors, or committee has been held
for which minutes have not been prepared and are not contained in such minute
books.
SECTION 4.19 Contracts; No Defaults.
----------------------
(a) Except as set forth in Schedule 4.19(a), each Applicable
Agreement material to FRI and the FRI Subsidiaries, taken as a whole, is in full
force and effect and is valid and enforceable in accordance with its terms.
(b) Except as set forth in Schedule 4.19(b):
(i) each of FRI and the FRI Subsidiaries and, to the knowledge of FRI,
each other party thereto, is in compliance in all material respects with all
applicable terms and requirements of each Applicable Agreement referred to in
Section 4.19(a); and
(ii) no event has occurred or circumstance exists that (with or
without notice or lapse of time) may contravene, conflict with, or result in a
violation or breach of, or give any of FRI and the FRI Subsidiaries or other
Person the right to declare a default or exercise any remedy under, or to
accelerate the maturity or performance of, or to cancel, terminate, or modify,
any Applicable Agreement referred to in Section 4.19(a).
SECTION 4.20 Form S-4; KKR Proxy Statement. None of the information
-----------------------------
supplied by FRI or any FRI Subsidiary for inclusion or incorporation by
reference in (i) the Form S-4 will, at the time filed with the Commission, any
time it is amended or supplemented and at the time it becomes effective under
the Securities Act,
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contain any untrue statement of a material fact or omit to state any material
fact required to be stated herein or necessary to make the statements therein
not misleading, and (ii) the KKR Proxy Statement will, at the date it is first
mailed to the KKR stockholders and at the time of the meeting of KKR's
stockholders held to vote on approval of this Agreement and the Merger, contain
any untrue statement of material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Form S-4 will comply as to form in all material respects with
the requirements of the Securities Act and the rules and regulations of the
Commission thereunder, except that no representation is made by FRI with respect
to statements made or incorporated by reference therein based on information
supplied by KKR or any KKR Subsidiary for inclusion or incorporation by
reference in the Form S-4.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF KKR
KKR hereby represents and warrants to FRI and Merger-Sub as follows:
SECTION 5.1 Organization, Standing and Qualification.
----------------------------------------
(a) Except as set forth on Schedule 5.1 (which exceptions could not,
singly or in the aggregate, reasonably be expected to have a Material Adverse
Effect on KKR), KKR and each of the KKR Subsidiaries (i) is a corporation or
other legal entity duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization; (ii) has all requisite power and
authority to own or lease, and operate its properties and assets, and to carry
on its business as now conducted and as proposed to be conducted; (iii) is duly
qualified or licensed to do business as a foreign corporation or other legal
entity and is in good standing in all jurisdictions in which it owns or leases
property or in which the conduct of its business requires it to so qualify or be
licensed, where the failure to qualify could, singly or in the aggregate,
reasonably be expected to have a Material Adverse Effect on KKR; and (iv) has
obtained all licenses, permits, franchises and other governmental authorizations
necessary to the ownership or operation of its properties or the conduct of its
business except for such failures to obtain that could not, singly or in the
aggregate, reasonably be expected to have a Material Adverse Effect on KKR.
Each KKR Subsidiary, along with its jurisdiction of organization, is identified
on Schedule 5.1.
(b) Except as set forth on Schedule 5.1(b), none of KKR or the KKR
Subsidiaries owns, directly or indirectly, any of the capital stock or other
equity securities of any other Person other than (i) the KKR Subsidiaries and
(ii) less than 100
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shares of capital stock of a publicly traded corporation whose principal
business includes the operation of restaurants. All of the issued and
outstanding shares of capital stock of the KKR Subsidiaries are duly authorized,
have been validly issued, fully paid and nonassessable, are free of preemptive
and similar rights, and except as set forth on Schedule 5.1(b) hereof are, and
as of the Closing will be, owned by KKR or a KKR Subsidiary free and clear of
all Liens, except for Permitted Liens and Liens granted in connection with and
securing obligations under the Bridge Loan Facility.
SECTION 5.2 Capitalization.
--------------
(a) As of the close of business on June 8, 1998, the total authorized
capital stock of KKR consists of 75,000,000 shares of common stock, $.01 par
value per share, 49,998,824 shares of which are issued and outstanding as of the
date hereof and 5,000,000 shares of preferred stock, par value $.01 per share,
no shares of Series A Convertible Preferred Stock of which are issued and
outstanding as of the date hereof and 20,048 shares of Series B Convertible
Preferred Stock of which are issued and outstanding as of the date hereof.
(b) Each share of KKR capital stock that is issued and outstanding
(i) has been duly authorized and validly issued and (ii) is fully paid and
nonassessable and free of preemptive and similar rights.
(c) Except for this Agreement or as set forth on Schedule 5.2(c),
there are no outstanding (i) securities convertible into or exchangeable for any
capital stock of KKR or any KKR Subsidiary, (ii) options, warrants or other
rights to purchase or subscribe for capital stock of KKR or any KKR Subsidiary
or securities convertible into or exchangeable for capital stock of KKR or any
KKR Subsidiary, (iii) contracts, commitments, agreements, understandings,
arrangements, calls or claims of any kind relating to the issuance of any
capital stock of KKR or any KKR Subsidiary, any such convertible or exchangeable
securities or any such options, warrants or rights or (iv) commitments or
obligations to purchase or redeem any shares of capital stock of any class of
equity securities of KKR or any such convertible or exchangeable securities or
any such options, warrants or other rights.
(d) Schedule 5.2(d) sets forth and describes all indebtedness for
borrowed money (including capitalized lease obligations) of KKR and each of the
KKR Subsidiaries outstanding on the date hereof. Except as set forth on KKR's
Schedules to this Agreement or disclosed in the KKR SEC Documents, neither KKR
nor any of the KKR Subsidiaries has, or immediately following the Closing will
have, any material liabilities of any nature, absolute, accrued, contingent or
otherwise, other than liabilities incurred after the date hereof in a manner not
prohibited by Section 7.3 hereof.
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SECTION 5.3 Authorization of Agreement and Other Documents.
----------------------------------------------
(a) The execution and delivery of this Agreement and the other
Documents to which KKR or any KKR Subsidiary is a party, and the performance of
their respective obligations hereunder or thereunder and the consummation of the
transactions contemplated hereby and thereby, have been duly authorized and no
other proceedings on the part of KKR, any of the KKR Subsidiaries or any of
their respective stockholders or Affiliates are necessary to authorize this
Agreement, the Merger or the other Documents, except for the approval of this
Agreement and the Merger by the KKR stockholders as required by the DGCL. This
Agreement is and, as of the Effective Time, each of the Documents to which KKR
or any of the KKR Subsidiaries is a party will be, a valid and binding
obligation of KKR or such KKR Subsidiary, as the case may be, enforceable in
accordance with its terms, except to the extent that enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance or other similar laws affecting enforcement of creditors' rights
generally, and by general principles of equity (regardless of whether
enforcement is considered in a proceeding at law or in equity).
(b) KKR and each of the KKR Subsidiaries has full power and authority
to execute and deliver each of the Documents to which it is a party, and to
perform its obligations hereunder and thereunder and to consummate the
transactions contemplated hereby and thereby.
(c) KKR has received an opinion from Sutro & Co. Incorporated to the
effect that the financial terms of the Merger are fair to KKR's stockholders.
SECTION 5.4 No Violation.
------------
(a) Neither KKR nor any of the KKR Subsidiaries is (i) in violation
of its respective Charter Documents, or (ii) in default in the performance of
any obligation, agreement or condition contained in an Applicable Agreement,
which default could, singly or in the aggregate, be reasonably expected to have
a Material Adverse Effect on KKR.
(b) The execution and delivery of and the performance by KKR and each
KKR Subsidiary of its obligations under each Document to which it is a party,
will not (i) constitute a breach or violation under the Charter Documents of KKR
or any of the KKR Subsidiaries; (ii) conflict with, violate, constitute a breach
or violation of or a default (with the passage of time or otherwise) under,
require the consent of any Person under, give to others any rights of
termination, amendment, acceleration, redemption, repurchase or cancellation of,
or result in the imposition of a Lien on any of the
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properties or assets of KKR or any of the KKR Subsidiaries or an acceleration of
indebtedness pursuant to, any Applicable Agreement; or (iii) constitute a
violation of any Applicable Law, except (A) in the case of clause (ii) above,
consents that have already been obtained or consents identified on Schedule
5.4(b) that KKR will use commercially reasonable efforts to obtain on or prior
to the time required or (B) in the case of clauses (ii) and (iii) above, such
conflicts, breaches, violations, defaults, terminations, amendments,
accelerations, redemptions, repurchases or creation of Liens which, singly or in
the aggregate, would not reasonably be expected to have a Material Adverse
Effect on KKR.
(c) The businesses of KKR and each of the KKR Subsidiaries are not
being, and KKR has not received any notice from any authority or Person that
such businesses have been or are being, conducted in violation of any Applicable
Law, except for possible violations which either singly or in the aggregate have
not resulted and could not reasonably be expected to in the future result in a
Material Adverse Effect.
SECTION 5.5 Absence of Certain Changes. Except (i) as and to the
--------------------------
extent set forth on Schedule 5.5, (ii) as disclosed in the KKR SEC Documents
filed on or prior to the date hereof, (iii) for the transactions contemplated by
this Agreement or (iv) for Permitted Transactions, since December 31, 1997,
neither KKR nor any of the KKR Subsidiaries has:
(a) suffered any Material Adverse Change;
(b) paid, discharged or otherwise satisfied any material claims,
liabilities or obligations (absolute, accrued, contingent or otherwise) other
than the payment, discharge or satisfaction in the ordinary course of business,
consistent with past practice of liabilities and obligations (i) reflected or
reserved against in the Financial Statements or (ii) incurred after December 31,
1997, in the ordinary course of business, consistent with past practice;
(c) permitted or allowed any of its material property or assets
(real, personal or mixed, tangible or intangible) to be subjected to any Liens,
except Permitted Liens;
(d) sold, transferred, or otherwise disposed of any of its
properties or assets (real, personal or mixed, tangible or intangible), except
in the ordinary course of business, consistent with past practice;
(e) granted (i) any increase in the compensation or benefits
payable or to become payable to any officer or director or general group of
employees
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(including any such increase pursuant to any bonus, pension, profit sharing or
other plan or commitment) or (ii) other than in the ordinary course of business
and consistent with past practice, any increase in the compensation or benefits
payable or to become payable to any employee;
(f) made any change in severance policy or practices;
(g) made any single expenditure capitalized in accordance with KKR's
current accounting policies or acquired any property or assets (other than new
materials and supplies) for a cost in excess of $50,000, in the aggregate;
(h) except for regularly scheduled dividends paid in cash on the KKR
Preferred Stock, declared, paid or set aside for payment any dividend or other
distribution in respect of its capital stock or redeemed, purchased or otherwise
acquired, directly or indirectly, any shares of capital stock or other
securities of KKR or any of the KKR Subsidiaries;
(i) made any material change in any method of tax or financial
accounting or accounting practice or made or changed any material election for
Federal income tax purposes;
(j) paid, loaned or advanced any amount to, or sold, transferred or
leased any properties or assets (real, personal or mixed, tangible or
intangible) to, or entered into any agreement or arrangement with, any of its
officers, directors or greater than 5% stockholders or any Affiliate or
associate of any of its officers, directors or greater than 5% stockholders
except for (x) directors' fees, and compensation to officers at rates not
exceeding the rates of compensation paid during the fiscal year ended December
31, 1997 and (y) customary advances for travel and similar business expenses; or
(k) agreed, whether in writing or otherwise, to take any action
described in this Section.
SECTION 5.6 Insurance. KKR and the KKR Subsidiaries maintain, with
---------
reputable insurers, insurance in such amounts, including deductible
arrangements, and of such a character as is usually maintained by reasonably
prudent managers of companies engaged in the same or similar business. Schedule
5.6 contains an accurate and complete description of all material policies of
fire, liability, workmen's compensation and other forms of insurance owned or
held by KKR or any of the KKR Subsidiaries. Except as set forth in Schedule 5.6,
all such policies are in full force and effect, all premiums with respect
thereto covering all periods up to and including the Effective
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Time will have been paid, and no notice of cancellation or termination has been
received with respect to any such policy other than notices received after the
date of this Agreement (copies of which KKR shall promptly deliver to FRI);
provided, that KKR shall timely replace each such policy that has been cancelled
or terminated. Except as set forth in Schedule 5.6, such policies will remain in
full force and effect through the respective dates set forth in Schedule 5.6
without the payment of additional premiums; and will not be materially affected
by, or terminate or lapse by reason of, the transactions contemplated by this
Agreement and the other Documents. All of such policies have been issued by
reputable insurance companies actively engaged in the insurance business.
SECTION 5.7 Financial Statements; Full Disclosure.
-------------------------------------
(a) The Financial Statements of KKR present fairly the financial
position of KKR and its consolidated Subsidiaries as of the dates thereof and
the results of their respective operations for the periods then ended. Except
as otherwise disclosed in the footnotes thereto, the audited Financial
Statements of KKR have been prepared in accordance with GAAP and with Regulation
S-X. Except as otherwise disclosed in the footnotes thereto, the unaudited
Financial Statements of KKR have been prepared in a manner consistent with the
audited Financial Statements of KKR and in accordance with GAAP for interim
financial information and with Regulation S-X and include all adjustments
(consisting of normal recurring accruals) that are necessary for a fair
presentation.
(b) KKR has timely filed all KKR SEC Documents, each of which
complied in all material respects with all applicable requirements of the
Securities Act and the Exchange Act as of the dates so filed. None of the KKR
SEC Documents (as of their respective filing dates) contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading. None of
the KKR Subsidiaries is required to file any forms, reports or other documents
with the Commission.
(c) No representation or warranty by KKR or any of the KKR
Subsidiaries in any of the Documents, and no statement contained in any written
materials furnished by or on behalf of KKR or its Subsidiaries to contains or
will contain any untrue statement of a material fact, or omits or will omit to
state any material fact necessary to make the statements herein or therein, in
light of the circumstances under which they were made or will be made, not
misleading.
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SECTION 5.8 Suppliers; Franchisees. Except as set forth on Schedule
----------------------
5.8, (a) to the best knowledge of KKR, there has not been any material adverse
change in the business relationship of KKR or any KKR Subsidiary with any of its
material suppliers; (b) there is no default by KKR, any of the KKR Subsidiaries
or, to the best knowledge of KKR, any other party under any agreement between
KKR or any of the KKR Subsidiaries and any of their respective franchisees; and
(c) to the best knowledge of KKR, there has not been an adverse change in the
business relationship of KKR or any of the KKR Subsidiaries with any of its
franchisees which in any such event could, singly or in the aggregate, be
reasonably expected to have a Material Adverse Effect on KKR.
SECTION 5.9 Intellectual Property. KKR and the KKR Subsidiaries own,
---------------------
or are licensed to use, all of their Intellectual Property necessary to carry on
its business as now conducted and as proposed to be conducted. There are no
Proceedings pending or, to the best knowledge of KKR, threatened concerning any
of such items of Intellectual Property and to the best knowledge of KKR there is
no basis for any such Proceeding. The use of such of Intellectual Property does
not conflict with, infringe upon, or violate any proprietary or other rights of
any other Person except such conflicts, infringements or violations that could
not singly or in the aggregate be reasonably expected to have a Material Adverse
Effect on KKR.
SECTION 5.10 Litigation. There is no Proceeding or series of related
----------
Proceedings against or affecting KKR or any of the KKR Subsidiaries or any of
their properties or assets, pending, or to the best knowledge of KKR,
threatened, that could, singly or in the aggregate, be reasonably expected to
have a Material Adverse Effect on KKR. Neither KKR nor any of the KKR
Subsidiaries is subject to any judgment, injunction, decree, writ,
interpretation or order of any Governmental Authority that could, singly or in
the aggregate, be reasonably expected to have a Material Adverse Effect on KKR.
SECTION 5.11 Labor Matters.
-------------
(a) Except as set forth on Schedule 5.11:
(i) there is no labor strike, dispute, slowdown, work stoppage or
lockout pending or, to the best knowledge of KKR, threatened against or
affecting KKR or any KKR Subsidiary that, singly or in the aggregate, could be
reasonably expected to have a Material Adverse Effect on KKR and, during the
past five years, there has not been any such action;
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(ii) no union claims to represent the employees of KKR or any KKR
Subsidiary;
(iii) neither KKR nor any KKR Subsidiary is a party to or bound by any
collective bargaining or similar agreement with any labor organization, or work
rules or practices agreed to with any labor organization or employee association
applicable to employees of KKR or any KKR Subsidiary;
(iv) none of the employees of KKR or any KKR Subsidiary are
represented by any labor organization, and neither KKR nor any KKR Subsidiary
has any knowledge of any current union organizing activities among the employees
of KKR or any KKR Subsidiary, nor to their best knowledge does any question
concerning representation exist concerning such employees;
(v) there are no written personnel policies, rules or procedures
applicable to employees of KKR or any KKR Subsidiary;
(vi) KKR and the KKR Subsidiaries are not engaged in any ULP; and
there is no ULP charge or complaint against KKR or any KKR Subsidiary pending
or, to the best knowledge of KKR, threatened before the NLRB;
(vii) there is no grievance or arbitration proceeding arising out of
any collective bargaining agreement or other grievance procedure relating to KKR
or any KKR Subsidiary;
(viii) no charges with respect to or relating to KKR or any KKR
Subsidiary are pending before the EEOC; and there are no pending or, to the best
knowledge of KKR, threatened wage and hour claims filed against KKR or any of
the KKR Subsidiaries with any Governmental Authority;
(ix) to the knowledge of KKR and the KKR Subsidiaries, no Governmental
Authority responsible for the enforcement of Applicable Employment Laws intends
to conduct an investigation with respect to or relating to KKR or any of the KKR
Subsidiaries and no such investigation is in progress;
(x) there are no pending OSHA citations relating to KKR or any of the
KKR Subsidiaries and, to the best knowledge of KKR, OSHA has not threatened to
file any citation;
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(xi) there is no pending investigation of, or complaint pending
against, KKR or any of the KKR Subsidiaries by the Office of Federal Contract
Compliance Programs or any similar state agency;
(xii) there are no Proceedings pending or, to the best knowledge of
KKR, threatened against, and no Person has alleged breach of any express or
implied contract of employment or of any Applicable Employment Law by, KKR or
any KKR Subsidiary; and
(xiii) there are no employment contracts or severance agreements
with any employees of KKR or the KKR Subsidiaries.
(b) Since the enactment of the WARN Act, KKR and the KKR Subsidiaries
have not effectuated (i) a "plant closing" (as defined in the WARN Act)
affecting any site of employment or one or more facilities or operating units
within any site of employment or facility of KKR or any KKR Subsidiary, or (ii)
a "mass layoff" (as defined in the WARN Act) affecting any site of employment or
facility of KKR or any KKR Subsidiary; nor has KKR or any KKR Subsidiary been
affected by any transaction or engaged in layoffs or employment terminations
sufficient in number to trigger application of any similar state or local law.
SECTION 5.12 Taxes. Except as otherwise disclosed in Schedule 5.12:
-----
(a) Each of KKR and the KKR Subsidiaries have timely filed (or have
had timely filed on their behalf) or will timely file or cause to be timely
filed, all Tax Returns required by applicable law to be filed by any of them
prior to or as of the Effective Time. All such Tax Returns and amendments
thereto are or will be true, complete and correct. The most recent financial
statements contained in the KKR SEC Documents provide an adequate accrual for
the payment of Taxes for the periods covered by such reports.
(b) Each of KKR and the KKR Subsidiaries have paid (or have had paid
on their behalf), or where payment is not yet due, have established (or have had
established on their behalf and for their sole benefit and recourse), or will
establish or cause to be established on or before the Effective Time, an
adequate accrual on the books and records of KKR and the KKR Subsidiaries for
the payment of, all Taxes due with respect to any fiscal quarter ending prior to
or as of, the Effective Time.
(c) No Audit by a Tax Authority is pending or, to the best knowledge
of KKR, threatened with respect to any Tax Returns filed by, or Taxes due from,
KKR or the KKR Subsidiaries. No deficiency or adjustment for any Taxes has
38
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been threatened, proposed, asserted or assessed against KKR or the KKR
Subsidiaries other than those that could not reasonably be expected to have a
Material Adverse Effect. There are no liens for Taxes upon the assets of KKR or
the KKR Subsidiaries, except liens for current Taxes not yet due for which
adequate reserves have been established in accordance with GAAP.
(d) Neither KKR nor the KKR Subsidiaries has given or been requested
to give any waiver of statutes of limitations relating to the payment of Taxes
or have executed powers of attorney with respect to Tax matters, which will be
outstanding as of the Effective Time. Subsection (d) of Schedule 5.12 sets
forth all open tax years with respect to KKR and the KKR Subsidiaries.
(e) Neither KKR nor the KKR Subsidiaries is a party to, is bound by
any tax sharing, tax indemnity, cost sharing, or similar agreement or policy
relating to Taxes.
(f) Neither KKR nor the KKR Subsidiaries has entered into agreements
that would result in the disallowance of any tax deductions pursuant to section
280G of the Code.
SECTION 5.13 Employee Benefit Plans; ERISA.
-----------------------------
(a) Schedule 5.13 sets forth a true and complete list of the
Benefit Plans of KKR and the KKR Subsidiaries.
(b) KKR has delivered to FRI, with respect to all Benefit Plans of
KKR and the KKR Subsidiaries, true, complete and correct copies of the
following: all plan documents and the most recent summary plan descriptions and
any subsequent summaries of material modifications or other material employee
communications discussing any employee benefit provided thereunder; forms 5500
as filed with the IRS for the most recent three plan years; all trust agreements
with respect to the Benefit Plans of KKR and the KKR Subsidiaries; copies of any
contracts with service providers and insurers providing benefits for
participants or liability insurance or bonding for the sponsors, administrators
or trustees of any Benefit Plan of KKR and the KKR Subsidiaries; the two most
recent annual audits and accountings of plan assets for all funded plans; the
most recent IRS determination letter for all plans qualified under Code section
401(a); all handbooks, manuals, and similar documents governing material
employment policies, practices and procedures and each Form S-8 and each
prospectus related thereto filed or used in the past three years.
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(c) With respect to each Benefit Plan of KKR and the KKR
Subsidiaries: (i) each Benefit Plan has been administered in compliance in all
material respects, with its terms including, but not limited to, any provisions
relating to contributions thereunder, and is in compliance in all material
respects with the applicable provisions of ERISA, the Code and all other
Applicable Laws (including, without limitation, provisions relating to funding,
filing, termination, reporting, disclosure and continuation coverage obligations
pursuant to Title V of COBRA); (ii) no Benefit Plan which is an "employee
pension benefit plan" (as defined in Section 3(2) of ERISA) has been the subject
of a "reportable event" (as defined in Section 4043 of ERISA) and to the
knowledge of KKR, there have been no "prohibited transactions" (as described in
section 4975 of the Code or in Part 4 of Subtitle B of Title I of ERISA) with
respect to any Benefit Plan of KKR and the KKR Subsidiaries; (iii) there are no
Proceedings (other than routine claims for benefits) pending or to the knowledge
of KKR threatened with respect to any Benefit Plan, the assets of any trust
thereunder, or the Benefit Plan sponsor or the Benefit Plan administrator with
respect to the design or operation of any Benefit Plan; (iv) each Benefit Plan
which is intended to be "qualified" within the meaning of section 401(a) of the
Code is so qualified, and any trust created pursuant to any such Benefit Plan is
exempt from federal income tax under section 501(a) of the Code and the IRS has
issued each such Benefit Plan a favorable determination letter which to KKR's
knowledge is currently applicable; (v) KKR is not aware of any circumstance or
event which would jeopardize the tax-qualified status of any such Benefit Plan
or the tax-exempt status of any related trust, or would cause the imposition of
any material liability, penalty or tax under ERISA or the Code with respect to
any Benefit Plan; (vi) no unsatisfied liabilities to participants, the IRS, DOL,
the PBGC or to any other Person have been incurred as a result of the
termination of any Benefit Plan; and (vii) there has been no event with respect
to a Benefit Plan which would require disclosure under Sections 4062(c), 4063(a)
or 4041(e) of ERISA.
(d) Neither KKR nor the KKR Subsidiaries maintains or is obligated to
contribute to or has ever maintained or been obligated to contribute to a
Multiemployer Plan or any "multiple employer plan" (within the meaning of
section 413(c) of the Code).
(e) All reports and information required to be filed with the DOL,
IRS and PBGC and with plan participants and their beneficiaries with respect to
each Benefit Plan of KKR and the KKR Subsidiaries have been filed.
(f) Except as set forth on Schedule 5.13(f) and except to the extent
required by COBRA and any similar state law, neither KKR nor the KKR
Subsidiaries maintain any retiree life and/or retiree health insurance plans
which provide for
40
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continuing benefits or coverage for any employee or any beneficiary of an
employee after such employee's termination of employment.
(g) Except as set forth on Schedule 5.13(g), the consummation of the
transactions contemplated by this Agreement will not, either alone or in
combination with another event, (viii) entitle any employee of KKR or any KKR
Subsidiary to severance pay, unemployment compensation or any other payment,
(ix) accelerate the time of payment or vesting, or increase the amount of
compensation due to any such employee, or (x) result in any liability under
Title IV of ERISA.
(h) Except as set forth on Schedule 5.13(h), no amounts payable under
the Benefit Plans of KKR will fail to be deductible for federal income tax
purposes by virtue of section 280G of the Code.
(i) Except as set forth on Schedule 5.13(i), no Benefit Plan of KKR
and the KKR Subsidiaries distributes, invests in or holds as plan assets or
otherwise, any equity securities of KKR or any Affiliate.
(j) Except as contemplated herein, KKR and the KKR Subsidiaries have
no commitment or obligation to (i) create or incur material liability with
respect to or cause to exist any other employee benefit plan, program or
arrangement, (ii) enter into any material contract or agreement to provide
compensation or benefits to any individual or (iii) modify or terminate any
Benefit Plan, other than with respect to a modification or termination required
by ERISA or the Code.
SECTION 5.14 Change in Control. Except as set forth on Schedule 5.14,
-----------------
neither KKR nor any of the KKR subsidiaries is a party to any Applicable
Agreement which is set forth on Schedules 5.11 or 5.19 that contains a "change
in control," "potential change in control" or similar provision that is
triggered by the transactions contemplated hereby. Except as set forth on
Schedule 5.14 or as otherwise contemplated by this Agreement, the consummation
of the transactions contemplated by this Agreement will not (either alone or
upon the occurrence of any additional acts or events) result in any payment
(whether of severance pay or otherwise) becoming due from KKR or the KKR
Subsidiaries to any Person.
SECTION 5.15 Governmental Consents. Except as set forth on Schedule
---------------------
5.15, no consent, approval or authorization of, or filing, registration or
qualification with, any Governmental Authority is required in connection with,
or as a condition to, the execution, delivery or performance of this Agreement
or any of the other Documents by KKR and the KKR Subsidiaries except (i)
filings, registrations or qualifications, if any, required to be made or
obtained on or before the Effective Time
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under (A) the Securities Act, (B) the Exchange Act, (C) state securities or
state corporation laws, (D) the HSR Act or (E) any Applicable Law governing the
sale of alcoholic beverages, each of which KKR shall use commercially reasonable
efforts to make or obtain on or before the Effective Time and (ii) where failure
to obtain such consents, approvals, authorizations or permits, or to make such
filings or notifications, would not, singly or in the aggregate, be reasonably
expected to have a Material Adverse Effect on KKR.
SECTION 5.16 Title to Properties. Each of KKR and each KKR Subsidiary
-------------------
(a) has legal and valid title to all the real properties and other assets
(tangible, intangible or mixed) it reflects in its Financial Statements as
owned, free and clear of all Liens, except for Permitted Liens and Liens set
forth on Schedule 5.16 and (b) enjoys peaceful and undisturbed possession under
all leases to which it is a party as lessee. All of the leases to which KKR or
any KKR Subsidiary is a party are legal, valid and binding and in full force and
effect, and, except as set forth on Schedule 5.16, no default by KKR, any KKR
Subsidiary or, to the best knowledge of KKR, any other party thereto has
occurred or is continuing thereunder. No property or asset, the value of which
is reflected in the balance sheets included in the Financial Statements of KKR,
is held under any lease or under any conditional sale or other title retention
agreement. Except for such assets, plants and facilities as are immaterial in
the aggregate to the business of KKR and the KKR Subsidiaries taken as a whole,
all tangible assets, plants and facilities of each of KKR and the KKR
Subsidiaries are in good condition and repair and are adequate for the uses to
which they are being put.
SECTION 5.17 Environmental Matters.
---------------------
(a) To the best knowledge of KKR, each of KKR and the KKR
Subsidiaries is in substantial compliance with the provisions of all
Environmental Laws, which compliance includes, but is not limited to, the
possession by KKR or the KKR Subsidiaries, as appropriate, of all licenses,
permits and other governmental authorizations required under applicable
Environmental Laws, and compliance with the terms and conditions thereof where
the failure to comply with their terms and conditions could, singly or in the
aggregate, have a Material Adverse Effect on KKR. Except where the failure to
comply would not, singly or in the aggregate, have a Material Adverse Effect on
KKR, neither KKR nor any of the KKR Subsidiaries has received any communication
(written or oral), whether from a Governmental Authority, citizens group,
employee or otherwise, that alleges that KKR or any of the KKR Subsidiaries is
not in such compliance with the provisions of all Environmental Laws, and there
are no currently existing circumstances known to KKR that, if not corrected,
could prevent such compliance in the future.
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(b) There is no Environmental Claim pending or, to the best knowledge
of KKR, threatened against KKR or any of the KKR Subsidiaries or against any
Person whose liability for any Environmental Claim KKR or any of the KKR
Subsidiaries has retained or assumed either contractually or by operation of law
and, to the best knowledge of KKR, there is no basis for any such claim that
could, singly or in the aggregate, have a Material Adverse Effect on KKR.
(c) Without in any way limiting the generality of the foregoing, to
the best knowledge of KKR, (a) there are no Material Environmental Concerns
present in any soil or groundwater at any property owned or operated by KKR or
any KKR Subsidiaries, (b) there are no underground storage tanks present at any
such real property owned by KKR or any KKR Subsidiary, and (c) no
polychlorinated biphenyls (PCBs) or PCB-containing items are used or stored at
any such property.
(d) True, complete and correct copies of the written reports, and all
parts thereof, of all environmental audits or assessments which have been
conducted at any property owned or operated by KKR or any KKR Subsidiary (within
the past five (5) years) have been made available to FRI.
SECTION 5.18 Books and Records. The books of account, minute books,
-----------------
stock record books, and other records of KKR and KKR Subsidiaries, all of which
have been made available to FRI, are complete and correct and have been
maintained in accordance with sound business practices and the requirements of
Section 13(b)(2) of the Exchange Act (regardless of whether or not KKR and the
KKR subsidiaries are subject to that Section), including the maintenance of an
adequate system of internal controls. The minute books of KKR and the KKR
Subsidiaries contain accurate and complete records of all meetings held of, and
corporate action taken by, the stockholders, the Boards of Directors, and
committees of the Boards of Directors of KKR and the KKR Subsidiaries, and no
meeting of any such stockholders, Board of Directors, or committee has been held
for which minutes have not been prepared and are not contained in such minute
books. At the Closing, all of those books and records will be in the possession
of KKR and the KKR subsidiaries.
SECTION 5.19 Contracts; No Defaults.
----------------------
(a) Schedule 5.19 contains a complete and accurate list, and KKR and
the KKR Subsidiaries shall at FRI's request deliver to FRI or make available for
FRI's review true and complete copies, of:
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(i) each Applicable Agreement that involves performance of services
or delivery of goods or materials by or to one or more of KKR and the KKR
Subsidiaries of an amount or value in excess of $150,000.
(ii) each Applicable Agreement that was not entered into in the
ordinary course of business and that involves expenditures or receipts of one or
more KKR and the KKR Subsidiaries in excess of $75,000.
(iii) each lease, rental or occupancy agreement, license, installment
and conditional sale agreement, and other Applicable Agreement affecting the
ownership of, leasing of, title to, use of, or any leasehold or other interest
in, any real or personal property (except personal property leases and
installment and conditional sales agreements having a value per item or
aggregate payments of less than $50,000 and with terms of less than one year);
(iv) each licensing agreement or other Applicable Agreement with
respect to Intellectual Property;
(v) each collective bargaining agreement and other Applicable
Agreement to or with any labor union or other employee representative of a group
of employees;
(vi) each joint venture, partnership, and other Applicable Agreement
involving a sharing of profits, losses, costs, or liabilities by any of KKR and
the KKR Subsidiaries with any other Person;
(vii) each Applicable Agreement containing covenants that in any way
purport to restrict the business activity of KKR or any of the KKR Subsidiaries
or any Affiliate of KKR or any of the KKR Subsidiaries, (other than directors or
officers of KKR) or limit the freedom of KKR or any of the KKR Subsidiaries or
any Affiliate of KKR or any of the KKR Subsidiaries (other than directors or
officers of KKR) to engage in any line of business or to compete with any
Person;
(viii) each power of attorney that is currently effective and
outstanding, other than powers of attorneys normally executed in connection with
the KKR SEC Documents;
(ix) each Applicable Agreement for capital expenditures in
excess of $50,000;
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(x) each other Applicable Agreement material to KKR and the KKR
Subsidiaries, taken as a whole, which has not otherwise been set forth on
Schedules 5.1 through 5.20; and
(xi) each enforceable amendment, supplement, and modification
(whether oral or written) in respect of any of the foregoing.
(b) Except as set forth in Schedule 5.19(b), each Applicable
Agreement referred to in Section 5.19(a) is in full force and effect and is
valid and enforceable in accordance with its terms.
(c) Except as set forth in Schedule 5.19(c):
(i) each of KKR and the KKR Subsidiaries and, to the knowledge of KKR,
each other party thereto is in compliance in all material respects with all
applicable terms and requirements of each Applicable Agreement referred to in
Section 5.19(a); and
(ii) no event has occurred or circumstance exists that (with or
without notice or lapse of time) may contravene, conflict with, or result in a
violation or breach of, or give any of KKR and the KKR Subsidiaries or other
Person the right to declare a default or exercise any remedy under, or to
accelerate the maturity or performance of, or to cancel, terminate, or modify,
any Applicable Agreement referred to in Section 5.19(a).
SECTION 5.20 Form S-4; Proxy Statement. None of the information
-------------------------
supplied by KKR or any KKR Subsidiary for inclusion or incorporation by
reference in (i) the Form S-4 will, at the time such Form is filed with the
Commission, at any time it is amended or supplemented and at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the KKR Proxy
Statement will, at the date it is first mailed to the KKR stockholders and at
the time of the meeting of KKR's stockholders held to vote on approval of this
Agreement and the Merger, contain any untrue statement of material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading. The KKR Proxy Statement will comply as to form in all
material respects with the requirements of the Exchange Act and the rules and
regulations of the Commission thereunder, except that no representation is made
by KKR with respect to statements made or incorporated by reference therein
based on information supplied by
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FRI or any FRI Subsidiary for inclusion or incorporation by reference in the KKR
Proxy Statement.
ARTICLE VI
COVENANTS OF FRI
SECTION 6.1 Sale of the Hamlet Shares to FRI-MRD. Concurrently with
------------------------------------
the execution of this Agreement, FRI shall cause FRI-MRD to execute and deliver
to KKR a purchase and sale agreement substantially in the form of Exhibit 6.1
relating to the sale of the Hamlet Shares to FRI-MRD.
SECTION 6.2 Loan to KKR. Concurrently with the execution of this
-----------
Agreement, FRI-MRD, The Hamlet Group, Inc. and the Guarantors named therein
shall execute and deliver to KKR on behalf of The Hamlet Group, Inc. a term loan
agreement substantially in the form of Exhibit 6.2 (the "Bridge Loan Agreement")
---------------------
and, subject to the conditions thereto, FRI shall cause FRI-MRD to advance to
The Hamlet Group, Inc. $3.0 million thereunder in cash.
SECTION 6.3 Conduct of Business Pending Merger. Except for Permitted
----------------------------------
Transactions, as otherwise specifically provided in this Agreement or in the
other Documents or as otherwise consented to in writing by KKR, which consent
shall not be unreasonably withheld, from the date of this Agreement to the
Effective Time, FRI will, and will cause each of the FRI Subsidiaries to,
conduct its operations only in the ordinary and usual course of business and
consistent with past practices and will, and will cause each of the FRI
Subsidiaries to, preserve intact its present business organization, take
commercially reasonable efforts to keep available the services of its present
officers, employees and consultants and preserve its present relationships with
licensors, licensees, customers, suppliers, employees, labor organizations and
others with whom they have a significant business relationship.
Without limiting the generality of the foregoing, and except for
Permitted Transactions, as otherwise specifically provided in this Agreement or
in the other Documents or as set forth in Schedule 6.3, FRI will not, and will
not permit any FRI Subsidiary to, indirectly, from the date of this Agreement to
the Effective Time, without the prior written consent of KKR, which shall not be
unreasonably withheld:
(a) adopt any amendment to or otherwise change the Charter
Documents of FRI or Merger-Sub;
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(b) authorize for issuance, sale, pledge, disposition or encumbrance,
or issue, sell, pledge, dispose of or encumber (whether through the issuance or
granting of options, warrants, commitments, subscriptions, rights to purchase,
convertible securities or otherwise), any capital stock of any class or any
other securities of, or any other ownership interest in, FRI or any FRI
Subsidiary, (other than the FRI Shares to be issued in the Merger), or amend any
of the terms of any such securities or agreements outstanding on the date
hereof;
(c) reclassify, combine, split or subdivide any shares of its capital
stock, declare, set aside or pay any dividend or other distribution (whether in
cash, securities or property or any combination thereof) in respect of any class
or series of its capital stock;
(d) redeem, purchase or otherwise acquire, or propose or offer to
redeem, purchase or otherwise acquire, any outstanding FRI Shares or other
securities of FRI or any of the FRI Subsidiaries;
(e) organize any new Subsidiary (other than Merger-Sub), acquire any
capital stock or equity securities of any Person or acquire any equity or
ownership interest (financial or otherwise) in any business, other than de
minimus investments in public corporations whose principal business includes the
operation of restaurants;
(f) (i) incur, assume or prepay any material liability, including,
without limitation, any indebtedness for borrowed money except in the ordinary
course of business and consistent with past practice, and in no event in excess
of $50,000, (ii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for obligations of any
third party, (iii) make any loans, advances or capital contributions to, or
investments in, any third party, (iv) mortgage or pledge any of its material
properties or assets, tangible or intangible, or create any material Lien
thereupon other than Permitted Liens, or (v) authorize any capital expenditures
not in FRI's capital budget on the date hereof which, individually or in the
aggregate, are in excess of $1,000,000;
(g) license or otherwise transfer, dispose of, permit to lapse or
otherwise fail to preserve any Intellectual Property of FRI or any FRI
Subsidiary, or dispose of or disclose to any person any trade secret, formula,
process or know-how not theretofore a matter of public knowledge, except where
such disposal or disclosure would not, individually or in the aggregate, be
reasonably expected to have a Material Adverse Effect on FRI;
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(h) enter into any material agreement, contract, commitment or
transaction other than in the ordinary course of business, consistent with past
practices;
(i) cancel any debts or waive, release or relinquish any material
contract rights or other rights of substantial value other than in the ordinary
course of business, consistent with past practices;
(j) authorize, recommend, propose or enter into or announce an
intention to authorize, recommend, propose or enter into an agreement in
principle or a definitive agreement with respect to any merger, consolidation,
liquidation, dissolution, or business combination, any acquisition of a material
amount of property or assets or securities, or any disposition of a material
amount of property or assets or securities, except as contemplated by this
Agreement;
(k) make any material change with respect to accounting policies or
procedures in effect as of December 28, 1997 except as may be required by
generally accepted accounting principles;
(l) pay, discharge or satisfy any material claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or otherwise)
other than the payment, discharge or satisfaction in the ordinary course of
business, consistent with past practices, of liabilities reflected or reserved
against in the FRI Financial Statements or incurred in the ordinary course of
business consistent with past practices since the date hereof;
(m) effectuate (i) a "plant closing" (as defined in the WARN Act)
affecting any site of employment or one or more facilities or operating units
within any site of employment of FRI or any FRI Subsidiary, or (ii) a "mass
layoff" (as defined in the WARN Act) affecting any site of employment of FRI or
any FRI Subsidiary, without complying fully with any and all notice obligations
(and/or pay and benefits in lieu of notice) under the WARN Act or any similar
obligation under applicable state or local law requiring notice (and/or pay and
benefits in lieu of notice) to employees in the event of a plant closing or
layoff. For purposes of the WARN Act and this Agreement, the Effective Time is
and shall be the same as the "effective date" within the meaning of the WARN
Act;
(n) commit or agree (in writing or otherwise) to take any of the
foregoing actions or any action that would make any representation or warranty
in this Agreement untrue or incorrect in any material respect, including as of
the date hereof and as of the Effective Time, as if made as of such time;
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(o) take any action with the knowledge that such action would
prevent the Merger from qualifying as a reorganization within the meaning of
sections 368(a) of the Code; or
(p) amend any Tax return, settle any Audit or make any election with
respect to Taxes which would materially adversely affect the Tax liability of
FRI or any FRI Subsidiary.
SECTION 6.4 No Solicitation. FRI will not, and will cause the FRI
---------------
Subsidiaries and each of their respective, officers, directors, employees,
agents and controlled Affiliates not to, directly or indirectly initiate,
solicit, engage in discussions or negotiations concerning, or provide any
information to any Person (other than KKR and its Representatives) relating to
any Acquisition Proposal. FRI will immediately cease and cause to be terminated
any existing activities, discussions and negotiations with respect to any
Acquisition Proposal. FRI shall immediately notify KKR if, subsequent to the
date hereof, any such negotiations, provision of information or data or
discussions are entered into or made or any such inquiries are received in
respect thereof, and shall provide details with respect thereto, including the
identity of any other party and the price and terms of any Acquisition Proposal.
SECTION 6.5 Amendment of Certificate and Bylaws; Recapitalization.
-----------------------------------------------------
Prior to the Effective Time FRI shall (a) amend and restate its Certificate of
Incorporation and Bylaws substantially in the forms set forth in Exhibit 6.5A1
and Exhibit 6.5A2, respectively, (b) issue to the holder of each FRI Share the
FRI Dividend and (c) duly adopt a further amendment to such Amended and Restated
Certificate of Incorporation, substantially in the form set forth in Exhibit
6.5B, renaming FRI as Koo Koo Roo Enterprises, Inc., such amendment to be filed
with the Delaware Secretary of State and effective substantially contemporaneous
with the occurrence of the Effective Time.
SECTION 6.6 Nasdaq National Market Quotation. FRI shall use
--------------------------------
commercially reasonable efforts to (a) cause the FRI Shares to be designated by
the NASD as a national market system security in the manner contemplated by
Section 262(b)(2) of the DGCL no later than the effective date of the Merger and
(b) maintain such quotation on the Nasdaq National Market (or any successor
system) or list the FRI Shares on the New York Stock Exchange or the American
Stock Exchange for a period of five years from the Effective Time unless in the
good faith determination of the Board of Directors of FRI, the maintenance of
such quotation or listing is not in the best interests of the stockholders of
FRI.
SECTION 6.7 Indemnification and Insurance.
-----------------------------
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(a) After the consummation of the Merger, the Surviving Corporation
shall remain responsible for the officers' and directors' right to
indemnification and exculpation provided for in the Charter Documents of KKR as
in effect on the date hereof, with respect to acts and omissions occurring prior
to the Effective Time including, without limitation, the transactions
contemplated by this Agreement.
(b) For six years after the Effective Time, FRI shall maintain, or
cause the Surviving Corporation to maintain, officers' and directors' liability
insurance covering the persons who are presently covered by KKR's officers' and
directors' liability insurance policies (copies of which have heretofore been
delivered to FRI), with respect to actions and omissions occurring or alleged to
have occurred prior to the Effective Time, on terms that are not materially less
favorable than the terms of such current insurance in effect on the date hereof;
provided, however, that FRI and the Surviving Corporation shall not be obligated
to make annual premium payments for such insurance to the extent such premiums
exceed $225,050 (175% of the annual premiums paid as of the date hereof by KKR
for such insurance (the "Maximum Amount")). If the amount of the annual
--------------
premiums necessary to maintain or procure such insurance coverage exceeds the
Maximum Amount, FRI and the Surviving Corporation shall maintain the most
advantageous policies of directors and officers liability insurance obtainable
for an annual premium equal to the Maximum Amount.
(c) From and after the occurrence of the Effective Time, (i) FRI and
the Surviving Corporation shall, to the fullest extent permitted under
applicable law, indemnify, defend and hold harmless each present and former
director and officer of KKR (collectively, the "Indemnified Parties") against
-------------------
any costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages, liabilities and amounts paid in settlement in
connection with any pending, threatened or completed claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of or pertaining to any action or omission occurring
prior to the Effective Time (including, without limitation, any claim, action,
suit, proceeding or investigation arising out of or pertaining to the
transactions contemplated by this Agreement); (ii) in the event of any such
claim, action, suit, proceeding or investigation (whether arising before or
after the Effective Time), FRI and the Surviving Corporation shall advance
expenses to each such Indemnified Party, including the payment of the reasonable
fees and expenses of counsel selected by such Indemnified Party, which counsel
shall be reasonably satisfactory to the Surviving Corporation promptly after
statements therefor are received, provided that (1) FRI and the Surviving
Corporation may require such Indemnified Party to undertake to repay such amount
if it is ultimately determined in a judicial proceeding that is final and
unappealable that such Indemnified Party is not entitled to be indemnified by
FRI and the Surviving Corporation in accordance with Section 145 of the DGCL,
(2) in any single action or series of related
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actions, FRI and the Surviving Corporation shall only be obligated to pay for
the fees and expenses of one such counsel (together with appropriate local
counsel) for all of the Indemnified Parties unless such counsel would have a
conflict of interest in such representation under applicable rules of
professional conduct, (3) FRI and the Surviving Corporation will cooperate fully
in the defense of any such matter and (4) if it is ultimately determined in a
judicial proceeding that is final and unappealable that FRI and the Surviving
Corporation wrongly denied their obligation to indemnify the Indemnified Parties
pursuant to this Section 6.7(c), the losses to be indemnified shall include the
Indemnified Parties' reasonable attorneys' fees in seeking indemnification.
Neither FRI nor the Surviving Corporation shall be liable for any settlement
effected without its written consent (which consent shall not be unreasonably
withheld).
(d) The provisions of this Section 6.7 are intended to be in addition
to the rights otherwise available to the directors and officers of KKR by law,
charter, statute, bylaw or agreement, shall survive the closing of the
transactions contemplated hereby, are intended to benefit each of the
Indemnified Parties (each of whom shall be entitled to enforce this Section
against the Surviving Corporation) and shall be binding on all successors and
assigns of FRI and the Surviving Corporation.
(e) In the event FRI, the Surviving Corporation or any of their
respective successors or assigns (i) consolidate with or merges into any other
person and shall not be the continuing or surviving corporation or entity of
such consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any Person, then, and in each such case, proper
provision shall be made so that the successors and assigns of FRI or the
Surviving Corporation assume the obligations set forth in this Section 6.7.
SECTION 6.8 Employee Benefits; Severance.
----------------------------
(a) For purposes of determining eligibility to participate,
entitlement to benefits and in all other respects where length of service is
relevant under any of Benefit Plans of FRI and the FRI Subsidiaries, following
the Effective Time, FRI shall cause the Benefit Plans of FRI and the FRI
Subsidiaries (including vesting, other than vesting under any defined
contribution or defined Benefit Plan of FRI and the FRI Subsidiaries), to credit
an applicable employee for such employee's service with KKR and any of the KKR
Subsidiaries to the same extent such service was credited under the applicable
Benefit Plans of KKR and the KKR Subsidiaries immediately prior to the Effective
Time.
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(b) At the Effective Time, FRI shall assume and honor, or cause the
Surviving Corporation to honor, in accordance with their terms the employment
contracts, severance agreements and severance pay policies identified in
Schedule 6.8.
(c) FRI and KKR agree that each may enter into retention and
transition bonus arrangements with its employees after the date hereof and prior
to the Effective Time, with the terms and amounts of such payments to be
determined and agreed to jointly by the Chief Executive Officers of FRI and KKR.
SECTION 6.9 Filing of Form S-8. FRI shall file the Form S-8 with the
------------------
Commission as soon as practicable after the Effective Time and request and use
its commercially reasonable efforts to obtain immediate effectiveness thereof.
ARTICLE VII
COVENANTS OF KKR
KKR covenants and agrees as follows:
SECTION 7.1 Sale of the Hamlet Shares to FRI-MRD. Concurrently with
-------------------------------------
the execution of this Agreement, KKR shall execute and deliver to FRI-MRD a
purchase and sale agreement substantially in the form of Exhibit 6.1 relating to
the sale of Hamlet Shares to FRI-MRD.
SECTION 7.2 Loan to KKR. Concurrently with the execution of this
-----------
Agreement, KKR shall, and shall cause each of its Subsidiaries that is a party
thereto, to execute and deliver to FRI-MRD the Bridge Loan Agreement.
SECTION 7.3 Conduct of Business Pending Merger. Except for Permitted
----------------------------------
Transactions, as otherwise specifically provided in this Agreement or in the
other Documents or as otherwise consented to in writing by FRI, which consent
shall not be unreasonably withheld, from the date of this Agreement to the
Effective Time, KKR will, and will cause each of the KKR Subsidiaries to,
conduct its operations only in the ordinary and usual course of business and
consistent with past practices and will, and will cause each of the KKR
Subsidiaries to, preserve intact its present business organization, take
commercially reasonable efforts to keep available the services of its present
officers, employees and consultants and preserve its present relationships with
licensors, licensees, customers, suppliers, employees, labor organizations and
others with whom they have a significant business relationship.
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Without limiting the generality of the foregoing, and except for
Permitted Transactions, as otherwise specifically provided in this Agreement or
in the other Documents, or as set forth on Schedule 7.3, KKR will not, and will
not permit any KKR Subsidiary to, directly or indirectly, from the date of this
Agreement to the Effective Time, without the prior written consent of FRI, which
shall not be unreasonably withheld:
(a) adopt any amendment to or otherwise change the Charter
Documents of KKR or any KKR Subsidiary;
(b) authorize for issuance, sale, pledge, disposition or encum
brance, or issue, sell, pledge, dispose of or encumber (whether through the
issuance or granting of options, warrants, commitments, subscriptions, rights to
purchase, convertible securities or otherwise), any capital stock of any class
or any other securities of, or any other ownership interest in, KKR or any KKR
Subsidiary (except for (1) the issuance of KKR Common Shares (i) upon the
exercise of options and warrants outstanding on the date hereof, (ii) upon
conversion or exchange of the KKR Preferred Shares outstanding on the date
hereof or issuable upon the exercise of warrants outstanding as of the date
hereof, or (iii) the issuance of KKR Common Shares in payment of accrued and
unpaid dividends on the KKR Preferred Shares in accordance with the terms
thereof and (2) as contemplated by Sections 7.1 and 7.2 hereof), or amend any of
the terms of any such securities or agreements outstanding on the date hereof;
(c) reclassify, combine, split or subdivide any shares of its capital
stock, declare, set aside or pay any dividend or other distribution (whether in
cash, securities or property or any combination thereof) in respect of any class
or series of its capital stock (other than regularly scheduled dividends on the
KKR Preferred Shares paid in cash in accordance with the terms thereof);
(d) redeem, purchase or otherwise acquire, or propose or offer to
redeem, purchase or otherwise acquire, any outstanding KKR Shares or other
securities of KKR or the KKR Subsidiaries;
(e) organize any new Subsidiary, acquire any capital stock or equity
securities of any Person or acquire any equity or ownership interest (financial
or otherwise) in any business;
(f) (i) incur, assume or prepay any material liability, including,
without limitation, any indebtedness for borrowed money except in the ordinary
course of business and consistent with past practice, and in no event in excess
of $50,000, (ii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly,
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contingently or otherwise) for obligations of any third party, (iii) make any
loans, advances or capital contributions to, or investments in, any third party,
(iv) mortgage or pledge any of its material properties or assets, tangible or
intangible, or create any material Lien thereupon other than Permitted Liens, or
(v) authorize any capital expenditures not in KKR's capital budget on the date
hereof which, individually or in the aggregate, are in excess of $50,000;
(g) license or otherwise transfer, dispose of, permit to lapse or
otherwise fail to preserve any Intellectual Property of KKR or any KKR
Subsidiary, or dispose of or disclose to any person any trade secret, formula,
process or know-how not theretofore a matter of public knowledge, except where
such disposal or disclosure would not, individually or in the aggregate, be
reasonably expected to have a Material Adverse Effect on KKR.
(h) enter into or amend any material agreement, contract, lease,
commitment or transaction other than in the ordinary course of business,
consistent with past practices;
(i) cancel any debts or waive, release or relinquish any material
contract rights or other rights of substantial value other than in the ordinary
course of business, consistent with past practices;
(j) except in accordance with Sections 7.1, 7.4 and 10.1(e),
authorize, recommend, propose or enter into or announce an intention to
authorize, recommend, propose or enter into an agreement in principle or a
definitive agreement with respect to any merger, consolidation, liquidation,
acquisition of a material amount of property or assets or securities, or any
disposition of a material amount of property or assets or securities;
(k) make any material change with respect to accounting policies or
procedures in effect as of December 31, 1997 except as may be required by
generally accepted accounting principles;
(l) pay, discharge or satisfy any material claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or otherwise)
other than the payment, discharge or satisfaction in the ordinary course of
business, consistent with past practices, of liabilities reflected or reserved
against in the Financial Statements of KKR or incurred in the ordinary course of
business, consistent with past practices since the date hereof;
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(m) effectuate (i) a "plant closing" (as defined in the WARN Act)
affecting any site of employment or one or more facilities or operating units
within any site of employment of KKR or any KKR Subsidiary, or (ii) a "mass
layoff" (as defined in the WARN Act) affecting any site of employment of KKR or
any KKR Subsidiary, without complying fully with any and all notice obligations
(and/or pay and benefits in lieu of notice) under the WARN Act or any similar
obligation under applicable state or local law requiring notice (and/or pay and
benefits in lieu of notice) to employees in the event of a plant closing or
layoff. For purposes of the WARN Act and this Agreement, the Effective Time is
and shall be the same as the "effective date" within the meaning of the WARN
Act;
(n) commit or agree (in writing or otherwise) to take any of the
foregoing actions or any action that would make any representation or warranty
in this Agreement untrue or incorrect in any material respect, including as of
the date hereof and as of the Effective Time, as if made as of such time;
(o) take any action with knowledge that such action would prevent
the Merger from qualifying as a reorganization within the meaning of sections
368(a) of the Code; or
(p) amend any Tax Return, settle any Audit or make any election with
respect to Taxes which would materially adversely affect the Tax liability of
KKR or any KKR Subsidiary.
SECTION 7.4 No Solicitation.
---------------
KKR will not, and will cause the KKR Subsidiaries and each of their
respective Affiliates, officers, directors, employees and agents (collectively
"Representatives") not to, directly or indirectly initiate, solicit or, except
- ----------------
to the extent the Board of Directors of KKR determines in good faith, after
consultation with its outside counsel, that such action is required for the
Board of Directors of KKR to comply with its duties under Applicable Law, engage
in discussions or negotiations concerning, or provide any information to any
Person (other than FRI and its Representatives) relating to any Acquisition
Proposal. KKR will immediately cease and cause to be terminated any existing
activities, discussions and negotiations with any Persons conducted heretofore
with respect to any Acquisition Proposal. KKR shall notify FRI immediately if
KKR, any of the KKR Subsidiaries or any of their respective Representatives
receives any unsolicited proposal concerning an Acquisition Proposal, the
identity of the Person making any such proposal and all of the terms and
conditions thereof, and shall keep FRI promptly advised of all developments
relating thereto. The provisions of this Section 7.4 shall not apply to the
Permitted Transactions.
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SECTION 7.5 KKR Stockholder Approval. KKR, acting through its Board
------------------------
of Directors, shall in accordance with its Charter Documents and all Applicable
Laws cause a meeting of its stockholders to be duly called and held as soon as
reasonably practicable for purposes of voting on the approval and adoption of
this Agreement and the Merger. The exact time period from the date of mailing
of the KKR Proxy Statement to the date of the meeting shall be determined by the
Board of Directors of KKR, in consultation with FRI, it being understood that
such period shall be designed to allow an adequate period for all KKR
stockholders to receive such material and vote by proxy, provided that such time
period shall in no event exceed 40 calendar days without the prior consent of
FRI. The Board of Directors of KKR shall, subject to their fiduciary duties,
recommend approval and adoption of this Agreement and the Merger by KKR's
stockholders. In connection with such meeting, KKR (a) will, together with FRI
in respect of the offering of the FRI Shares pursuant to the Form S-4, use their
respective commercially reasonable efforts to file and have cleared by the
Commission and will thereafter mail to its stockholders as promptly as
practicable the KKR Proxy Statement and all other proxy materials for such
meeting and (b) will, subject to the foregoing, use commercially reasonable
efforts to obtain the necessary approvals by its stockholders of this Agreement
and the transactions contemplated hereby in accordance with the DGCL.
SECTION 7.6 Affiliates. Prior to the execution of this Agreement KKR
----------
shall deliver to FRI a letter identifying all persons who, in KKR's reasonable
judgment, may be deemed, as of the date of this Agreement, "affiliates" of KKR
for purposes of Rule 145 under the Securities Act. KKR shall use commercially
reasonable efforts to cause each person named in such letter to deliver a
written agreement substantially in the form attached hereto as Exhibit 7.6.
SECTION 7.7 Employee Benefit Matters. KKR and the KKR Subsidiaries
------------------------
shall terminate each Benefit Plan of KKR and the KKR Subsidiaries which is a
"defined contribution plan" or "defined benefit plan," as such terms are defined
in Sections 3(34) and 3(35) of ERISA, respectively, effective prior to the
Effective Time, and shall appoint FRI as plan administrator under each such plan
for the sole purpose of completing the termination thereof, filing all
appropriate documents with government agencies and distributing participant
accounts in accordance with the applicable provisions of each such terminated
Benefit Plan. FRI shall offer participation in each Benefit Plan of FRI and the
FRI Subsidiaries which is a defined contribution plan or defined benefit plan to
participants in such terminated Benefit Plans of KKR and the KKR Subsidiaries as
soon as practicable after the Effective Time, and shall permit such participants
to elect direct rollovers of their accounts in such terminated Benefit Plans to
such FRI Benefit Plans.
ARTICLE VIII
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MUTUAL COVENANTS
SECTION 8.1 Access to Information.
---------------------
(a) So long as this Agreement has not been terminated, upon
reasonable notice and subject to restrictions contained in confidentiality
agreements with third parties to which such party is subject (from which such
party shall use commercially reasonable efforts to be released), each of KKR and
FRI shall (and shall cause each of their respective Subsidiaries to) afford to
the officers, employees, accountants, counsel and other representatives of the
other, reasonable access, during normal business hours during the period prior
to the Effective Time, to all its properties, books, contracts, commitments and
records and, during such period, each of KKR and FRI shall (and shall cause each
of their respective Subsidiaries to) furnish promptly to the other all
information concerning its business, properties and personnel as such other
party may reasonably request.
(b) Each party shall keep such information confidential in accordance
with, and shall otherwise abide by, the terms of the Confidentiality,
Noncircumvention and Nondisclosure Agreement, dated as of January 20, 1998, as
if such party is the Confidant thereunder.
SECTION 8.2 Preparation of Form S-4 and the KKR Proxy Statement.
---------------------------------------------------
Promptly following the date of this Agreement, FRI shall prepare and file with
the SEC the Form S-4, in which the KKR Proxy Statement will be included as a
prospectus. Each of FRI and KKR shall use commercially reasonable efforts to
have the Form S-4 declared effective under the Securities Act as promptly as
practicable after such filing. FRI shall also take any action (other than
qualifying to do business or subjecting itself to taxation or service of process
in any jurisdiction in which it is not now so qualified or subject) reasonably
required to be taken under any applicable state securities law in connection
with the issuance of the FRI Shares in the Merger, and KKR shall furnish all
information concerning KKR and the holders of the KKR Common Shares and rights
to acquire KKR Common Shares pursuant to the KKR Stock Plans, warrants or other
arrangements as may be reasonably required in connection with any such action.
Each of FRI and KKR shall furnish all information concerning itself to the other
as may be reasonably requested in connection with any such action and the
preparation, filing and distribution of the Form S-4 and the preparation, filing
and distribution of the KKR Proxy Statement. FRI, Merger-Sub and KKR each agree
to correct any information provided by it for use in the Form S-4 or the KKR
Proxy Statement which shall have become false or misleading.
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SECTION 8.3 Reasonable Efforts. Subject to the terms and conditions
------------------
of this Agreement, each of the parties hereto agrees to use commercially
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or advisable consistent with
Applicable Law to assure that all conditions to Closing set forth in Article IX
of this Agreement are satisfied as expeditiously as possible including, without
limitation, (i) the prompt preparation and filing with the Commission of the
Form S-4, (ii) the preparation and filing of all applicable forms under the HSR
Act, (iii) supplying certification to Latham & Watkins for the purpose of
satisfying the condition set forth in Section 9.3(g) and (iv) the preparation
and filing of all other forms, registrations and notices required to be filed to
consummate the transactions contemplated hereby and the taking of such actions
as are necessary to obtain any requisite approvals, consents, orders,
exemptions, waivers by any public or private third party. Each party shall
promptly consult with the other with respect to, provide any necessary
information with respect to and provide the other (or its counsel) copies of,
all filings made by such party with any Governmental Authority in connection
with this Agreement and the transactions contemplated hereby.
SECTION 8.4 Brokers or Finders. Each of KKR and FRI represents, as
------------------
to itself, its Subsidiaries and its Affiliates, that no agent, broker,
investment banker, financial advisor or other firm or person is or will be
entitled to any brokers' or finder's fee or any other commission or similar fee
in connection with any of the transactions contemplated by this Agreement,
except (a) fees and expenses to F.M. Roberts & Co. Inc. and to Sutro & Co.
Incorporated, which fees and expenses will be paid by KKR in accordance with
KKR's agreements as in place on the date hereof with such firms (copies of which
have been delivered by KKR to FRI prior to the date of this Agreement), and (b)
fees and expenses to Libra Investments, Inc., which fees and expenses will be
paid by FRI in accordance with FRI's agreement as in place on the date hereof
with such firm. Each of KKR and FRI agrees to indemnify, defend and hold the
other harmless from and against any and all claims, liabilities or obligations
with respect to any other fees, commissions or expenses asserted by any person
on the basis of any act or statement alleged to have been made by or on behalf
of such party.
SECTION 8.5 Notification of Certain Matters. Between the date of
-------------------------------
this Agreement and the Effective Time, KKR shall give prompt written notice to
FRI and FRI shall give prompt written notice to KKR, of the occurrence (or non-
occurrence) of any event of which any executive officer or director of KKR or
FRI, respectively, has knowledge, the occurrence (or non-occurrence) of which
would be likely to cause any representation or warranty contained in this
Agreement or any other Document to be untrue or inaccurate in any material
respect and of any material failure of either party to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder and shall use commercially reasonable efforts to cure any such
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defect; provided, however, that delivery of any notice pursuant to this Section
8.4 shall not limit or otherwise affect the remedies available to either party
hereunder.
SECTION 8.6 Further Information. As soon as practicable after such
-------------------
information becomes available, and in any event not later than thirty (30) days
after the end of each fiscal month, KKR shall provide to FRI and FRI shall
provide to KKR an unaudited consolidated balance sheet as of the end of such
month and the related consolidated statements of results of operations and
statements of cash flows for such period provided that such internal financial
statements shall be supplied in a form and manner consistent with previously
supplied statements.
SECTION 8.7 Fees and Expenses.
-----------------
(a) Except as set forth in clauses (b) and (c) below or Section 11.8,
whether or not the Merger is consummated, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
the exclusive obligation of, and shall be paid by, the party incurring such
expenses.
(b) If (i) this Agreement is terminated pursuant to Section 10.1(e)
and at the time of such termination neither FRI nor Merger-Sub is in material
breach of this Agreement or (ii) following the making by any Person (the
"referrent Person") of an Acquisition Proposal with respect to KKR, which
- -----------------
Acquisition Proposal is publicly disclosed and not withdrawn, this Agreement is
terminated pursuant to Section 10.1(d), at the time of termination neither FRI
nor Merger-Sub is in material breach of this Agreement and KKR or any of its
Affiliates enters into an agreement setting forth any substantive terms of, or
consummates, any Acquisition Proposal with respect to KKR with the referrent
Person or any of its Affiliates within six months of the date of such
termination, then KKR shall pay to FRI, by wire transfer of immediately
available funds, a fee of $6.0 million (the "Fee") (x) in the case of clause (i)
---
above, within three business days of delivery of written notice of such
termination or (y) in the case of clause (ii) above, concurrently with
consummation by such referrent Person or any of its Affiliates of any
Acquisition Proposal with respect to KKR. KKR shall in no event be obligated to
pay more than one such Fee with respect to all such occurrences and such
termination. The parties hereto acknowledge that an agreement relating solely to
the treatment of confidential information shall not be deemed to relate to the
substantive terms of an Acquisition Proposal.
(c) If (i) this Agreement is terminated (A) pursuant to Section
10.1(b) (unless at the time of termination any of the conditions contained in
Sections 9.3(a) through (h) remain unsatisfied or FRI has failed to obtain the
consents identified on Schedule 4.4(b)) or (B) pursuant to Section 10.1(d) and
(ii) at the time of either such
59
<PAGE>
termination neither FRI nor Merger-Sub is in breach in any material respect of
this Agreement and KKR or any of its Affiliates enters into an agreement setting
forth any substantive terms of, or consummates, any Acquisition Proposal with
respect to KKR within six months of the date of such termination, concurrently
with consummation of such Acquisition Proposal, KKR shall pay to FRI, by wire
transfer of immediately available funds, an amount equal to all of the Expenses
incurred by FRI; provided, that no Expenses shall be payable pursuant to this
--------
clause (c) if KKR has paid the Fee pursuant to clause (b).
SECTION 8.8 Accountants' Letters.
--------------------
(a) FRI shall use commercially reasonable efforts to cause to be
delivered to KKR a "comfort" letter of KPMG Peat Marwick LLP, its independent
accountants, dated a date within two business days before the date on which the
Form S-4 shall become effective, addressed to KKR, in form and substance
reasonably satisfactory to KKR and customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements similar to the Form S-4. In connection with FRI's efforts to obtain
such letter, if requested by KPMG Peat Marwick LLP, KKR shall deliver to such
accounting firm a representation letter complying with SAS 72.
(b) KKR shall use commercially reasonable efforts to cause to be
delivered to FRI a "comfort" letter of BDO Seidman LLP, its independent
accountants, dated a date within two business days before the date on which the
Form S-4 shall become effective, addressed to FRI, in form and substance
reasonably satisfactory to FRI and customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements similar to the Form S-4. In connection with KKR's efforts to obtain
such letter, if requested by BDO Seidman LLP, FRI shall deliver to such
accounting firm a representation letter complying with SAS 72.
SECTION 8.9 Public Announcements. FRI and KKR shall consult with
--------------------
each other before issuing any press release or otherwise making any public
statements with respect to the Merger and shall not, and shall cause each of
their Representatives not to, issue any such press release or make any such
public statement prior to such consultation, except as may be required by law or
any listing agreement with its securities exchange. Contemporaneous with the
execution and delivery of this Agreement, FRI and KKR shall cause to be released
a joint press release in the form attached hereto as Exhibit 8.8.
60
<PAGE>
ARTICLE IX
CONDITIONS
SECTION 9.1 Conditions to Each Party's Obligation to Effect the Merger.
----------------------------------------------------------
The respective obligations of each party to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) The applicable waiting period with respect to the Merger under
the HSR Act shall have expired or been terminated.
(b) The Form S-4 and any required post-effective amendment (if any)
shall have become effective under the Securities Act and shall not be the
subject of any stop order or proceedings seeking a stop order.
(c) No statute, rule, regulation, executive order, decree or
injunction shall have been enacted, entered, promulgated or enforced by any
United States court or Governmental Authority of competent jurisdiction which
prohibits the consummation of the Merger and shall be in effect.
(d) This Agreement shall have been approved and adopted by the
affirmative vote of the required percentage(s) of each of the outstanding KKR
Shares, in each case, in accordance with the DGCL.
(e) Each party hereto shall have obtained all consents, approvals,
authorizations and permits required from third parties and any Governmental
Authority necessary for the consummation of the transactions contemplated by
this Agreement, except for those consents, approvals, authorizations and permits
which the failure to obtain would not reasonably be expected to result in a
Material Adverse Effect on FRI or KKR, as the case may be; provided that the
failure to obtain required consents in connection with (i) any of KKR's
restaurant leases set forth on Schedule 9.1(e) or three or more of KKR's other
restaurant leases (in each case unless waived by FRI) or (ii) fourteen or more
of FRI's restaurant leases (unless waived by KKR), shall be deemed to constitute
a Material Adverse Effect.
(f) KKR shall have received from Sutro & Co. Incorporated a bring-
down opinion dated within two business days of the date of the KKR Proxy
Statement confirming the opinion referred to in Section 5.3(c).
61
<PAGE>
SECTION 9.2 Conditions of Obligations of FRI. The obligation of FRI
--------------------------------
to effect the Merger are further subject to the satisfaction at or prior to the
Effective Time of the following conditions, unless waived by FRI:
(a) The representations and warranties of KKR set forth in this
Agreement shall be true and correct in all material respects (except for
representations and warranties that contemplate a Material Adverse Effect or
Material Adverse Change, which shall be true and correct as written) as of the
date of this Agreement and (except to the extent such representations speak as
of an earlier date) as of the Effective Time as though made on and as of the
Effective Time, except for changes contemplated by this Agreement.
(b) KKR shall have performed and complied, in all material respects,
with all obligations and covenants required to be performed or complied with by
it under this Agreement at or prior to the Effective Time.
(c) FRI shall have received from KKR an officer's certificate
substantially in the form of Exhibit 9.2(c) attached hereto.
(d) FRI shall have received from Latham & Watkins or other counsel to
KKR acceptable to FRI, an opinion substantially in the form of Exhibit 9.2(d)
attached hereto.
(e) From the date of this Agreement through the Effective Time,
KKR shall not have suffered a Material Adverse Change.
(f) Holders of no more than seven and one-half percent (7.5%) of KKR
Shares outstanding at the Effective Time shall have properly demanded and not
rescinded appraisal pursuant to Section 262 of the DGCL.
(g) The sale of Hamlet Shares to FRI-MRD shall have been completed,
and such shares shall be owned by FRI-MRD free and clear of any and all Liens
imposed by any action or inaction of KKR or any KKR Subsidiary.
(h) The KKR Notes shall have been repaid in full.
(i) The aggregate liquidation preference of the outstanding shares of
Series B Convertible Preferred Stock shall not exceed $100,000, and the only
rights the holders of such outstanding shares of Series B Convertible Preferred
Stock shall have upon consummation of the Merger shall be of those set forth in
Sections 2.6 and 3.4 hereof.
62
<PAGE>
SECTION 9.3 Conditions of Obligations of KKR. The obligation of KKR
--------------------------------
to effect the Merger is further subject to the satisfaction at or prior to the
Effective Time of the following conditions, unless waived by KKR:
(a) The representations and warranties of FRI set forth in this
Agreement shall be true and correct in all material respects (except for
representations and warranties that contemplate a Material Adverse Effect or
Material Adverse Change, which shall be true and correct as written) already
specified as of the date of this Agreement and (except to the extent such
representations speak as of an earlier date) as of the Effective Time as though
made on and as of the Effective Time, except for changes contemplated by this
Agreement.
(b) FRI shall have performed and complied, in all material respects,
with all obligations and covenants required to be performed or complied with by
it under this Agreement at or prior to the Effective Time.
(c) The Board of Directors of FRI shall have been reconstituted as of
the Effective Time to consist of those individuals set forth in Exhibit 9.3(c)
attached hereto.
(d) KKR shall have received from FRI an officer's certificate
substantially in the form of Exhibit 9.3(d) attached hereto.
(e) KKR shall have received from Skadden, Arps, Slate, Meagher & Flom
LLP, or other counsel to FRI acceptable to KKR, an opinion substantially in the
form of Exhibit 9.2(e) attached hereto.
(f) From the date of this Agreement through the Effective Time,
FRI shall not have suffered a Material Adverse Change.
(g) At or prior to the time the KKR Proxy Statement is mailed to the
KKR stockholders, KKR shall have received an opinion from Latham & Watkins,
based on customary representations of FRI, Merger-Sub and KKR, substantially to
the effect that (i) the Merger will constitute a reorganization within the
meaning of section 368(a) of the Code. In the event that Latham & Watkins is
unable to deliver such opinion or subsequently withdraws or modifies its opinion
as contemplated by the last sentence of this paragraph, FRI may, at its sole and
absolute discretion, propose an alternative structure to the Merger which KKR
will be required to use commercially reasonable efforts to implement; provided,
--------
that (i) KKR shall have received an opinion from Latham & Watkins, based on
customary representations of FRI, Merger-Sub and KKR, substantially to the
effect that the alternative structure will constitute a reorganiza-
63
<PAGE>
tion within the meaning of section 368(a) of the Code, (ii) FRI proposes such
alternate structure within 15 business days of receiving notice from KKR that
Latham & Watkins is unable to give such opinion and (iii) such alternative
structure does not adversely affect the Merger Consideration to be received by
the KKR stockholders or any other material economic term of this Agreement.
Further, the opinion of Latham & Watkins delivered pursuant to this section
shall not have been withdrawn or modified in any material respect as a result of
a change in Applicable Law or a change in the underlying facts.
(h) The FRI Shares shall be approved for quotation on the Nasdaq
National Market.
(i) The sale of Hamlet Shares to FRI-MRD shall have been completed
resulting in the receipt by KKR of cash in an amount not less than $20 million.
ARTICLE X
TERMINATION AND AMENDMENT
SECTION 10.1 Termination. This Agreement may be terminated at any
-----------
time prior to the Effective Time, whether before or after approval of the
matters presented in connection with the Merger by the stockholders of KKR:
(a) by mutual written consent of KKR and FRI;
(b) by either KKR or FRI, if the Merger shall not have been
consummated before December 18, 1998 unless the failure to consummate the Merger
by such date shall be due to the action or failure to act of the party seeking
to terminate);
(c) by either KKR or FRI, if any permanent injunction or other order
of a court or other competent authority preventing the consummation of the
Merger shall have become final and nonappealable;
(d) by either FRI or KKR if, at the meeting of KKR stockholders
called to act on this Agreement (including any adjournment or postponement
thereof), the requisite vote of the KKR stockholders shall not have been
obtained; or
(e) by either KKR or FRI, if KKR's Board of Directors shall have
withdrawn or modified or changed (including by amendment to the KKR Proxy
64
<PAGE>
Statement) in a manner adverse to FRI or Merger-Sub its approval or
recommendation of this Agreement or the Merger.
SECTION 10.2 Effect of Termination. In the event of the termination
---------------------
and abandonment of this Agreement pursuant to Section 10.1 hereof, this
Agreement shall forthwith become void and have no effect, without any liability
on the part of any party hereto or its affiliates, directors, officers or
stockholders, other than the provisions of this Article X and Sections 8.1(b) ,
8.7, 11.1, 11.4, 11.5, 11.6, 11.7, 11.8 and 11.11. Notwithstanding the
foregoing, nothing contained in this Section shall relieve any party from
liability for any material breach of any covenant, representation or warranty
contained herein.
SECTION 10.3 Amendment. This Agreement may be amended by the parties
---------
hereto at any time before or after approval of the matters presented in
connection with the Merger by the stockholders of KKR and FRI but, after any
such approvals, no amendment shall be made that by law requires further
approvals by such stockholders without such further approvals. This Agreement
may not be amended except by an instrument in writing signed on behalf of each
of the parties hereto.
SECTION 10.4 Extension; Waiver. At any time prior to the Effective
-----------------
Time, the parties hereto may, to the extent legally allowed, (i) extend the time
for the performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties of the
other parties hereto contained herein or in any document delivered pursuant
hereto and (iii) waive compliance with any of the agreements or conditions
contained herein by the other parties hereto. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid only if set forth in
a written instrument signed on behalf of such party.
ARTICLE XI
MISCELLANEOUS
SECTION 11.1 Notices. All notices and other communications hereunder
-------
shall be in writing, and shall be deemed given upon receipt if delivered
personally, sent by facsimile transmission (receipt of which is confirmed) or by
certified or registered mail, return receipt requested, or by a nationally
recognized private overnight courier to the parties at the following addresses
(or at such other address for a party as shall be specified by like notice):
65
<PAGE>
(a) if to KKR, to:
Koo Koo Roo, Inc.
11075 Santa Monica Boulevard, Suite 225
Los Angeles, CA 90025
Attention: A. William Allen, III,
Chief Executive Officer and
Ronald D. Garber, Esq.,
General Counsel
Facsimile No.: (310) 479-4221
with copies to:
Latham and Watkins
633 West Fifth Street, Suite 4000
Los Angeles, CA 90071
Attention: Anthony J. Richmond
Facsimile No.: (213) 891-8763
and
(b) if to FRI, to:
Family Restaurants, Inc.
18831 Von Karman Avenue, 3/rd/ Floor
Irvine, CA 92612
Attention: Todd E. Doyle, Vice President and General
Counsel
Facsimile No.: (949) 757-8076
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue
Los Angeles, California 90071
Attention: Michael Woronoff
Facsimile No.: (213) 687-5600
SECTION 11.2 Descriptive Headings. The descriptive headings herein
--------------------
are inserted for convenience only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
66
<PAGE>
SECTION 11.3 Counterparts. This Agreement may be executed in two or
------------
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when two or more counterparts have been signed by
each of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
SECTION 11.4 Entire Agreement; Assignment. This Agreement, along with
----------------------------
the schedules, exhibits and other documents referred to herein, (a) constitutes
the entire agreement and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof (other than the Non-disclosure Agreement, any provisions of such latter
agreement which are inconsistent with the transactions contemplated by this
Agreement being superseded by the provisions hereof) and (b) may not be assigned
by operation of law or otherwise without the prior written consent of the other
parties which may be given or withheld in their sole discretion. Subject to the
preceding sentence, this Agreement shall be binding on, inure to the benefit of,
and be enforceable by the parties hereto and their respective successors and
assigns.
SECTION 11.5 Governing Law. This Agreement shall be governed and
-------------
construed in accordance with the laws of the State of Delaware without regard to
any applicable principles of conflicts of law.
SECTION 11.6 Specific Performance. The parties hereto agree that if
--------------------
any of the provisions of this Agreement were not performed in accordance with
their specific terms or were otherwise breached, irreparable damage would occur,
no adequate remedy at law would exist and damages would be difficult to
determine, and that the parties shall be entitled to specific performance of the
terms hereof, in addition to any other remedy at law or equity.
SECTION 11.7 Parties in Interest. This Agreement shall be binding
-------------------
upon and inure solely to the benefit of each party hereto, and, except for the
provisions of Section 6.7 which are intended to be for the benefit of the
persons referred to therein and their beneficiaries, and may be enforced by such
persons as intended third-party beneficiaries, nothing in this Agreement,
express or implied, is intended to or shall confer upon any other person or
persons any rights, benefits or remedies of any nature whatsoever under or by
reason of this Agreement.
SECTION 11.8 Attorneys' Fees. In any suit or action brought by any
---------------
party hereto to enforce this Agreement, the prevailing party shall be entitled
to reasonable attorneys' fees and costs incurred by the prevailing party in
connection therewith, including costs and expenses associated with any and all
appeals.
67
<PAGE>
SECTION 11.9 Survival of Representations and Warranties. None of the
------------------------------------------
representations and warranties made in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive beyond the Effective Time and
each shall be deemed to have terminated at and as of the Effective Time. This
Section 11.9 shall not limit any covenant or agreement of the parties which by
its terms contemplates performance after the Effective Time.
SECTION 11.10 Obligation of FRI. Whenever this Agreement requires
-----------------
Merger-Sub to take any action, such requirement will be deemed to include an
undertaking by FRI to cause Merger-Sub to take such action.
SECTION 11.11 Validity. The invalidity or unenforceability of any
--------
provision of this Agreement shall not affect the validity or unenforceability of
any other provisions of this Agreement, which shall remain in full force and
effect.
68
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement and
Plan of Merger to be signed by their respective officers thereunto duly
authorized as of the date first written above.
KOO KOO ROO, INC.
By: /s/ A. William Allen, III
-------------------------------
Name: A. William Allen, III
Title: Chief Executive Officer
FAMILY RESTAURANTS, INC
By: /s/ R. T. Trebing, Jr.
-------------------------------
Name: R. T. Trebing, Jr.
------------------------
Title: EVP/CFO
-----------------------
FRI-SUB, INC.
By: /s/ R. T. Trebing, Jr.
-------------------------------
Name: R. T. Trebing, Jr.
-------------------------
Title: President
-----------------------
69
<PAGE>
EXHIBIT 3.1
FORM OF
RESTATED
CERTIFICATE OF INCORPORATION
OF
FAMILY RESTAURANTS, INC.
The undersigned, Todd E. Doyle certifies that he is the Vice President
and General Counsel of Family Restaurants, Inc., a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), and does
hereby further certify as follows:
(1) The name of the Corporation is Family Restaurants, Inc.
(2) The name under which the Corporation was originally incorporated
was Family Restaurants, Inc. and the original Certificate of Incorporation
of the Corporation was filed with the Secretary of State of the State of
Delaware on September 15, 1986.
(3) This Restated Certificate of Incorporation was duly adopted by in
accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware.
(4) The text of the Restated Certificate of Incorporation of the
Corporation as amended hereby is restated to read in its entirety, as
follows:
FIRST: The name of the Corporation is Family Restaurants, Inc.,
-----
(hereinafter, the "Corporation").
SECOND: The address of the registered office of the Corporation in
------
the State of Delaware is 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at that address is The
Corporation Trust Company.
<PAGE>
THIRD: The purpose of the Corporation is to engage in any lawful
-----
act or activity for which a corporation may be organized under the General
Corporation Law of the State of Delaware as set forth in Title 8 of the Delaware
Code (the "GCL").
FOURTH: The total number of shares of stock which the Corporation
------
shall have authority to issue is [300,000,000] shares of Common Stock, each
having a par value of one cent ($.01), and [50,000,000] shares of Preferred
Stock, each having a par value of one cent ($.01).
The Board of Directors is expressly authorized to provide for the
issuance of all or any shares of the Preferred Stock in one or more classes or
series, and to fix for each such class or series such voting powers, full or
limited, or no voting powers, and such distinctive designations, preferences and
relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such class or series and as may be permitted by
the GCL, including, without limitation, the authority to provide that any such
class or series may be (i) subject to redemption at such time or times and at
such price or prices; (ii) entitled to receive dividends (which may be
cumulative or non-cumulative) at such rates, on such conditions, and at such
times, and payable in preference to, or in such relation to, the dividends
payable on any other class or classes or any other series; (iii) entitled to
such rights upon the dissolution of, or upon any distribution of the assets of,
the Corporation; or (iv) convertible into, or exchangeable for, shares of any
other class or classes of stock, or of any other series of the same or any other
class or classes of stock, of the Corporation at such price or prices or at such
rates of exchange and with such adjustments; all as may be stated in such
resolution or resolutions.
FIFTH: The following provisions are inserted for the management
-----
of the business and the conduct of the affairs of the Corporation, and for
further definition, limitation and regulation of the powers of the Corporation
and of its directors and stockholders:
(1) The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors.
(2) The directors shall have concurrent power with the stockholders
to make, alter, amend, change, add to or repeal the By-Laws of the
Corporation.
2
<PAGE>
(3) The number of directors of the Corporation shall be as from time
to time fixed by, or in the manner provided in, the By-Laws of the
Corporation. Election of directors need not be by written ballot unless
the By-Laws so provide.
(4) No director shall be personally liable to the Corporation or any
of its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) pursuant to Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived
an improper personal benefit. Any repeal or modification of this Article
Five by the stockholders of the Corporation shall not adversely affect any
right or protection of a director of the Corporation existing at the time
of such repeal or modification with respect to acts or omissions occurring
prior to such repeal or modification.
(5) In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered
to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation, subject, nevertheless, to the
provisions of the GCL, this Certificate of Incorporation, and any By-Laws
adopted by the stockholders; provided, however, that no By-Laws hereafter
adopted by the stockholders shall invalidate any prior act of the directors
which would have been valid if such By-Laws had not been adopted.
(6) The Corporation shall indemnify its directors and officers to the
fullest extent authorized or permitted by law, as now or hereafter in
effect, and such right to indemnification shall continue as to a person who
has ceased to be a director or officer of the Corporation and shall inure
to the benefit of his or her heirs, executors and personal and legal
representatives; provided, however, that, except for proceedings to enforce
-------- -------
rights to indemnification, the Corporation shall not be obligated to
indemnify any director or officer (or his or her heirs, executors or
personal or legal representatives) in connection with a proceeding (or part
thereof) initiated by such person unless such proceeding (or part thereof)
was authorized or consented to by the Board of Directors. The
3
<PAGE>
right to indemnification conferred by this Article Five shall include the
right to be paid by the Corporation the expenses incurred in defending or
otherwise participating in any proceeding in advance of its final
disposition.
The Corporation may, to the extent authorized from time to time
by the Board of Directors, provide rights to indemnification and to the
advancement of expenses to employees and agents of the Corporation similar
to those conferred in this Article Five to directors and officers of the
Corporation.
The rights to indemnification and to the advance of expenses
conferred in this Article Five shall not be exclusive of any other right
which any person may have or hereafter acquire under this Amended and
Restated Certificate of Incorporation, the By-Laws of the Corporation, any
statute, agreement, vote of stockholders or disinterested directors or
otherwise.
Any repeal or modification of this Article Five by the
stockholders of the Corporation shall not adversely affect any rights to
indemnification and to the advancement of expenses of a director or officer
of the Corporation existing at the time of such repeal or modification with
respect to any acts or omissions occurring prior to such repeal or
modification.
SIXTH: Meetings of stockholders may be held within or without the
-----
State of Delaware, as the By-Laws may provide. The books of the Corporation may
be kept (subject to any provision contained in the GCL) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-Laws of the Corporation.
SEVENTH: The Corporation reserves the right to amend, alter,
-------
change or repeal any provision contained in this Certificate of Incorporation,
in the manner now or hereafter prescribed by statute, and all rights conferred
upon stockholders herein are granted subject to this reservation.
EIGHTH: In furtherance and not in limitation of the powers conferred
------
upon it by the laws of the State of Delaware, the Board of Directors shall have
the power to adopt, amend, alter or repeal the Corporation's By-Laws.
4
<PAGE>
FAMILY RESTAURANTS, INC.
---------------------------------
Todd E. Doyle
Vice President and General Counsel
<PAGE>
EXHIBIT 3.2
FORM OF
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
FAMILY RESTAURANTS, INC.
_________________________________________
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
_________________________________________
Family Restaurants, Inc., a Delaware corporation (hereinafter called
the "Corporation"), does hereby certify as follows:
FIRST: Article FIRST of the Corporation's Certificate of
-----
Incorporation is hereby amended to read in its entirety as set forth below:
FIRST: The name of the corporation is Koo Koo Roo Enterprises, Inc.
-----
(hereinafter the "Corporation").
SECOND: The foregoing amendment was duly adopted in accordance with
------
Section 242 of the General Corporation Law of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
duly executed in its corporate name this ___ day of ___________, 1998.
FAMILY RESTAURANTS, INC.
By:_______________________________________________
Name:
Title:
<PAGE>
EXHIBIT 3.3
FORM OF
AMENDED AND RESTATED
BY-LAWS
of
FAMILY RESTAURANTS, INC.
A Delaware Corporation
Effective _______ ___, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
ARTICLE I - OFFICES.................................................... 2
Section 1.1 Registered Office........................................ 2
Section 1.2 Other Offices............................................ 2
ARTICLE II - MEETINGS OF STOCKHOLDERS.................................. 2
Section 2.1 Place of Meetings........................................ 2
Section 2.2 Annual Meetings.......................................... 2
Section 2.3 Nomination of Directors.................................. 4
Section 2.4 Special Meetings......................................... 5
Section 2.5 Conduct of Meetings...................................... 5
Section 2.6 Notice................................................... 6
Section 2.7 Adjournments............................................. 6
Section 2.8 Quorum................................................... 6
Section 2.9 Proxies.................................................. 7
Section 2.10 Voting................................................... 7
Section 2.11 Consent of Stockholders in Lieu of Meeting............... 8
Section 2.12 List of Stockholders Entitled to Vote.................... 8
Section 2.13 Stock Ledger............................................. 9
Section 2.14 Inspectors of Election................................... 9
Section 2.15 Record Date.............................................. 9
ARTICLE III - DIRECTORS................................................ 10
Section 3.1 Number and Election of Directors......................... 10
Section 3.2 Vacancies................................................ 11
Section 3.3 Duties and Powers........................................ 11
Section 3.4 Organization............................................. 11
Section 3.5 Meetings................................................. 11
Section 3.6 Quorum................................................... 12
Section 3.7 Actions of Board......................................... 12
Section 3.8 Meetings by Means of Conference Telephone................ 12
Section 3.9 Committees............................................... 12
Section 3.10 Compensation............................................. 13
Section 3.11 Interested Directors..................................... 13
ARTICLE IV - OFFICERS.................................................. 14
Section 4.1 General.................................................. 14
Section 4.2 Election................................................. 14
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 4.3 Voting Securities Owned by the Corporation............... 14
Section 4.4 Chairman of the Board of Directors....................... 15
Section 4.5 President................................................ 15
Section 4.6 Vice Presidents.......................................... 15
Section 4.7 Secretary................................................ 16
Section 4.8 Treasurer................................................ 16
Section 4.9 Assistant Secretaries.................................... 17
Section 4.10 Assistant Treasurers..................................... 17
Section 4.11 Other Officers........................................... 17
ARTICLE V - STOCK...................................................... 18
Section 5.1 Form of Certificates..................................... 18
Section 5.2 Signatures............................................... 18
Section 5.3 Lost, Destroyed, Stolen or Mutilated Certificates........ 18
Section 5.4 Transfers................................................ 18
Section 5.5 Transfer and Registry Agents............................. 19
Section 5.6 Beneficial Owners........................................ 19
ARTICLE VI - NOTICES................................................... 19
Section 6.1 Notices.................................................. 19
Section 6.2 Waivers of Notice........................................ 19
ARTICLE VII - GENERAL PROVISIONS....................................... 20
Section 7.1 Dividends................................................ 20
Section 7.2 Disbursements............................................ 20
Section 7.3 Fiscal Year.............................................. 20
Section 7.4 Corporate Seal........................................... 20
ARTICLE VIII - INDEMNIFICATION......................................... 21
Section 8.1 Power to Indemnify in Actions, Suits or Proceedings
Other than Those by or in the Right of the Corporation... 21
Section 8.2 Power to Indemnify in Actions, Suits or Proceedings
by or in the Right of the Corporation.................... 21
Section 8.3 Authorization of Indemnification......................... 22
Section 8.4 Good Faith Defined....................................... 22
Section 8.5 Indemnification by a Court............................... 22
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 8.6 Expenses Payable in Advance.............................. 23
Section 8.7 Nonexclusivity of Indemnification and
Advancement of Expenses.................................. 23
Section 8.8 Insurance................................................ 23
Section 8.9 Certain Definitions...................................... 24
Section 8.10 Survival of Indemnification and Advancement of Expenses.. 24
Section 8.11 Limitation on Indemnification............................ 24
Section 8.12 Indemnification of Employees and Agents.................. 25
ARTICLE IX - AMENDMENTS................................................ 25
Section 9.1 Amendments............................................... 25
Section 9.2 Entire Board of Directors................................ 25
</TABLE>
iii
<PAGE>
FORM OF
AMENDED AND RESTATED
BY-LAWS
OF
FAMILY RESTAURANTS, INC.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
-------
Section 1.1 Registered Office. The registered office of the
-----------------
Corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware.
Section 1.2 Other Offices. The Corporation may also have offices at
-------------
such other places, both within and without the State of Delaware, as the Board
of Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
Section 2.1 Place of Meetings. Meetings of the stockholders for the
-----------------
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware, as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2.2 Annual Meetings. The Annual Meetings of Stockholders for
---------------
the election of directors shall be held on such date and at such time as shall
be designated from time to time by the Board of Directors.
No business may be transacted at an Annual Meeting of Stockholders,
other than business that is either (a) specified in the notice of meeting (or
any supplement thereto) given by or at the direction of the Board of Directors
(or any duly authorized committee thereof), (b) otherwise properly brought
before the annual meeting by or at the direction of the Board of Directors (or
any duly authorized committee
2
<PAGE>
thereof) or (c) otherwise properly brought before the annual meeting by any
stockholder of the Company (i) who is a stockholder of record on the date of the
giving of the notice provided for in this Section 2.2 and on the record date for
the determination of stockholders entitled to vote at such annual meeting and
(ii) who complies with the notice procedures set forth in this Section 2.2.
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary of
the Company.
To be timely, a stockholder's notice to the Secretary must be
delivered to or mailed and received at the principal executive offices of the
Company not less than sixty (60) days nor more than ninety (90) days prior to
the anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that in the event that the annual meeting is
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure of the date of the annual meeting was made, whichever
first occurs.
To be in proper written form, a stockholder's notice to the Secretary
must set forth as to each matter such stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and record address of such stockholder, (iii) the
class or series and number of shares of capital stock of the Company which are
owned beneficially or of record by such stockholder, (iv) a description of all
arrangements or understandings between such stockholder and any other person or
persons (including their names) in connection with the proposal of such business
by such stockholder and any material interest of such stockholder in such
business and (v) a representation that such stockholder intends to appear in
person or by proxy at the annual meeting to bring such business before the
meeting.
No business shall be conducted at the annual meeting of stockholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 2.2; provided, however, that, once business
has been properly brought before the annual meeting in accordance with such
procedures, nothing in this Section 2.2 shall be deemed to preclude discussion
by any stockholder of any such business. If the Chairman of an annual meeting
determines that business was not
3
<PAGE>
properly brought before the annual meeting in accordance with the foregoing
procedures, the Chairman shall declare to the meeting that the business was not
properly brought before the meeting and such business shall not be transacted.
Section 2.3 Nomination of Directors. Only persons who are nominated
-----------------------
in accordance with the following procedures shall be eligible for election as
directors of the Company, except as may be otherwise provided in the Certificate
of Incorporation with respect to the right of holders of preferred stock of the
Corporation to nominate and elect a specified number of directors in certain
circumstances. Nominations of persons for election to the Board of Directors may
be made at any annual meeting of stockholders, or at any special meeting of
stockholders called for the purpose of electing directors, (a) by or at the
direction of the Board of Directors (or any duly authorized committee thereof)
or (b) by any stockholder of the Company (i) who is a stockholder of record on
the date of the giving of the notice provided for in this Section 2.3 and on the
record date for the determination of stockholders entitled to vote at such
meeting and (ii) who complies with the notice procedures set forth in this
Section 2.3.
In addition to any other applicable requirements, for a nomination to
be made by a stockholder, such stockholder must have given timely notice thereof
in proper written form to the Secretary of the Company.
To be timely, a stockholder's notice to the Secretary must be
delivered to or mailed and received at the principal executive offices of the
Company (a) in the case of an annual meeting, not less than sixty (60) days nor
more than ninety (90) days prior to the anniversary date of the immediately
preceding annual meeting of stockholders; provided, however, that in the event
that the annual meeting is called for a date that is not within thirty (30) days
before or after such anniversary date, notice by the stockholder in order to be
timely must be so received not later than the close of business on the tenth
(10th) day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure of the date of the annual meeting
was made, whichever first occurs; and (b) in the case of a special meeting of
stockholders called for the purpose of electing directors, not later than the
close of business on the tenth (10th) day following the day on which notice of
the date of the special meeting was mailed or public disclosure of the date of
the special meeting was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Secretary
must set forth (a) as to each person whom the stockholder proposes to nominate
for election as a director (i) the name, age, business address and residence
address of the person, (ii)
4
<PAGE>
the principal occupation or employment of the person, (iii) the class or series
and number of shares of capital stock of the Company which are owned
beneficially or of record by the person and (iv) any other information relating
to the person that would be required to be disclosed in a proxy statement or
other filings required to be made in connection with solicitations of proxies
for election of directors pursuant to Section 14 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and the rules and regulations
promulgated thereunder; and (b) as to the stockholder giving the notice (i) the
name and record address of such stockholder, (ii) the class or series and number
of shares of capital stock of the Company which are owned beneficially or of
record by such stockholder, (iii) a description of all arrangements or
understandings between such stockholder and each proposed nominee and any other
person or persons (including their names) pursuant to which the nomination(s)
are to be made by such stockholder, (iv) a representation that such stockholder
intends to appear in person or by proxy at the meeting to nominate the persons
named in its notice and (v) any other information relating to such stockholder
that would be required to be disclosed in a proxy statement or other filings
required to be made in connection with solicitations of proxies for election of
directors pursuant to Section 14 of the Exchange Act and the rules and
regulations promulgated thereunder. Such notice must be accompanied by a written
consent of each proposed nominee to being named as a nominee and to serve as a
director if elected.
No person shall be eligible for election as a director of the Company
unless nominated in accordance with the procedures set forth in this Section
2.3. If the Chairman of the meeting determines that a nomination was not made in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the nomination was defective and such defective nomination shall be
disregarded.
Section 2.4 Special Meetings. Unless otherwise required by law or by
----------------
the certificate of incorporation of the Corporation, as amended and restated
from time to time (the "Certificate of Incorporation"), Special Meetings of
Stockholders, for any purpose or purposes, may be called by either (i) the
Chairman of the Board of Directors, (ii) the President, (iii) any Vice
President, (iv) the Secretary or (v) any Assistant Secretary, and shall be
called by any such officer at the request in writing of (i) the Board of
Directors, (ii) a committee of the Board of Directors that has been duly
designated by the Board of Directors and whose powers and authority include the
power to call such meetings or (iii) stockholders owning a majority of the
capital stock of the Corporation issued and outstanding and entitled to vote.
Such request shall state the purpose or purposes of the proposed meeting. At a
Special Meeting of the Stockholders,
5
<PAGE>
only such business shall be conducted as shall be specified in the notice of
meeting (or any supplement thereto).
Section 2.5 Conduct of Meetings. The Board of Directors of the
-------------------
Corporation may adopt by resolution such rules and regulations for the conduct
of the meeting of the stockholders as it shall deem appropriate. Except to the
extent inconsistent with such rules and regulations as adopted by the Board of
Directors, the chairman of any meeting of the stockholders shall have the right
and authority to prescribe such rules, regulations and procedures and to do all
such acts as, in the judgment of such chairman, are appropriate for the proper
conduct of the meeting. Such rules, regulations or procedures, whether adopted
by the Board of Directors or prescribed by the chairman of the meeting, may
include, without limitation, the following: (i) the establishment of an agenda
or order of business for the meeting; (ii) the determination of when the polls
shall open and close for any given matter to be voted on at the meeting; (iii)
rules and procedures for maintaining order at the meeting and the safety of
those present; (iv) limitations on attendance at or participation in the meeting
to stockholders of record of the corporation, their duly authorized and
constituted proxies or such other persons as the chairman of the meeting shall
determine; (v) restrictions on entry to the meeting after the time fixed for the
commencement thereof; and (vi) limitations on the time allotted to questions or
comments by participants.
Section 2.6 Notice. Whenever stockholders are required or permitted
------
to take any action at a meeting, a written notice of the meeting shall be given
which shall state the place, date and hour of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is called.
Unless otherwise required by law, the written notice of any meeting shall be
given not less than ten nor more than sixty days before the date of the meeting
to each stockholder entitled to vote at such meeting.
Section 2.7 Adjournments. Any meeting of the stockholders may be
------------
adjourned from time to time to reconvene at the same or some other place, and
notice need not be given of any such adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken. At the
adjourned meeting, the Corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
6
<PAGE>
Section 2.8 Quorum. Except as otherwise required by law or by the
------
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. A quorum, once established, shall
not be broken by the withdrawal of enough votes to leave less than a quorum.
If, however, such quorum shall not be present or represented at any meeting of
the stockholders, the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting from time to
time, in the manner provided by Section 2.7, until a quorum shall be present or
represented.
Section 2.9 Proxies. Any stockholder entitled to vote may do so in
-------
person or by his or her proxy appointed by an instrument in writing subscribed
by such stockholder or by his or her attorney thereunto authorized, delivered to
the Secretary of the meeting; provided, however, that no proxy shall be voted or
-------- -------
acted upon after three years from its date, unless said proxy provides for a
longer period. Without limiting the manner in which a stockholder may authorize
another person or persons to act for him or her as proxy, either of the
following shall constitute a valid means by which a stockholder may grant such
authority:
(1) A stockholder may execute a writing authorizing another
person or persons to act for him or her as proxy. Execution may be
accomplished by the stockholder or his or her authorized officer, director,
employee or agent signing such writing or causing his or her signature to
be affixed to such writing by any reason able means, including, but not
limited to, by facsimile signature.
(2) A stockholder may authorize another person or persons to act
for him or her as proxy by transmitting or authorizing the transmission of
a telegram or other means of electronic transmission to the person who will
be the holder of the proxy or to a proxy solicitation firm, proxy support
service organization or like agent duly authorized by the person who will
be the holder of the proxy to receive such transmission, provided that any
such telegram or other means of electronic transmission must either set
forth or be submitted with information from which it can be determined that
the telegram or other electronic transmission was authorized by the
stockholder.
7
<PAGE>
Any copy, facsimile telecommunication or other reliable reproduction of the
writing or transmission authorizing another person or persons to act as proxy
for a stockholder may be substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used; provided that such copy, facsimile telecommunication
--------
or other reproduction shall be a complete reproduc tion of the entire original
writing or transmission.
Section 2.10 Voting. At all meetings of the stockholders at which a
------
quorum is present, except as otherwise required by law, the Certificate of
Incorporation or these By-Laws, any question brought before any meeting of
stockholders shall be decided by the affirmative vote of the holders of a
majority of the total number of votes of the capital stock present in person or
represented by proxy and entitled to vote on such question, voting as a single
class. Unless otherwise provided in the Certificate of Incorporation, and
subject to Section 2.12, each stockholder represented at a meeting of
stockholders shall be entitled to cast one vote for each share of the capital
stock entitled to vote on such question held by such stockholder. The Board of
Directors, in its discretion, or the officer of the Corporation presiding at a
meeting of stockholders, in his or her discretion, may require that any votes
cast at such meeting shall be cast by written ballot.
Section 2.11 Consent of Stockholders in Lieu of Meeting. Unless
------------------------------------------
otherwise provided in the Certificate of Incorporation, any action required or
permitted to be taken at any Annual or Special Meeting of Stockholders of the
Corporation, may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and voted
and shall be delivered to the Corporation by delivery to its registered office
in the State of Delaware, its principal place of business, or an officer or
agent of the corporation having custody of the book in which proceed ings of
meetings of stockholders are recorded. Delivery made to the Corporation's
registered office shall be by hand or by certified or registered mail, return
receipt requested. Every written consent shall bear the date of signature of
each stockholder who signs the consent and no written consent shall be effective
to take the corporate action referred to therein unless, within sixty days of
the earliest dated consent delivered in the manner required by this Section 2.11
to the Corporation, written consents signed by a sufficient number of holders to
take action are delivered to the Corporation by delivery to its registered
office in the state of Delaware, its principal place of business, or an officer
or agent of the Corporation having custody of the book in which
8
<PAGE>
proceedings of meetings of stockholders are recorded. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing
and who, if the action had been taken at a meeting, would have been entitled to
notice of the meeting if the record date for such meeting had been the date that
written consents signed by a sufficient number of holders to take the action
were delivered to the Corporation as provided above in this section.
Section 2.12 List of Stockholders Entitled to Vote. The officer of
-------------------------------------
the Corporation who has charge of the stock ledger of the Corporation shall
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
Section 2.13 Stock Ledger. The stock ledger of the Corporation shall
------------
be the only evidence as to who are the stockholders entitled to examine the
stock ledger, the list required by Section 2.13 or the books of the Corporation,
or to vote in person or by proxy at any meeting of stockholders.
Section 2.14 Inspectors of Election. In advance of any meeting of
----------------------
stockholders, the Board by resolution or the Chairman or President shall appoint
one or more inspectors of election to act at the meeting and make a written
report thereof. One or more other persons may be designated as alternate
inspectors to replace any inspector who fails to act. If no inspector or
alternate is present, ready and willing to act at a meeting of stockholders, the
Chairman of the meeting shall appoint one or more inspectors to act at the
meeting. Unless otherwise required by law, inspectors may be officers,
employees or agents of the Corporation. Each inspector, before entering upon
the discharge of his or her duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to the
best of his or her ability. The inspector shall have the duties prescribed by
law and shall take charge of the polls and, when the vote is completed, shall
make a certificate of the result of the vote taken and of such other facts as
may be required by law.
9
<PAGE>
Section 2.15 Record Date.
-----------
(a) In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date shall not be more
than sixty nor less than ten days before the date of such meeting. If no record
date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held. A determination of stockholders
of record entitled to notice of or to vote at a meeting of stockholders shall
apply to any adjournment of the meeting; providing, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than ten days after the date
upon which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the Board of Directors is
required by law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office in this State, its principal
place of business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded.
Delivery made to a corporation's registered office shall be by hand or by
certified or registered mail, return receipt requested. If no record date has
been fixed by the Board of Directors and prior action by the Board of Directors
is required by law, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting shall be at the close
of business on the day on which the Board of Directors adopts the resolutions
taking such prior action.
(c) In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change,
10
<PAGE>
conversion or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than sixty days prior to such action. If
no record date is fixed, the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
ARTICLE III
DIRECTORS
---------
Section 3.1 Number and Election of Directors. The Board of Directors
--------------------------------
shall consist of not less than __________ nor more than _________ members, the
exact number of which shall be determined from time to time by resolution
adopted by the Board of Directors. Except as provided in Section 3.3, directors
shall be elected by the stockholders at the Annual Meetings of Stockholders,
and each director so elected shall hold office until such director's successor
is duly elected and qualified, or until such director's death, or until such
director's earlier resignation or removal. Any director may resign at any time
upon written notice to the Corporation. Directors need not be stockholders.
Section 3.2 Vacancies. Unless otherwise required by law or the
---------
Certificate of Incorporation, vacancies arising through death, resignation,
removal or otherwise may be filled only by a majority of the directors then in
office, though less than a quorum, or by a sole remaining director, and the
directors so chosen shall hold office until the next annual election and until
their successors are duly elected and qualified, or until their earlier death,
resignation or removal.
Section 3.3 Duties and Powers. The business of the Corporation shall
-----------------
be managed by or under the direction of the Board of Directors which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
By-Laws required to be exercised or done by the stockholders.
Section 3.4 Organization. At each meeting of the Board of Directors,
------------
the Chairman of the Board of Directors, or, in his or her absence, a director
chosen by a majority of the directors present, shall act as Chairman. The
Secretary of the Corporation shall act as Secretary at each meeting of the Board
of Directors. In case the
11
<PAGE>
Secretary shall be absent from any meeting of the Board of Directors, an
Assistant Secretary shall perform the duties of Secretary at such meeting; and
in the absence from any such meeting of the Secretary and all the Assistant
Secretaries, the Chairman of the meeting may appoint any person to act as
Secretary of the meeting.
Section 3.5 Meetings. The Board of Directors of the Corporation may
--------
hold meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held at such time
and at such place as may from time to time be determined by the Board of
Directors and, unless required by resolution of the Board of Directors, without
notice. Special meetings of the Board of Directors may be called by the
Chairman of the Board of Directors, the Vice Chairman, if there be one, or a
majority of the directors then in office. Notice thereof stating the place,
date and hour of the meeting shall be given to each director either by mail not
less than forty-eight (48) hours before the date of the meeting, by telephone,
facsimile or telegram on twenty-four (24) hours' notice, or on such shorter
notice as the person or persons calling such meeting may deem necessary or
appropriate in the circumstances.
Section 3.6 Quorum. Except as may be otherwise required by law, the
------
Certificate of Incorporation or these By-Laws, at all meetings of the Board of
Directors, a majority of the entire Board of Directors shall constitute a quorum
for the transaction of business and the act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the Board
of Directors. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting of the time and
place of the adjourned meeting, until a quorum shall be present.
Section 3.7 Actions of Board. Unless otherwise provided by the
----------------
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 3.8 Meetings by Means of Conference Telephone. Unless
-----------------------------------------
otherwise provided by the Certificate of Incorporation or these By-Laws, members
of the Board of Directors of the Corporation, or any committee designated by the
Board of Directors, may participate in a meeting of the Board of Directors or
such committee by means of a conference telephone or similar communications
equipment by means of
12
<PAGE>
which all persons participating in the meeting can hear each other, and
participation in a meeting pursuant to this Section 3.10 shall constitute
presence in person at such meeting.
Section 3.9 Committees. The Board of Directors may[, BY RESOLUTION
----------
PASSED BY A MAJORITY OF THE ENTIRE BOARD OF DIRECTORS,] * designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of any such committee. In the absence or disqualification
of a member of a committee, and in the absence of a designation by the Board of
Directors of an alternate member to replace the absent or disqualified member,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any absent or disqualified member. Any committee, to the extent permitted by
law and provided in the resolution establishing such committee, shall have and
may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may require it. Each
committee shall keep regular minutes and report to the Board of Directors when
required.
Section 3.10 Compensation. The directors may be paid their expenses,
------------
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary, or such other emoluments as the Board of Directors shall from time to
time determine. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
Section 3.11 Interested Directors. No contract or transaction between
--------------------
the Corporation and one or more of its directors or officers, or between the
Corporation and
- -----------------
* SECTION 141(c) OF THE DGCL WAS AMENDED IN 1996 TO PERMIT THE BOARD OF
DIRECTORS TO ESTABLISH COMMITTEES WITHOUT THE REQUIREMENT THAT SUCH ACTION
BE APPROVED BY A MAJORITY OF THE WHOLE BOARD. FOR CORPORATIONS (SUCH AS
FRI) FORMED PRIOR TO JULY 1, 1996 THIS PROVISION ONLY APPLIES IF A MAJORITY
OF THE WHOLE BOARD HAS ADOPTED A RESOLUTION ELECTING TO BE GOVERNED BY
SECTION 141(c)(2).
13
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any other corporation, partnership, association, or other organization in which
one or more of its directors or officers are directors or officers, or have a
financial interest, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of
the Board of Directors or committee thereof which authorizes the contract or
transaction, or solely because such person's or their votes are counted for such
purpose if (i) the material facts as to such person's or their relationship or
interest and as to the contract or transaction are disclosed or are known to the
Board of Directors or the committee, and the Board of Directors or committee in
good faith authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested directors
be less than a quorum; or (ii) the material facts as to such person's or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the stockholders;
or (iii) the contract or transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified, by the Board of Directors, a
committee thereof or the stockholders. Common or interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes the contract or transaction.
ARTICLE IV
OFFICERS
--------
Section 4.1 General. The officers of the Corporation shall be chosen
-------
by the Board of Directors and shall be a President, a Secretary and a Treasurer.
The Board of Directors, in its discretion, may also choose a Chairman of the
Board of Directors (who must be a director) and one or more Vice Presidents,
Assistant Secretaries, Assistant Treasurers and other officers. Any number of
offices may be held by the same person, unless otherwise prohibited by law, the
Certificate of Incorporation or these By-Laws. The officers of the Corporation
need not be stockholders of the Corporation nor, except in the case of the
Chairman of the Board of Directors, need such officers be directors of the
Corporation.
Section 4.2 Election. The Board of Directors at its first meeting
--------
held after each Annual Meeting of Stockholders (or action by written consent of
stockholders in lieu of the Annual Meeting of Stockholders), shall elect the
officers of the Corporation who shall hold their offices for such terms and
shall exercise such powers and perform such duties as shall be determined from
time to time by the Board of Directors;
14
<PAGE>
and all officers of the Corporation shall hold office until their successors are
chosen and qualified, or until their earlier resignation or removal. Any officer
elected by the Board of Directors may be removed at any time by the affirmative
vote of a majority of the Board of Directors. Any vacancy occurring in any
office of the Corporation shall be filled by the Board of Directors. The
salaries of all officers of the Corporation shall be fixed by the Board of
Directors.
Section 4.3 Voting Securities Owned by the Corporation. Powers of
------------------------------------------
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the President or any Vice President or any
other officer authorized to do so by the Board of Directors and any such officer
may, in the name of and on behalf of the Corporation, take all such action as
any such officer may deem advisable to vote in person or by proxy at any meeting
of security holders of any corporation in which the Corporation may own
securities and at any such meeting shall possess and may exercise any and all
rights and power incident to the ownership of such securities and which, as the
owner thereof, the Corporation might have exercised and possessed if present.
The Board of Directors may, by resolution, from time to time confer like powers
upon any other person or persons.
Section 4.4 Chairman of the Board of Directors. The Chairman of the
----------------------------------
Board of Directors, if there be one, shall preside at all meetings of the
stockholders and of the Board of Directors. [THE CHAIRMAN OF THE BOARD OF
DIRECTORS SHALL BE THE CHIEF EXECUTIVE OFFICER OF THE CORPORATION, AND] except
where by law the signature of the President is required, the Chairman of the
Board of Directors shall possess the same power as the President to sign all
contracts, certificates and other instruments of the Corporation which may be
authorized by the Board of Directors. During the absence or disability of the
President, the Chairman of the Board of Directors shall exercise all the powers
and discharge all the duties of the President. The Chairman of the Board of
Directors shall also perform such other duties and may exercise such other
powers as from time to time may be assigned to him or her by these By-Laws or by
the Board of Directors.
Section 4.5 President. The President shall, subject to the control
---------
of the Board of Directors and, if there be one, the Chairman of the Board of
Directors, have general supervision of the business of the Corporation and shall
see that all orders and resolutions of the Board of Directors are carried into
effect. The President shall execute all bonds, mortgages, contracts and other
instruments of the Corporation requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be
15
<PAGE>
otherwise signed and executed and except that the other officers of the
Corporation may sign and execute documents when so authorized by these By-Laws,
the Board of Directors or the President. In the absence or disability of the
Chairman of the Board of Directors, or if there be none, the President shall
preside at all meetings of the stockholders and the Board of Directors. [IF
THERE BE NO CHAIRMAN OF THE BOARD OF DIRECTORS,] the President shall be the
Chief Executive Officer of the Corporation. The President shall also perform
such other duties and may exercise such other powers as from time to time may be
assigned to him or her by these By-Laws or by the Board of Directors.
Section 4.6 Vice Presidents. At the request of the President or in
---------------
his or her absence or in the event of his or her inability or refusal to act
(and if there be no Chairman of the Board of Directors), the Vice President or
the Vice Presidents if there is more than one (in the order designated by the
Board of Directors) shall perform the duties of the President, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the President. Each Vice President shall perform such other duties and have
such other powers as the Board of Directors from time to time may prescribe. If
there be no Chairman of the Board of Directors and no Vice President, the Board
of Directors shall designate the officer of the Corporation who, in the absence
of the President or in the event of the inability or refusal of the President to
act, shall perform the duties of the President, and when so acting, shall have
all the powers of and be subject to all the restrictions upon the President.
Section 4.7 Secretary. The Secretary shall attend all meetings of
---------
the Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book or books to be kept for that purpose; the
Secretary shall also perform like duties for the standing committees of the
Board of Directors when required. The Secretary shall give, or cause to be
given, notice of all meetings of the stockholders and special meetings of the
Board of Directors, and shall perform such other duties as may be prescribed by
the Board of Directors, the Chairman of the Board of Directors or President,
under whose supervision the Secretary shall be. If the Secretary shall be
unable or shall refuse to cause to be given notice of all meetings of the
stockholders and special meetings of the Board of Directors, and if there be no
Assistant Secretary, then either the Board of Directors or the President may
choose another officer to cause such notice to be given. The Secretary shall
have custody of the seal of the Corporation and the Secretary or any Assistant
Secretary, if there be one, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by the signature
of the Secretary or by the signature of any such Assistant Secretary. The Board
of Directors may give general authority to any other officer to affix the seal
of the
16
<PAGE>
Corporation and to attest the affixing by his or her signature. The Secretary
shall see that all books, reports, statements, certificates and other documents
and records required by law to be kept or filed are properly kept or filed, as
the case may be.
Section 4.8 Treasurer. The Treasurer shall have the custody of the
---------
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all transactions as Treasurer and of the financial condition of the Corporation.
If required by the Board of Directors, the Treasurer shall give the Corporation
a bond in such sum and with such surety or sureties as shall be satisfactory to
the Board of Directors for the faithful performance of the duties of the office
of Treasurer and for the restoration to the Corporation, in case of the
Treasurer's death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in the Treasurer's
possession or under control of the Treasurer belonging to the Corporation.
Section 4.9 Assistant Secretaries. Except as may be otherwise
---------------------
provided in these By-Laws, Assistant Secretaries, if there be any, shall perform
such duties and have such powers as from time to time may be assigned to them by
the Board of Directors, the President, any Vice President, if there be one, or
the Secretary, and in the absence of the Secretary or in the event of his or her
disability or refusal to act, shall perform the duties of the Secretary, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Secretary.
Section 4.10 Assistant Treasurers. Assistant Treasurers, if there be
--------------------
any, shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Treasurer, and in the absence of the Treasurer or in the
event of the Treasurer's disability or refusal to act, shall perform the duties
of the Treasurer, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the Treasurer. If required by the Board of
Directors, an Assistant Treasurer shall give the Corporation a bond in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of the office of Assistant
Treasurer and for the restoration to the Corporation, in case of the Assistant
Treasurer's death,
17
<PAGE>
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in the Assistant Treasurer's
possession or under control of the Assistant Treasurer belonging to the
Corporation.
Section 4.11 Other Officers. Such other officers as the Board of
--------------
Directors may choose shall perform such duties and have such powers as from time
to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
-----
Section 5.1 Form of Certificates. Every holder of stock in the
--------------------
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation, (i) by the Chairman of the Board of Directors, the President or a
Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation, certifying the number of
shares owned by such holder of stock in the Corporation.
Section 5.2 Signatures. Any or all of the signatures on a
----------
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if such person were such officer, transfer agent or registrar at
the date of issue.
Section 5.3 Lost, Destroyed, Stolen or Mutilated Certificates. The
-------------------------------------------------
Board of Directors may direct a new certificate to be issued in place of any
certificate theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate, or such person's legal
representative, to advertise the same in such manner as the Board of Directors
shall require and/or to give the Corporation a bond in such sum as it may direct
as indemnity
18
<PAGE>
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
Section 5.4 Transfers. Stock of the Corporation shall be
---------
transferable in the manner prescribed by law and in these By-Laws. Transfers of
stock shall be made on the books of the Corporation only by the person named in
the certificate or by such person's attorney lawfully constituted in writing and
upon the surrender of the certificate therefor, properly endorsed for transfer
and payment of all necessary transfer taxes; provided, however, that such
-------- -------
surrender and endorsement or payment of taxes shall not be required in any case
in which the officers of the Corporation shall determine to waive such
requirement. Every certificate exchanged, returned or surrendered to the
Corporation shall be marked "Cancelled," with the date of cancellation, by the
Secretary or Assistant Secretary of the Corporation or the transfer agent
thereof. No transfer of stock shall be valid as against the Corporation for any
purpose until it shall have been entered in the stock records of the Corporation
by an entry showing from and to whom transferred.
Section 5.5 Transfer and Registry Agents. The Corporation may from
----------------------------
time to time maintain one or more transfer offices or agencies and registry
offices or agencies at such place or places as may be determined from time to
time by the Board of Directors.
Section 5.6 Beneficial Owners. The Corporation shall be entitled to
-----------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
law.
ARTICLE VI
NOTICES
-------
Section 6.1 Notices. Whenever written notice is required by law, the
-------
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at such
person's address as it appears
19
<PAGE>
on the records of the Corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Written notice may also be given personally or by telegram,
facsimile, telex or cable.
Section 6.2 Waivers of Notice.
-----------------
Whenever any notice is required by law, the Certificate of
Incorporation or these By-Laws, to be given to any director, member of a
committee or stockholder, a waiver thereof in writing, signed, by the person or
persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent to notice. Attendance of a person at a
meeting, present by person or represented by proxy, shall constitute a waiver of
notice of such meeting, except where the person attends the meeting for the
express purpose of objecting at the beginning of the meeting to the transaction
of any business because the meeting is not lawfully called or convened.
ARTICLE VII
GENERAL PROVISIONS
------------------
Section 7.1 Dividends. Subject to the requirements of the General
---------
Corporation Law of the State of Delaware as set forth in Title 8 of the Delaware
Code (the "GCL") and the provisions of the Certificate of Incorporation,
dividends upon the capital stock of the Corporation may be declared by the Board
of Directors at any regular or special meeting of the Board of Directors (or any
action by written consent in lieu thereof in accordance with Section 3.8), and
may be paid in cash, in property, or in shares of the Corporation's capital
stock. Before payment of any dividend, there may be set aside out of any funds
of the Corporation available for dividends such sum or sums as the Board of
Directors from time to time, in its absolute discretion, deems proper as a
reserve or reserves to meet contingencies, or for purchasing any of the shares
of capital stock, warrants, rights, options, bonds, debentures, notes, scrip or
other securities or evidences of indebtedness of the Corporation, or for
equalizing dividends, or for repairing or maintaining any property of the
Corporation, or for any other proper purpose, and the Board of Directors may
modify or abolish any such reserve.
Section 7.2 Disbursements. All checks or demands for money and notes
-------------
of the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.
20
<PAGE>
Section 7.3 Fiscal Year. The fiscal year of the Corporation shall be
-----------
fixed by resolution of the Board of Directors.
Section 7.4 Corporate Seal. The corporate seal shall have inscribed
--------------
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VII
INDEMNIFICATION
---------------
Section 8.1 Power to Indemnify in Actions, Suits or Proceedings Other
---------------------------------------------------------
than Those by or in the Right of the Corporation. Subject to Section 8.3, the
- ------------------------------------------------
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Corporation) by reason of the fact that such
person is or was a director or officer of the Corporation, or is or was a
director or officer of the Corporation serving at the request of the Corporation
as a director or officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, such person had no reasonable cause to believe his or her conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
---- ----------
equivalent, shall not, of itself, create a presumption that such person did not
act in good faith and in a manner which such person reasonably believed to be in
or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
Section 8.2 Power to Indemnify in Actions, Suits or Proceedings by or
---------------------------------------------------------
in the Right of the Corporation. Subject to Section 8.3, the Corporation shall
- -------------------------------
indemnify any person who was or is a party or is threatened to be made a party
to any threatened,
21
<PAGE>
pending or completed action or suit by or in the right of the Corporation to
procure a judgment in its favor by reason of the fact that such person is or was
a director or officer of the Corporation, or is or was a director or officer of
the Corporation serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit if such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Corporation; except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the Corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
Section 8.3 Authorization of Indemnification. Any indemnification
--------------------------------
under this Article VIII (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because such person has met the applicable standard of conduct set forth in
Section 8.1 or Section 8.2, as the case may be. Such determination shall be
made (i) by a majority vote of the directors who are not parties to such action,
suit or proceeding, even though less than a quorum, or (ii) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion, or (iii) by the stockholders. To the extent, however, that a
director or officer of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding described above, or in
defense of any claim, issue or matter therein, such person shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
such person in connection therewith, without the necessity of authorization in
the specific case.
Section 8.4 Good Faith Defined. For purposes of any determination
------------------
under Section 8.3, a person shall be deemed to have acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the Corporation, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe his or her conduct was
unlawful, if such person's action is based on the records or books of account of
the Corporation or another enterprise, or on information supplied to such person
by the officers of the Corporation or another enterprise in the course of their
duties, or on the advice of legal counsel for the
22
<PAGE>
Corporation or another enterprise or on information or records given or reports
made to the Corporation or another enterprise by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by
the Corporation or another enterprise. The term "another enterprise" as used in
this Section 4 shall mean any other corporation or any partnership, joint
venture, trust, employee benefit plan or other enterprise of which such person
is or was serving at the request of the Corporation as a director, officer,
employee or agent. The provisions of this Section 8.4 shall not be deemed to be
exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth in Section 8.1
or 8.2, as the case may be.
Section 8.5 Indemnification by a Court. Notwithstanding any contrary
--------------------------
determination in the specific case under Section 8.3, and notwithstanding the
absence of any determination thereunder, any director or officer may apply to
the Court of Chancery of the State of Delaware or any other court of competent
jurisdiction in the State of Delaware for indemnification to the extent
otherwise permissible under Sections 8.1 and 8.2. The basis of such
indemnification by a court shall be a determination by such court that
indemnification of the director or officer is proper in the circumstances
because such person has met the applicable standards of conduct set forth in
Section 8.1 or 8.2, as the case may be. Neither a contrary determination in the
specific case under Section 8.3 nor the absence of any determination thereunder
shall be a defense to such application or create a presumption that the director
or officer seeking indemnification has not met any applicable standard of
conduct. Notice of any application for indemnification pursuant to this Section
8.5 shall be given to the Corporation promptly upon the filing of such
application. If successful, in whole or in part, the director or officer
seeking indemnifica tion shall also be entitled to be paid the expense of
prosecuting such application.
Section 8.6 Expenses Payable in Advance. Expenses incurred by a
---------------------------
director or officer in defending or investigating a threatened or pending
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to be
indemnified by the Corporation as authorized in this Article VIII.
23
<PAGE>
Section 8.7 Nonexclusivity of Indemnification and Advancement of
----------------------------------------------------
Expenses. The indemnification and advancement of expenses provided by or
- --------
granted pursuant to this Article VIII shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under the Certificate of Incorporation or any By-Law, agreement,
contract, vote of stockholders or disinterested directors or pursuant to the
direction (howsoever embodied) of any court of competent jurisdiction or
otherwise, both as to action in such person's official capacity and as to action
in another capacity while holding such office, it being the policy of the
Corporation that indemnification of the persons specified in Section 8.1 and 8.2
shall be made to the fullest extent permitted by law. The provisions of this
Article VIII shall not be deemed to preclude the indemnification of any person
who is not specified in Section 8.1 or 8.2 but whom the Corporation has the
power or obligation to indemnify under the provisions of the GCL, or otherwise.
Section 8.8 Insurance. The Corporation may purchase and maintain
---------
insurance on behalf of any person who is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise against any liability asserted against such person and incurred
by such person in any such capacity, or arising out of such person's status as
such, whether or not the Corporation would have the power or the obligation to
indemnify such person against such liability under the provisions of this
Article VIII.
Section 8.9 Certain Definitions. For purposes of this Article VIII,
-------------------
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors or officers, so that any person who is or was a director or officer of
such constituent corporation, or is or was a director or officer of such
constituent corporation serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, shall stand in
the same position under the provisions of this Article VIII with respect to the
resulting or surviving corporation as such person would have with respect to
such constituent corporation if its separate existence had continued. For
purposes of this Article VIII, references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or
24
<PAGE>
involves services by, such director or officer with respect to an employee
benefit plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner such person reasonably believed to be in the interest of
the participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the Corporation"
as referred to in this Article VIII.
Section 8.10 Survival of Indemnification and Advancement of Expenses.
-------------------------------------------------------
The indemnification and advancement of expenses provided by, or granted pursuant
to, this Article VIII shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of the heirs, executors and administrators of such a
person.
Section 8.11 Limitation on Indemnification. Notwithstanding anything
-----------------------------
contained in this Article VIII to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Section 8.5
hereof), the Corporation shall not be obligated to indemnify any director or
officer (or his or her heirs, executors or personal or legal representatives) or
advance expenses in connection with a proceeding (or part thereof) initiated by
such person unless such proceeding (or part thereof) was authorized or consented
to by the Board of Directors of the Corporation.
Section 8.12 Indemnification of Employees and Agents. The Corporation
---------------------------------------
may, to the extent authorized from time to time by the Board of Directors,
provide rights to indemnification and to the advancement of expenses to
employees and agents of the Corporation similar to those conferred in this
Article VIII to directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
----------
Section 9.1 Amendments. These By-Laws may be altered, amended or
----------
repealed, in whole or in part, or new By-Laws may be adopted by the stockholders
or by the Board of Directors, provided, however, that notice of such alteration,
amendment, repeal or adoption of new By-Laws be contained in the notice of such
meeting of stockholders or Board of Directors as the case may be. All such
amendments must be approved by either the holders of a majority of the
outstanding capital stock entitled to vote thereon or by a majority of the
entire Board of Directors then in office.
25
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Section 9.2 Entire Board of Directors. As used in this Article IX
-------------------------
and in these By-Laws generally, the term "entire Board of Directors" means the
total number of directors which the Corporation would have if there were no
vacancies.
26
<PAGE>
EXHIBIT 4.7
================================================================================
FRI-MRD CORPORATION
___________________________________
FIRST AMENDMENT
Dated as of June 9, 1998
to
Note Agreement
Dated August 12, 1997
___________________________________
Re: Up to $75,000,000 15.0% Senior Discount Notes
Due January 24, 2002
================================================================================
<PAGE>
FIRST AMENDMENT TO NOTE AGREEMENT
First Amendment, dated as of June 9, 1998 (the "First Amendment"), to
the Note Agreement, dated as of August 12, 1997 (the "Original Note Agreement"),
among FRI-MRD Corporation, a Delaware corporation (the "Company"), and each of
the purchasers listed on Schedule A attached to the Note Agreement
(collectively, the "Noteholders").
RECITALS:
A. The Company and the Noteholders have entered into the Original
Note Agreement pursuant to which the Company has issued $75,000,000 of its 15.0%
Senior Discount Notes due January 24, 2002 (the "Notes").
B. In connection with the Original Note Agreement, the Company and
the Noteholders have entered into a Letter Agreement, dated August 12, 1997 (the
"Letter Agreement").
C. On January 14, 1998, the Company entered into a Joinder Agreement
with each of the purchasers listed therein.
D. The Company and the Noteholders party hereto desire to amend the
Original Note Agreement as set forth herein and the Noteholders party hereto own
not less than 50% of the Accreted Value of the Notes outstanding.
E. Capitalized terms used herein shall have the respective meanings
ascribed thereto in the Original Note Agreement unless herein defined.
NOW, THEREFORE, the Company and the Noteholders party hereto do hereby
agree as follows:
1. Amendments. Upon effectiveness of this agreement in accor-
----------
dance with the terms of Section 5 hereof:
(a) Section 5.5(1) of the Original Note Agreement shall be and
is hereby amended by adding after the word "Notes" at the end thereof the
phrase "and the Secured Discount Notes."
1
<PAGE>
(b) Section 5.5(2) of the Original Note Agreement shall be and
is hereby amended in its entirety to read as follows:
"(2) Indebtedness under the Credit Agreement not to exceed the Maximum
Amount outstanding at any one time;"
(c) Section 5.5(3) of the Original Note Agreement shall be and
is hereby amended by adding at the end thereof the phrase "and Indebtedness
of KKR and its subsidiaries existing upon the consummation of the
transactions contemplated by the Merger Agreement and the Stock Purchase
Agreement".
(d) Section 5.5(10) of the Original Note Agreement shall be and
is hereby amended by replacing the number "$75,000,000" with the number
"$99,000,000" and by adding after the phrase "amount of Notes" the phrase
"and Secured Discount Notes".
(e) Section 5.5(11) of the Original Note Agreement shall be and
is hereby amended by adding the phrase "refinancing" immediately following
the phrase "in connection with the renewal, expansion".
(f) Section 5.8 of the Original Note Agreement shall be and is
hereby amended by adding after subsection (iii):
"(iv) any Subsidiary may merge or consolidate with or into KKR."
(g) Section 5.9(iv) of the Original Note Agreement shall be and
is hereby amended by adding after the phrase "under the Notes" the phrase
", the Secured Discount Note Agreement and the Secured Discount Notes".
(h) Section 5.9(v) of the Original Note Agreement shall be and
is hereby amended by adding after the phrase "Value Creation Units Plan"
the phrase ", including payments made in connection with the termination or
amendment of such plan".
(i) Section 5.9 of the Original Note Agreement shall be and is
hereby amended by removing the word "or" at the end of subsection (x),
replacing "(xi)" with "(xii)" and by adding after subsection (x):
2
<PAGE>
"(xi) consummation of the transactions contemplated by the Merger
Agreement and the Stock Purchase Agreement, or"
(j) Sections 6.3 and 6.4 of the Original Note Agreement shall be
and are hereby amended by replacing the word "principal" with the words
"Accreted Value" in the first sentence thereof.
(k) Section 8.1 of the Original Note Agreement shall be and is
hereby amended by adding the following definitions thereto:
"Excess EBITDA" means, on any date, the amount, if any, by which the
product of six (6) times the consolidated EBITDA of the Company and
its Subsidiaries, on a pro forma basis for the most recent fiscal year
of the Company ending on or prior to such date exceeds the sum of the
accreted Indebtedness outstanding on such date under the Notes and the
Secured Discount Notes and funded Indebtedness outstanding on such
date under the Credit Agreement."
"KKR" shall mean Koo Koo Roo, Inc.
"Maximum Amount" on any date shall mean, if such date is (a) on or
prior to December 31, 1999, $55,000,000, or (b) during any fiscal year
thereafter, the sum of (A) $35,000,000 and (B) the Excess EBITDA;
provided, that the Maximum Amount shall in no event exceed
--------
$55,000,000.
"Merger Agreement" means the Agreement and Plan of Merger, dated as of
June 9, 1998, by and among FRI, FRI-Sub, Inc. and KKR.
"Secured Discount Note Agreement" shall mean the FRI-MRD Corporation
Note Agreement, dated as of June 9, 1998, Re: $24,000,000 14.0% Senior
Secured Discount Notes due January 24, 2002.
"Secured Discount Notes" shall mean the Indebtedness evidenced by the
14.0% Senior Secured Discount Notes due January 24, 2002 issued under
the Secured Discount Note Agreement.
"Stock Purchase Agreement" means the Stock Purchase Agreement, dated
as of June 9, 1998, between the Company and KKR."
3
<PAGE>
(l) The definition of "Permitted Lien" in Section 8.1 of the
Original Note Agreement shall be and is hereby amended by (i) replacing
"and (xvii)" with "(xvii) Liens securing Indebtedness outstanding under the
Secured Discount Notes; and (xviii)", (ii) adding the phrase ",
refinancing" immediately prior to the phrase "or refundings" and (iii)
adding the phrase "and Liens existing upon the assets of KKR, The Hamlet
Group, Inc., and each of their subsidiaries, which Liens are in existence
on the date hereof or which Liens are incurred in the ordinary course of
business consistent with past practice on or prior to the closing of, and
were not created in connection with or anticipation of, the transactions
contemplated by the Merger Agreement and the Stock Purchase Agreement" to
the end of subsection (i) thereof.
(m) The definition of "EBITDA" in Section 8.1 of the Original
Note Agreement shall be and is hereby amended by adding the phrase "(i)
opening costs," immediately prior to existing subsection (i) and by
increasing each existing subsection by one.
(n) The definition of "Credit Agreement" in Section 8.1 of the
Original Note Agreement shall be and is hereby amended by adding the phrase
",refinancing" immediately following the phrase "any refunding".
2. Letter Agreement Waivers. The Noteholders party hereto consent to
------------------------
a waiver of subsection (iii) of the Letter Agreement to permit the ownership and
operation directly or indirectly by the Company of Color Me Mine, Inc. and
Arrosto Coffee Company, Inc.
3. Representations and Warranties of the Company. To induce the
---------------------------------------------
Noteholders to execute and deliver this First Amendment, the Company represents
and warrants to the Noteholders that:
(a) this First Amendment has been duly authorized, executed and
delivered by the Company and this First Amendment constitutes the legal,
valid and binding obligation, contract and agreement of the Company
enforceable against it in accordance with its terms, except as enforcement
may be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws or equitable principles relating to or limiting creditors'
rights generally;
4
<PAGE>
(b) the execution, delivery and performance by the Company of
this First Amendment (i) has been duly authorized by all necessary action
of the Company and, if required, shareholder action, (ii) does not require
the consent or approval of any governmental or regulatory body or agency,
and (iii) will not (A) violate (l) any provision of law, statute, rule or
regulation or its constituent documents, (2) any order of any court or any
rule, regulation or order of any other agency or government binding upon
it, or (3) any provision of any material indenture, agreement or other
instrument to which it is a party or by which its properties or assets are
or may be bound, or (B) result in a breach or constitute (alone or with due
notice or lapse of time or both) a default under any indenture, agreement
or other instrument referred to in clause (iii)(A)(3) of this Section 3(b);
(c) as of the date hereof and after giving effect to this First
Amendment, no Default or Event of Default has occurred which is continuing;
and
(d) all representations set forth in the form of certificate
attached as Exhibit B to the Original Note Agreement, as amended hereby,
are true and correct as of the date hereof.
4. Representations and Warranties of the Noteholders. Each of the
-------------------------------------------------
Noteholders party hereto represents and warrants to the Company that:
(a) this First Amendment has been duly authorized, executed and
delivered by such Noteholder and this First Amendment constitutes the
legal, valid and binding obligation, contract and agreement of such
Noteholder enforceable against it in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws or equitable principles relating to or limiting
creditors' rights generally; and
(b) Such Noteholder is the holder of the aggregate Accreted
Value of Notes set forth under its name on the execution pages hereof (or
such owner's duly designated proxy).
5. Conditions to Effectiveness of this First Amendment. This First
---------------------------------------------------
Amendment shall not become effective until, and shall become effective when the
following conditions shall have been satisfied:
5
<PAGE>
(a) executed counterparts of this First Amendment, duly executed
by the Company and the registered holders of at least 50% of the
outstanding principal of the Notes, shall have been delivered to the
Company and the Noteholders; and
(b) the transactions contemplated by the Agreement and Plan of
Merger, dated as of June 9, 1998, by and among FRI, FRI-Sub, Inc. and KKR
shall have been consummated.
6. Miscellaneous.
-------------
(a) This First Amendment shall be construed in connection with
and as part of the Original Note Agreement, and except as modified and
expressly amended by this First Amendment, all terms, conditions and
covenants contained in the Original Note Agreement and the Notes are hereby
ratified and shall be and remain in full force and effect.
(b) Any and all notices, requests, certificates and other
instruments executed and delivered after the execution and delivery of this
First Amendment may refer to the Original Note Agreement without making
specific reference to this First Amendment but nevertheless all such
references shall include this First Amendment unless the context otherwise
requires.
(c) The descriptive headings of the various Sections or parts of
this First Amendment are for convenience only and shall not affect the
meaning or construction of any of the provisions hereof.
(d) This First Amendment shall be governed by and construed in
accordance with the law of the State of New York including, without
limitation, Sections 5-1401 of the New York General Obligations Law.
6
<PAGE>
(e) The execution hereof by you shall constitute a contract
between us for the uses and purposes herein above set forth, and this First
Amendment may be executed in any number of counterparts, each executed
counterpart constituting an original, but all together only one agreement.
FRI-MRD CORPORATION
By: /s/ R. T. Trebing, Jr.
-------------------------
Name: R. T. Trebing, Jr.
Title: President
7
<PAGE>
Accepted and Agreed to:
THE BROWN & WILLIAMSON MASTER
RETIREMENT TRUST
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ Steve Tananbaum
----------------------------
Name: Steve Tananbaum
Title: Director
Aggregate Accreted Value:
of Notes Held: $1,200,000
----------
[signature pages continued on next page]
8
<PAGE>
THE MAINSTAY FUNDS, ON BEHALF
OF ITS STRATEGIC INCOME FUND
SERIES
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ Steve Tananbaum
----------------------------
Name: Steve Tananbaum
Title: Director
Aggregate Accreted Value:
of Notes Held: $320,000
--------
[signature pages continued on next page]
9
<PAGE>
HIGHBRIDGE CAPITAL CORPORATION
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ Steve Tananbaum
----------------------------
Name: Steve Tananbaum
Title: Director
Aggregate Accreted Value:
of Notes Held: $450,000
--------
[signature pages continued on next page]
10
<PAGE>
THE MAINSTAY FUNDS, ON BEHALF
OF ITS HIGH YIELD CORPORATE
BOND FUND SERIES
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ Steve Tananbaum
----------------------------
Name: Steve Tananbaum
Title: Director
Aggregate Accreted Value:
of Notes Held: $45,850,000
-----------
[signature pages continued on next page]
11
<PAGE>
MAINSTAY VP SERIES FUND, INC., ON
BEHALF OF HIGH YIELD CORPORATE
BOND PORTFOLIO
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ Steve Tananbaum
----------------------------
Name: Steve Tananbaum
Title: Director
Aggregate Accreted Value:
of Notes Held: $
------------------------
[signature pages continued on next page]
12
<PAGE>
POLICE OFFICERS PENSION SYSTEM
OF THE CITY OF HOUSTON
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ Steve Tananbaum
----------------------------
Name: Steve Tananbaum
Title: Director
Aggregate Accreted Value:
of Notes Held: $1,100,000
----------
[signature pages continued on next page]
13
<PAGE>
VULCAN MATERIALS COMPANY HIGH
YIELD ACCOUNT
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ Steve Tananbaum
----------------------------
Name: Steve Tananbaum
Title: Director
Aggregate Accreted Value:
of Notes Held: $180,000
--------
14
<PAGE>
EXHIBIT 4.8
- --------------------------------------------------------------------------------
FRI-MRD CORPORATION
NOTE AGREEMENT
Dated as of June 9, 1998
Re:
$24,000,000 14.0% Senior Secured Discount Notes
due January 24, 2002
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION HEADING PAGE
<S> <C>
SECTION 1. DESCRIPTION OF NOTES AND COMMITMENT........................................... 1
Section 1.1. Description of Notes............................................ 1
Section 1.2. Commitment, Closing Date........................................ 2
SECTION 2. PREPAYMENT OF NOTES........................................................... 2
Section 2.1. Optional Prepayments............................................ 2
Section 2.2. Notice of Prepayments........................................... 2
Section 2.3. Allocation of Prepayments....................................... 2
SECTION 3. REPRESENTATIONS............................................................... 3
Section 3.1. Representations of the Company.................................. 3
Section 3.2. Representations of the Purchasers............................... 3
SECTION 4. CLOSING CONDITIONS............................................................ 4
Section 4.1. Closing Certificate............................................. 4
Section 4.2. Company's Existence and Authority............................... 4
Section 4.3. Consents........................................................ 4
Section 4.4. Opinion......................................................... 5
Section 4.5. Waiver.......................................................... 5
Section 4.6. Consummation of the Hamlet Acquisition.......................... 5
SECTION 5. COMPANY COVENANTS............................................................. 5
Section 5.1. Corporate Existence, Etc........................................ 5
Section 5.2. Insurance....................................................... 5
Section 5.3. Taxes........................................................... 6
Section 5.4. Maintenance, Etc................................................ 6
Section 5.5. Limitations on Indebtedness..................................... 6
Section 5.6. Limitation on Liens............................................. 7
Section 5.7. Restricted Payments............................................. 7
Section 5.8. Mergers, Consolidations and Sales of Assets..................... 8
Section 5.9. Transactions with Affiliates.................................... 9
Section 5.10. Financial Statements, etc...................................... 10
Section 5.11. Issuance of THG Securities..................................... 11
SECTION 6. EVENTS OF DEFAULT AND REMEDIES THEREFOR....................................... 11
Section 6.1. Events of Default............................................... 11
Section 6.2. Notice to Holders............................................... 12
Section 6.3. Acceleration of Maturities...................................... 13
Section 6.4. Rescission of Acceleration...................................... 13
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SECTION HEADING PAGE
<S> <C>
SECTION 7. AMENDMENTS, WAIVERS AND CONSENTS.............................................. 13
Section 7.1. Consent Required................................................ 13
Section 7.2. Solicitation of Noteholders..................................... 14
Section 7.3. Effect of Amendment or Waiver................................... 14
SECTION 8. PLEDGE........................................................................ 14
Section 8.1. Pledge.......................................................... 14
Section 8.2. Representations and Warranties Regarding
Pledged Securities.............................................. 14
Section 8.3. Covenants Regarding Pledged Securities.......................... 15
Section 8.4. Voting Rights; Dividends; etc................................... 16
Section 8.5. Remedies Upon Default........................................... 16
Section 8.6. Application of Proceeds of Sale................................. 18
Section 8.7. Termination..................................................... 18
Section 8.8. Appointment..................................................... 18
Section 8.9. Duties of Agent................................................. 18
Section 8.10. Power of Attorney............................................... 18
SECTION 9. INTERPRETATION OF AGREEMENT; DEFINITIONS...................................... 19
Section 9.1. Definitions..................................................... 19
Section 9.2 Accounting Principles........................................... 27
MISCELLANEOUS........................................................................... 28
Section 10.1 Note Register.................................................. 28
Section 10.2. Exchange of Notes.............................................. 28
Section 10.3. Loss, Theft, Etc. of Notes..................................... 29
Section 10.4. Powers and Rights Not Waived; Remedies Cumulative.............. 29
Section 10.5. Notices........................................................ 29
Section 10.6. Successors and Assigns......................................... 29
Section 10.7. Integration and Severability................................... 30
Section 10.8. Governing Law.................................................. 30
Section 10.9. Captions....................................................... 30
Section 10.10. Brokerage Fees................................................ 30
Section 10.11. Termination................................................... 30
</TABLE>
<PAGE>
ATTACHMENTS TO NOTE AGREEMENT:
Schedule I Name and Address of Purchasers
Exhibit A Form of 14.0% Senior Secured Discount Note Due January 24, 2002
Exhibit B Certificate of the Company
Exhibit C Opinion of Counsel for the Company
Exhibit D First Amendment
<PAGE>
FRI-MRD CORPORATION
NOTE AGREEMENT
RE: $24,000,000 14.0% SENIOR SECURED DISCOUNT NOTES
DUE JANUARY 24, 2002
Dated as of June 9, 1998
To the Purchasers named in Schedule I attached hereto that are signatories to
this Agreement
Ladies and Gentlemen:
The undersigned, FRI-MRD Corporation, a Delaware corporation (the
"Company"), agrees with each Purchaser as follows:
SECTION 1. DESCRIPTION OF NOTES AND COMMITMENT.
Section 1.1. Description of Notes. The Company will authorize the issue
and sale of $24,000,000 aggregate principal amount of its 14.0% Senior Secured
Discount Notes due January 24, 2002 (the "Notes") to be dated the date of issue.
Each Note will be issued at substantial discount from its principal amount for a
price equal to its Purchase Price on the date of purchase. Cash interest will
not accrue on the Notes prior to July 31, 1999. Thereafter, interest on the
Notes will accrue at the lower of (i) 14.0% per annum and (ii) the highest rate
permitted by law (the "Interest Rate") and will be payable semi-annually on
January 31 and July 31 of each year, commencing on January 31, 2000, and at
maturity. The Notes will bear interest on overdue principal (including any
overdue required or optional prepayment of principal) and premium, if any, and
(to the extent legally enforceable) on any overdue installment of interest at
the Interest Rate from the date such payment is due, whether by acceleration or
otherwise, until paid. The Notes will mature on January 24, 2002, and will be
substantially in the form attached hereto as Exhibit A. Interest on the Notes
shall be computed on the basis of a 360-day year of twelve 30-day months. The
term "Notes" as used herein shall include each Note delivered pursuant to this
Agreement. The terms that are capitalized herein shall have the meanings set
forth in Section 9.1 hereof unless the context shall otherwise require. The
Notes will be senior secured obligations of the Company ranking senior in right
of payment to all existing and future subordinated Indebtedness of the Company.
The proceeds from the sale of the Notes will be used exclusively to purchase,
and thereafter will be secured by, all of the outstanding capital stock of The
Hamlet Group, Inc. ("THG").
1
<PAGE>
Section 1.2. Commitment, Closing Date. Subject to the terms and conditions
hereof and on the basis of the representations and warranties hereinafter set
forth, the Company agrees to issue and sell to each Purchaser, and each
Purchaser agrees to purchase from the Company, the aggregate principal amount of
Notes set forth opposite such Purchaser's name on Schedule I attached hereto by
delivery of the Purchase Price for such Notes in cash. Delivery of the Notes
will be made at the principal offices of Skadden, Arps, Slate, Meagher & Flom
LLP, 919 Third Avenue, New York, New York, 10022 against payment therefor in
Federal or other funds current and immediately available in an amount equal to
the Purchase Price at 10 A.M., Eastern time, on such date as the Company shall
specify by not less than five Business Days' prior written notice to the
applicable Purchaser (the "Closing Date"). The Notes delivered to each
Purchaser on the Closing Date will be delivered in the form of a single
registered Note registered in the name of such Purchaser or in the name of such
Purchaser's nominee or in such other denominations (not less than $100,000 in
principal amount) as such Purchaser may specify no later than two Business Days
prior to the Closing Date and in substantially the form attached hereto as
Exhibit A; provided, however, that the Company shall not be required to issue
-------- -------
any Notes in a denomination of less than $1,000,000 if immediately after such
issuance there would be issued and outstanding more than twenty Notes of less
than $1,000,000.
SECTION 2. PREPAYMENT OF NOTES.
No prepayment of the Notes may be made except to the extent and in the
manner expressly provided in this Agreement.
Section 2.1. Optional Prepayments. The Company may at any time prepay the
outstanding Notes, either in whole or in part, by payment of the aggregate
Accreted Value (or portion thereof) and (in addition) after July 31, 1999
accrued and unpaid interest thereon to the date of such prepayment, together
with a premium equal to the Call Premium. Any partial prepayment shall be for
an amount not less than $1,000,000 of the aggregate principal amount of the
Notes then outstanding.
Section 2.2. Notice of Prepayments. The Company will give notice of any
prepayment of the Notes pursuant to Section 2.1 to the holder thereof not less
than 30 days nor more than 45 days before the date fixed for such prepayment
specifying (a) such date, (b) the aggregate Accreted Value (or portion thereof)
of the Notes to be prepaid, (c) accrued and unpaid interest, if any, applicable
to the prepayment and (d) the Call Premium, if any. Notice of prepayment having
been so given, the aggregate Accreted Value (or portion thereof) specified in
such notice, together with the Call Premium and accrued and unpaid interest, if
any, shall become due and payable on the prepayment date.
Section 2.3. Allocation of Prepayments. All partial prepayments made
pursuant to Section 2.1 hereof shall be applied on all outstanding Notes ratably
in accordance with the unpaid Accreted Value thereof; provided, that the Company
may make such adjustments so
2
<PAGE>
that each Note remaining outstanding after any such prepayment shall be at least
$1,000,000 aggregate principal amount at maturity.
SECTION 3. REPRESENTATIONS.
Section 3.1. Representations of the Company. The Company represents and
warrants that all representations set forth in the form of certificate attached
hereto as Exhibit B are true and correct as of the date hereof and are
incorporated herein by reference with the same force and effect as though herein
set forth in full.
Section 3.2. Representations of the Purchasers. Each Purchaser represents,
warrants and agrees that:
(a) Such Purchaser is acquiring its Notes for the purpose of investment
and not with a view to the distribution thereof, and that such
Purchaser has no present intention of selling, negotiating or
otherwise disposing of its Notes; provided that the disposition of its
property shall at all times be and remain within its control.
(b) No part of the funds to be used by such Purchaser to purchase the
Notes constitutes assets allocated to any separate account maintained
by it. As used in this Section 3.2(b), the term "separate account"
shall have the meaning assigned to it in ERISA.
(c) The Notes are issued at a substantial discount from their principal
amount. Consequently, such Purchaser is aware that it may be required
to include amounts in gross income for federal income tax purposes in
advance of receipt of the cash payments to which the income is
attributable.
(d) Such Purchaser is not a "creditor" as defined in Regulation T of the
Board of Governors of the Federal Reserve System.
(e) Such Purchaser is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization with
all requisite power and authority to execute, deliver and perform its
obligations under this Agreement and to consummate the transactions
contemplated hereby.
(f) No approval, consent or withholding of objection on the part of any
regulatory body, state, federal or local, or any other third party is
necessary in connection with the execution by such Purchaser of the
Agreement or its acceptance of its Notes or compliance by such
Purchaser with any of the provisions of the Agreement or the Notes,
unless such consent or approval has already been obtained.
3
<PAGE>
(g) The execution, delivery and performance by such Purchaser of this
Agreement and all other instruments and documents to be executed and
delivered by such Purchaser in connection herewith are not (and will
not be or result) in material conflict with or in material
contravention or material violation of any law (including common law),
rule or regulation by which such Purchaser is bound or to which it is
subject or any material agreement to which it is a party.
(h) The Notes have not been registered under the Securities Act of 1933,
as amended (the "Securities Act"), or any state securities laws, and
may not be sold, transferred or otherwise disposed of by such
Purchaser without such registration or an exemption therefrom. Such
Purchaser is either an accredited investor within the meaning of Rule
501 of the Securities Act or a qualified institutional buyer within
the meaning of Rule 144A of the Securities Act.
(i) Such Purchaser understands that the Company may have material, non-
public information regarding FRI or the Company and their respective
conditions (financial or otherwise), results of operations,
businesses, properties, plans and prospects (collectively,
"Information"). Such Purchaser further acknowledges that it has been
offered and does not wish to receive any of this Information and that
such information might be material to such Purchaser's decision to
purchase the Notes. Accordingly, such Purchaser acknowledges and
agrees that the Company shall have no obligation to disclose to such
Purchaser any of such Information.
SECTION 4. CLOSING CONDITIONS.
Each Purchaser's obligation to purchase the Notes on the Closing Date shall
be subject to the performance by the Company of its agreements hereunder that
are to be performed at or prior to the time of delivery of the Notes, and to the
following further conditions precedent:
Section 4.1. Closing Certificate. Such Purchaser shall have received (i) a
certificate dated the date hereof, signed by an Officer of the Company
substantially in the form attached hereto as Exhibit B and (ii) a certificate
dated the Closing Date, signed by an Officer of the Company certifying as to the
satisfaction of the closing conditions set forth in this Section 4. The Company
shall use commercially reasonable efforts to effect the conditions set forth in
Sections 4.3 and 4.6 hereof.
Section 4.2. Company's Existence and Authority. Such Purchaser shall have
received, in form and substance reasonably satisfactory to it, such documents
and evidence with respect to the Company as such Purchaser may reasonably
request in order to establish the existence and good standing of the Company and
the authorization of the transactions contemplated by this Agreement.
4
<PAGE>
Section 4.3. Consents. Any consents or approvals required to be obtained
by the Company, FRI or any of their Subsidiaries that are necessary to permit
the consummation of the transactions contemplated hereby on such Closing Date
shall have been obtained.
Section 4.4. Opinion. Each Purchaser shall have received an opinion dated
the Closing Date from Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the
Company, in form and substance reasonably satisfactory to counsel to the
Purchasers (reasonability including, at a minimum, (i) an opinion substantially
in the form of the opinion received from counsel to the Company in connection
with the issuance of the Existing Senior Discount Notes, and (ii) a customary
opinion as to the validity, perfection and priority of the Purchasers' security
interest in the Pledged Securities).
Section 4.5. Waiver. Holders of at least 50% of the aggregate Accreted
Value of the Existing Discount Notes shall have entered into the First Amendment
to the Existing Discount Note Agreement, substantially in the form of Exhibit D.
Section 4.6. Consummation of the Hamlet Acquisition. The Company shall
have acquired all of the outstanding capital stock of THG pursuant to the Hamlet
Acquisition Agreement. From the date hereof until the Closing Date, there shall
have been no material changes to the Hamlet Acquisition Agreement and KKR shall
not have suffered a Material Adverse Change (as defined in the Merger
Agreement). The Pledged Securities shall have been delivered to the Agent and,
upon such delivery in the State of New York, the security interest of the Agent
in the Pledged Securities will be a perfected first priority security interest.
The Company's obligation to sell the Notes to a Purchaser on the Closing
Date shall be subject to the performance by such Purchaser of its agreements
hereunder that are to be performed at or prior to the time of delivery of the
Notes and to the conditions precedent contained in Section 4.3, 4.5 and 4.6.
SECTION 5. COMPANY COVENANTS.
From and after the date of this Agreement and continuing so long as any
amount remains unpaid on any Note:
Section 5.1. Corporate Existence, Etc. The Company will preserve and keep
in force and effect its corporate existence, and will cause each Subsidiary to
preserve and keep in force and effect its corporate, partnership or other
existence in accordance with the respective organizational documents of each
such Subsidiary, and the rights and franchises of the Company and its
Subsidiaries, provided that (a) the Company shall not be required to preserve
any such right or franchise, or the existence, right or franchise of any of its
Subsidiaries, if the Board of Directors of the Company shall determine that the
preservation thereof is no longer desirable in the conduct of the businesses of
the Company and its Subsidiaries taken as a whole
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and (b) the provisions of this Section 5.1 shall not limit the ability of the
Company or any Subsidiary of the Company to engage in any transaction permitted
by Section 5.8 hereof.
Section 5.2. Insurance. The Company will maintain, and will cause each
Subsidiary to maintain, insurance coverage by financially sound and reputable
insurers in such forms and amounts and against such risks as are customary for
corporations of established reputation engaged in the same or a similar business
and owning and operating similar properties.
Section 5.3. Taxes. The Company will pay or discharge or cause to be paid
or discharged, before the same shall become delinquent, all material taxes,
assessments and governmental charges levied or imposed upon the Company or any
of its Subsidiaries or upon the income, profits or property of the Company or of
any such Subsidiary; provided, however, that the Company shall not be required
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to pay or discharge or cause to be paid or discharged any such tax, assessment
or charge (i) whose amount, applicability or validity is being contested in good
faith by appropriate proceedings and, if required by GAAP, for which adequate
provision has been made, or (ii) where the failure to effect such payment or
discharge is not adverse in any material respect to any Purchaser.
Section 5.4. Maintenance, Etc. The Company will cause all material
properties owned by or leased to it or any of its Subsidiaries and material to
the business of the Company and its Subsidiaries, taken as a whole, to be
maintained and kept in normal condition and working order (ordinary wear and
tear and losses due to casualty excepted) and will from time to time cause to be
made all necessary repairs, renewals, and replacements thereof, all as in the
judgment of the Company may be necessary, so that the business carried on in
connection therewith may be properly conducted; provided, however, that (a)
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nothing in this Section shall prevent the Company from discontinuing the use,
operation or maintenance of any of such properties, or disposing of any of them,
if such discontinuance or disposal is, in the judgment of its Board of Directors
or of the Board of Directors, board of trustees or managing partners of the
Subsidiary concerned, or of an Officer (or other agent employed by the Company
or any of its Subsidiaries) of the Company or such Subsidiary having managerial
responsibility for any such property, desirable in the conduct of the businesses
of the Company or any of its Subsidiaries (provided that any such disposal is
for a fair value after taking into account all circumstances involved in the
decision to dispose of such property); and (b) the provisions of this Section
5.4 shall not limit the ability of the Company or any Subsidiary to engage in
any transaction permitted by Section 5.8 hereof.
Section 5.5. Limitations on Indebtedness. The Company will not, and will
not permit any Subsidiary to, create, assume or incur any Indebtedness except:
(1) Indebtedness evidenced by the Notes and the Existing
Discount Notes;
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(2) Indebtedness under the Credit Agreement not to exceed the
Maximum Amount outstanding at any one time;
(3) Indebtedness of the Company and its Subsidiaries and of KKR
and its subsidiaries outstanding as of the date of this Agreement;
(4) Indebtedness relating to insurance premium financing or in
respect of workers' compensation claims, in each case incurred in the
ordinary course of business;
(5) Indebtedness relating to the Company's and its Subsidiaries'
controlled disbursement accounts or in respect of overdrafts of zero
balance bank accounts, in each case incurred in the ordinary course of
business;
(6) Indebtedness in respect of Capitalized Lease Obligations or
purchase money financings (including the purchase price of inventory);
provided that such Indebtedness is secured only by the applicable asset;
(7) Indebtedness between a Subsidiary and the Company or between
Subsidiaries;
(8) Indebtedness represented by surety and performance bonds and
similar obligations, in each case incurred in the ordinary course of
business;
(9) Hedging Obligations of the Company or a Subsidiary incurred
in the ordinary course of business;
(10) Notwithstanding any amounts incurred under clauses (1)
through (9) of this Section 5.5, additional Indebtedness of the Company and
its Subsidiaries outstanding at any time that does not exceed in the
aggregate an amount equal to (i) $99,000,000 less (ii) the aggregate
principal amount of Notes and Existing Discount Notes then outstanding; and
(11) Indebtedness issued or incurred in connection with the
renewal, expansion, refinancing or refunding of Indebtedness permitted by
the preceding clauses (1) through (10) of this Section 5.5; provided that
any expansion of such Indebtedness would otherwise satisfy the conditions
of one of the other clauses (1) through (10) of this Section 5.5.
Section 5.6 Limitation on Liens. The Company will not, and will not
permit any Subsidiary to, create, incur, assume or suffer to exist any Liens
other than Permitted Liens unless the Notes are secured equally and ratably with
any other obligations thereby secured.
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Section 5.7. Restricted Payments. The Company will not, and will not
permit any Subsidiary, to make any distribution or declare or pay any dividends
(in cash or other property, other than capital Stock) on, or purchase, redeem or
otherwise retire any of the Company's or any of its Subsidiaries' capital Stock,
whether now or hereafter outstanding, except:
(a) Any Subsidiary may declare and pay dividends or other distributions
to, or purchase, redeem or otherwise retire any capital Stock from,
the Company or any Subsidiary.
(b) So long as no Event of Default exists and is continuing at the time of
such payment or would result therefrom, the Company may declare and
pay dividends or other distributions to FRI in amounts from time to
time required to make regular interest payments with respect to the
FRI Notes (excluding therefrom any interest in respect of any increase
in the aggregate principal amount thereof occurring after the Closing
Date), if and so long as FRI uses the proceeds of such dividends or
other distributions to satisfy such interest obligation.
(c) The Company may declare and pay dividends or other distributions to
FRI during each fiscal year equal to the sum of (i) an amount not in
excess of the federal, state, local and foreign taxes and assessments
payable by FRI and its subsidiaries (determined on a consolidated
basis) for such year, plus (ii) the aggregate amount of all general
corporate, operating and administrative expenses incurred by FRI
(including, without limitation, any such expenses incurred on behalf
of its Subsidiaries) in the ordinary course of business.
(d) The Company and each Subsidiary may purchase, acquire, cancel or
otherwise retire for value shares of capital Stock of FRI or any of
its Subsidiaries, options on any such shares or related stock
appreciation rights or similar securities held by directors, officers,
employees or former directors, officers or employees (or their estates
or beneficiaries under their estates or permitted transferees) that
were issued pursuant to any Stock Based Plan, in each case upon death,
disability, retirement, termination or pursuant to the terms of such
Stock Based Plan; provided, however, that the aggregate consideration
paid for such purchases, acquisitions, cancellations or retirements
shall not exceed $2.5 million in any fiscal year.
Notwithstanding the foregoing, this Agreement does not prevent immaterial
cash dividends in lieu of payment of fractional shares.
Section 5.8. Mergers, Consolidations and Sales of Assets.
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(a) The Company will not, and will not permit any Subsidiary to, (1)
consolidate with or be a party to a merger with any other corporation,
(2) sell, lease or otherwise dispose of all or substantially all of
the assets of the Company and its Subsidiaries (on a consolidated
basis), or (3) issue any securities or any rights or options to
purchase securities for less than fair value as determined in good
faith by the Board of Directors, provided, however, that:
(i) any Subsidiary (other than THG) may merge or consolidate
with or into the Company or any Subsidiary;
(ii) the Company may consolidate or merge with any other
corporation if (A) the Company shall be the surviving or continuing
corporation or else the surviving or continuing corporation shall (x)
have a consolidated EBITDA for the twelve-month period ending on the
last day of the calendar quarter immediately preceding the date of
such consolidation or merger, determined on a pro forma basis, equal
to or exceeding that of the Company for such period and (y) assume all
of the obligations of the Company under the Notes and this Agreement
and (B) at the time of such consolidation or merger and after giving
effect thereto no Default or Event of Default shall have occurred and
be continuing;
(iii) any Subsidiary (other than THG) may sell, lease or
otherwise dispose of its assets, or issue securities, to the Company
or any Subsidiary; and
(iv) any Subsidiary (other than THG) may merge or consolidate
with or into KKR.
Section 5.9. Transactions with Affiliates. The Company will not, and will
not permit any Subsidiary to, enter into any transaction (or series of related
transactions) (a "Transaction") with any holder (or any Affiliate of such
holder) of 5% or more of any class of capital Stock of the Company or with any
Affiliate of the Company, involving payments by the Company or any Subsidiary
(including, without limitation, any sale, purchase, lease or loan or any other
direct or indirect payment, transfer or other disposition) in excess of
$2,000,000, other than the following Transactions:
(i) Transactions between or among the Company and its
Subsidiaries or between or among such Subsidiaries,
(ii) Transactions the terms of which are at least as favorable
as the terms that could be obtained by the Company or such Subsidiary,
as the case may be, in a comparable transaction made on an arm's-
length basis between unaffiliated parties (in each case as determined
in good faith by a majority of the directors of the Company
unaffiliated with such holder or Affiliate, or if
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there are no such directors, as determined in good faith by its Board
of Directors),
(iii) Transactions in which the Company or any Subsidiary
delivers to the holders of the Notes a written opinion of an
independent nationally recognized investment banking firm stating that
such Transaction is fair to the Company or such Subsidiary from a
financial point of view,
(iv) the performance by the Company of its obligations
hereunder and under the Notes, the Existing Discount Note Agreement
and the Existing Discount Notes,
(v) the payment of reasonable and customary compensation or
fees (including, without limitation, options or related stock
appreciation rights or similar securities issued pursuant to any Stock
Based Plan and payments pursuant to the Value Creation Units Plan,
including payments made in connection with the termination or
amendment of such plan) to officers, directors, and employees of FRI,
the Company or any of its Subsidiaries, in each case as determined by
the Company's Board of Directors in good faith,
(vi) loans or advances to officers, directors and employees of
FRI, the Company or any of its Subsidiaries made in the ordinary
course of business not to exceed $2 million at any time outstanding,
(vii) purchases (for equal to or less than fair value) or sales
(for equal to or more than fair value) of goods and services made in
the ordinary course of business,
(viii) Transactions permitted by, and complying with, the
provisions of Section 5.7 hereof,
(ix) Transactions permitted by, and complying with, the
provisions of Section 5.8 hereof,
(x) management and tax sharing agreements in effect on the
date hereof or any replacements thereof which do not materially
increase the obligations of the Company or its Subsidiaries,
(xi) consummation of the transactions contemplated by the
Merger Agreement and the Hamlet Acquisition Agreement, or
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(xii) Investments by the Company or any Subsidiary in any
Unrestricted Subsidiary not to exceed $10,000,000 in the aggregate at
any one time outstanding.
Section 5.10. Financial Statements, etc. (a) As long as FRI is a reporting
company under the Exchange Act, the Company shall deliver to the holders of the
Notes, FRI's form 10-Q Quarterly Reports, Form 10-K Annual Reports, and Form 8-K
Current Reports, and any other filings made by FRI with the Securities and
Exchange Commission, if any, as soon as reasonably practicable after the same
are filed.
(b) In the event FRI is no longer a reporting company under the
Exchange Act, the Company shall deliver to the holders of the Notes as soon as
available, but in any event within 60 days after the end of each of the first
three quarters during each of FRI's fiscal years, an unaudited balance sheet,
income statement, and statement of cash flow covering FRI's operations during
such period; and (b) as soon as available, but in any event within 105 days
after the end of each of FRI's fiscal years, financial statements of FRI for
each such fiscal year, audited by independent certified public accountants.
Such audited financial statements shall include a balance sheet, profit and loss
statement, and statement of cash flow and, promptly after receipt and if
prepared, such accountants' letter to management.
(c) Each Purchaser acknowledges that it is familiar with its
responsibilities under the federal securities laws relating to restrictions on
trading in securities of an issuer while in possession of material, non-public
information, and restrictions on sharing such information with other persons who
may engage in such trading; and agrees that such Purchaser will not violate
those restrictions, and will use reasonable efforts to prevent any of its
directors, officers, employees, agents and advisors (including, without
limitation, attorneys, accountants, bankers and financial advisors) who receive
any such information from such Purchaser concerning the Company (whether
prepared by the Company, its advisors or otherwise and irrespective of the form
of communication) from violating those restrictions.
Section 5.11. Issuance of THG Securities. THG will not issue any equity
security or any security, convertible or exchangeable into, or exercisable for,
or warrants, options or other rights to purchase, an equity security of THG.
SECTION 6. EVENTS OF DEFAULT AND REMEDIES THEREFOR.
Section 6.1. Events of Default. Any one or more of the following shall
constitute an "Event of Default" as the term is used herein:
(a) Default shall occur in the payment of interest on any Note when the
same shall have become due and such default shall continue for more
than 10 Business Days; or
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(b) Default shall occur in the making of any payment of the principal of
any Note or the Call Premium, if any, thereon at the expressed or any
maturity date or at any date fixed for prepayment; or
(c) Default shall occur in the observance or performance of any other
provision of this Agreement which is not remedied within 30 days after
the date on which written notice thereof is given to the Company by
the holders of a majority in aggregate Accreted Value of the
outstanding Notes; or
(d) Any judgment or order for the payment of money shall be rendered
against the Company or a Material Subsidiary of the Company by a court
of competent jurisdiction and shall not be discharged or stayed within
90 days, and the amount thereof that is not covered by insurance,
letters of credit or a bond shall be in excess of $10,000,000 and
either (i) an enforcement proceeding shall have been commenced by any
creditor upon such judgment or order or (ii) there shall be any period
of 90 consecutive days, after written notice has been given to the
Company by the Holders of at least 25% in aggregate Accreted Value of
the outstanding Notes, during which a stay of enforcement of such
judgment or order, by reason of a pending appeal or otherwise, shall
not be in effect; or
(e) An event of default occurs which extends beyond any period of grace
applicable thereto under any mortgage, indenture or other instrument
under which there may be issued any Indebtedness of the Company or any
Material Subsidiary of the Company for borrowed money having an
outstanding principal amount of $10,000,000 or more in the aggregate,
whether such Indebtedness now exists or shall hereafter be created, if
either (i) such default results from the failure to pay principal upon
the final maturity of such Indebtedness or (ii) as result of such
event of default such Indebtedness has been declared to be due and
payable prior to its stated maturity, provided, however, that if such
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default shall be remedied or cured or waived by the holders of such
Indebtedness, then the Event of Default hereunder by reason thereof
shall be deemed to have been thereupon remedied, cured or waived
without further action on the part of the holders of the Notes; or
(f) The Company or any Material Subsidiary becomes insolvent, is generally
not paying its debts as they become due or makes an assignment for the
benefit of creditors, or the Company or any Material Subsidiary
applies for or consents to the appointment of a custodian, trustee,
liquidator, or receiver for the Company or such Subsidiary or for the
major part of the property of either; or
(g) A custodian, trustee, liquidator, or receiver is appointed for the
Company or any Material Subsidiary or for the major part of the
property of either and is not discharged within 45 days after such
appointment; or
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(h) Bankruptcy, reorganization, arrangement or insolvency proceedings, or
other proceedings for relief under any bankruptcy or similar law or
laws for the relief of debtors, are instituted by or against the
Company or any Material Subsidiary and, if instituted against the
Company or any Material Subsidiary, are consented to or are not
dismissed within 45 days after such institution; or
(i) A Change of Control occurs; or
(j) FRI retires or prepays all or any portion of the FRI Notes with a
source other than (i) assets of FRI, (ii) Notes issued in exchange for
FRI Notes or (iii) proceeds of Indebtedness issued by FRI or the
Company that is subordinate in right of payment to the Notes.
Section 6.2. Notice to Holders. When the Company has knowledge that any
Event of Default described in the foregoing Section 6.1 has occurred, the
Company agrees to give notice to the holders of the outstanding Notes within
three Business Days of the date on which the Company becomes aware of such Event
of Default.
Section 6.3. Acceleration of Maturities. When any Event of Default
described in paragraphs (a) through (j), inclusive, of said Section 6.1 has
happened and is continuing, the holder or holders of 25% or more of the Accreted
Value of outstanding Notes may, by notice to the Company, declare the entire
Accreted Value and all interest accrued and unpaid, if any, on all Notes to be,
and all Notes shall thereupon become, forthwith due and payable, without any
presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived. When any Event of Default described in paragraph (h)
of Section 6.1 has occurred, then the Accreted Value of all outstanding Notes
(together with accrued and unpaid interest, if any) shall immediately become due
and payable without presentment, demand or notice of any kind. Upon the Notes
becoming due and payable as a result of any Event of Default as aforesaid, the
Company will forthwith pay to the holders of the Notes the entire outstanding
Accreted Value and interest accrued and unpaid, if any, on the Notes. No course
of dealing on the part of any Noteholder nor any delay or failure on the part of
any Noteholder to exercise any right shall operate as a waiver of such right or
otherwise prejudice such holder's rights, powers and remedies.
Section 6.4. Rescission of Acceleration. The provisions of Section 6.3 are
subject to the condition that if the Accreted Value of and accrued and unpaid
interest, if any, on all or any outstanding Notes have been declared immediately
due and payable by reason of the occurrence of any Event of Default described in
paragraphs (a) through (j), inclusive, of Section 6.1, the holders of a majority
in aggregate Accreted Value of the outstanding Notes may, by written instrument
filed with the Company, rescind and annul such declaration and the consequences
thereof.
SECTION 7. AMENDMENTS, WAIVERS AND CONSENTS.
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Section 7.1. Consent Required. Any term, covenant, agreement or condition
of this Agreement may, with the consent of the Company, be amended or compliance
therewith may be waived (either generally or in a particular instance and either
retroactively or prospectively), if the Company shall have obtained the consent
in writing of the holders of at least 50% in aggregate Accreted Value of
outstanding Notes; provided that without the written consent of the holders of
all of the Notes then outstanding, no such waiver, modification, alteration or
amendment shall be effective (a) that will change the time of payment of the
principal of or the interest on any Note or reduce the Accreted Value thereof or
change the rate of interest thereon, or (b) that will change any of the
provisions with respect to optional prepayment or (c) that will change the
percentage of holders of the Notes required to consent to any such amendment,
modification or waiver of any of the provisions of this Section 7 or Section 6.
Section 7.2. Solicitation of Noteholders. Executed or true and correct
copies of any waiver effected pursuant to the provisions of Section 7.1 shall be
delivered by the Company to each holder of outstanding Notes forthwith following
the date on which the same shall have been executed and delivered by the holder
or holders of the requisite percentage of outstanding Notes.
Section 7.3. Effect of Amendment or Waiver. Any such amendment or waiver
shall apply equally to all of the holders of the Notes and shall be binding upon
them, upon each future holder of any Note and upon the Company, whether or not
such Note shall have been marked to indicate such amendment or waiver. No such
amendment or waiver shall extend to or affect any obligation not expressly
amended or waived or impair any right consequent thereon.
SECTION 8. PLEDGE.
Section 8.1. Pledge. As collateral security for payment in full of the
Notes, the Company hereby pledges, hypothecates, assigns, transfers, sets over
and delivers unto the Agent for the benefit of the Purchasers a first priority
security interest in all the Pledged Collateral. On the Closing Date, unless
previously delivered, the Company shall deliver the Pledged Securities to the
Agent for the benefit of the Purchasers. The certificates representing the
Pledged Securities shall be accompanied by executed undated stock powers, duly
endorsed to the Agent by the Company.
If any additional Pledged Collateral (or, during an Event of Default, any
dividends or other cash distributions paid in cash or cash equivalents on the
Pledged Securities) shall come into the possession or control of the Company or
any Subsidiary, the Company or such Subsidiary shall hold or control in trust
and forthwith transfer and deliver the same to the Agent subject to the
provisions hereof. If at any time the Agent notifies the Company that
additional stock powers endorsed in blank with respect to the Pledged Securities
are required, the Company
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shall promptly execute in blank and deliver such stock powers as the Agent may
reasonably request.
Section 8.2. Representations and Warranties Regarding Pledged Securities.
The Company hereby represents and warrants to the Agent and the Purchasers that:
(a) Upon consummation of the transactions contemplated by the Hamlet
Acquisition Agreement, the Company will be the sole legal and beneficial owner
of, and will have good and valid title to, the Pledged Securities, free and
clear of all Liens other than the security interest created by this Agreement.
The Company has the unqualified right and authority to execute this Agreement
and, upon consummation of transactions contemplated by the Hamlet Acquisition
Agreement, to pledge the Pledged Securities to the Agent as provided for herein.
(b) There are no outstanding options, warrants or other similar agreements
providing for the sale or issuance of securities of THG to which the Company or
THG is a party.
(c) Upon consummation of the transactions contemplated by the Hamlet
Acquisition Agreement, the Pledged Securities will be validly issued and fully
paid and non-assessable;
(d) No consent, approval or authorization of or designation or filing with
any authority on the part of the Company is required in connection with the
pledge and security interest granted under this Agreement, other than those that
will on or prior to the Closing Date be obtained or effected.
Section 8.3. Covenants Regarding Pledged Securities. The Company agrees
that:
(a) The Company has delivered, or will on or prior to the Closing Date
deliver, to the Agent all instruments and stock certificates, if any,
representing the Pledged Securities, duly endorsed in blank or accompanied by an
assignment or assignments sufficient to transfer title thereto.
(b) The Company will not, without the prior written consent of the Agent
(which consent shall be in the Agent's sole discretion), sell, transfer or
convey any interest in, or suffer or permit any Lien to be created upon or with
respect to, any of the Pledged Securities (other than as created under this
Agreement) during the term of the pledge established hereby; provided that,
notwithstanding anything herein to the contrary, the Company may sell in an
arms-length transaction for fair value all or any portion of the Pledged
Collateral for cash so long as 100% of the net proceeds thereof are utilized to
repay the Notes pursuant to Section 2.1.
(c) The Company will, at its own expense, at any time and from time to time
at the Agent's reasonable request, do, make, procure, execute and deliver all
acts, things, writings, assurances and other documents as may be reasonably
required by the Agent to preserve,
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establish, demonstrate or enforce the Agent's rights, interests and remedies
created by or provided in this Agreement.
Section 8.4. Voting Rights; Dividends; etc.
So long as no Event of Default has occurred and is continuing:
(a) The Company shall be entitled to receive and retain any dividends and
other cash distributions paid in cash or cash equivalents on the Pledged
Securities.
(b) The Company shall be entitled to vote or consent or grant waivers or
ratifications with respect to the Pledged Securities in any manner not violating
any provision of this Agreement.
Section 8.5. Remedies Upon Default.
At any time when an Event of Default has occurred and is continuing:
(a) The Agent may collect by legal proceedings or otherwise all dividends,
capital distributions and other sums now or hereafter payable on
account of said Pledged Securities, and hold the same as part of the
Pledged Securities, or apply the same to the principal amount of the
Notes then owing or interest thereon as set forth in Section 8.6.
(b) The Agent may discharge any taxes, liens, security interest or other
encumbrances levied or placed on the Pledged Securities or pay for the
maintenance and preservation of the Pledged Securities; the amount of
such payments, plus any and all reasonable fees, costs and expenses of
the Agent (including reasonable attorneys' fees and disbursements) in
connection therewith shall be applied as set forth in Section 8.6.
(c) In addition to all the rights and remedies of a secured party under
applicable law, the Agent shall have the right, and without demand of
performance or other demand, advertisement or notice of any kind,
except as specified below, to or upon the Company or any other person
(all and each of which demands, advertisements and/or notices are
hereby expressly waived to the extent permitted by law), to proceed
forthwith to collect, receive, appropriate and realize upon the
Pledged Securities, or any part thereof and to proceed forthwith to
sell, assign, give an option or options to purchase, contract to sell,
or otherwise dispose of and deliver the Pledged Securities or any part
thereof in one or more parcels at public or private sale or sales at
any stock exchange, broker's board or at any of the Agent's offices or
elsewhere at such prices and on such terms (including, without
limitation, a requirement that any purchaser of all or any part of the
Pledged
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Securities shall be required to purchase any securities constituting
the Pledged Securities solely for investment and without any intention
to make a distribution thereof) as the Agent in its sole and absolute
discretion deems appropriate without any liability for any loss due to
decrease in the market value of the Pledged Securities during the
period held. The Agent agrees that if notice of sale shall be required
by law such notification shall be deemed reasonable and properly given
if mailed to the Company, postage prepaid, at least ten (10) Business
Days (or such longer period required by any provision of applicable
laws) before any such disposition, to the address indicated in the
notice provisions below. Any disposition of the Pledged Securities or
any part thereof may be for cash or on credit or for future delivery
without assumption of any credit risk, with the right of the Agent to
purchase all or any part of the Pledged Securities so sold at any such
sale or sales, public or private, free of any equity or right of
redemption in the Company, which right or equity is, to the extent
permitted by applicable law, hereby expressly waived or released by
the Company.
(d) All of the Agent's rights and remedies, including but not limited to
the foregoing, shall be cumulative and not exclusive and shall be
enforceable alternatively, successively or concurrently as the Agent
may deem expedient.
(e) The Agent may elect to obtain (at the Company's expense) the advice of
any independent investment banking firm with respect to the method and
manner of sale or other disposition of any of the Pledged Securities,
the best price reasonably obtainable therefor, the consideration of
cash and/or credit terms, or any other details concerning such sale or
disposition. The Agent, in its sole discretion, may elect to sell on
such credit terms which it deems reasonable. The sale of any of the
Pledged Securities on credit terms shall not relieve the Company of
its liability under the Notes until the Notes have been paid in full.
(f) The Company recognizes that the Agent may be unable to effect a public
sale of all or a part of the Pledged Securities by reason of certain
prohibitions contained in any applicable securities laws, but may be
compelled to resort to one or more private sales to a restricted group
of purchasers who will be obliged to agree, among other things, to
acquire the Pledged Securities for their own account, for investment
and not with a view for the distribution or resale thereof. The
Company agrees that private sales so made may be at prices and on
other terms less favorable to the seller than if the Pledged
Securities were sold at public sale, and that the Agent has no
obligation to delay the sale of any Pledged Securities for the period
of time necessary to permit the registration of the Pledged Securities
for public sale under the Securities Act. The Company agrees that a
private sale or sales made under the foregoing circumstances shall be
deemed to have been made in a commercially reasonable manner.
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(g) Upon any sale or other disposition, the Agent shall have the right to
deliver, assign and transfer to the purchaser thereof the Pledged
Securities so sold or disposed of. Each purchaser at any such sale or
other disposition (including the Agent) shall hold the Pledged
Securities free from any claim or right of the Company of whatever
kind, including any equity or right of redemption of the Company. The
Company specifically waives, to the extent permitted by applicable
laws, all rights of redemption, stay or appraisal which it had or may
have under any rule of law or statute now existing or hereafter
adopted.
(h) The Agent shall not be obligated to make any sale or other
disposition, unless the terms thereof shall be reasonably satisfactory
to it. The Agent may, subject to applicable laws, without notice or
publication, adjourn any private or public sale, and, upon ten (10)
business Days' prior written notice to the Company, hold such sale at
any time or place to which the same may be so adjourned. In case of
any sale of all or any part of the Pledged Securities, on credit or
future delivery, the Pledged Securities so sold may be retained by the
Agent until the selling price is paid by the purchaser thereof, but
the Agent shall incur no liability in the case of the failure of such
purchaser to take up and pay for the property so sold.
(i) The Company hereby irrevocably grants to Agent, with full power of
substitution, a proxy to vote and exercise any and all voting rights
held by it with respect to the Pledged Securities. The proxy granted
hereunder is coupled with an interest and is irrevocable.
Section 8.6. Application of Proceeds of Sale. The proceeds of sale of the
Pledged Collateral sold pursuant to Section 8.5 hereof shall be applied by the
Agent on behalf of the Purchasers as follows:
(a) to the payment of all reasonable out-of-pocket costs and expenses
incurred by the Agent in connection with such sale, including, but not limited
to, all court costs and the reasonable fees and expenses of counsel for the
Agent in connection therewith, and the payment of all other costs and expenses
paid or incurred by the Agent in connection with this Agreement, or the exercise
of any right or remedy hereunder, to the extent that such advances, costs, and
expenses shall not have been paid previously to the Agent; and
(b) to the payment in full of all interest and premium, if any, owed
with respect to the Notes and all principal of the Notes in such order as
determined by the Purchasers.
Any amounts remaining after such applications shall be remitted to the
Company.
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Section 8.7. Termination. The pledge referenced herein shall terminate
when all of the Notes shall have been fully paid, at which time the Agent shall
assign and deliver to the Company, or to such other Person or Persons as the
Company shall designate, against receipt, such of the Pledged Collateral (if
any) as shall not have been sold or otherwise applied by the Agent pursuant to
the terms hereof, together with appropriate instruments of reassignment and
release.
Section 8.8. Appointment. Each Purchaser hereby irrevocably designates and
appoints the Agent and the Agent hereby accepts such appointment, as the Agent
of such Purchaser under Section 8 to hold the Pledged Collateral for and on
behalf of such Purchaser, and each such Purchaser irrevocably authorizes the
Agent to take such action on its behalf with respect to the Pledged Collateral
under the provisions of Section 8 and to exercise such powers and perform such
duties as are expressly delegated to the Agent by the terms of Section 8,
together with such other powers as are reasonably incidental thereto. The Agent
shall act in accordance with the instructions of the Purchasers holding in
excess of 50% of the Accreted Value of the Notes. No Purchaser shall have any
obligation to pay the fees and expenses of the Agent hereunder, which fees and
expenses shall be paid by the Company.
Section 8.9. Duties of Agent. The Agent shall be required to exercise the
reasonable care which a secured party would customarily exercise with respect to
the Pledged Collateral in its possession.
Section 8.10. Power of Attorney. The Company hereby constitutes and
irrevocably appoints the Agent, as the Company's true and lawful attorney-in-
fact to the full extent permitted by law, at any time or times when an Event of
Default has occurred and is continuing for the limited purpose of allowing the
Agent to affix to certificates and documents representing the Pledged Securities
the stock power delivered with respect thereto, to transfer or cause the
transfer of the Pledged Securities, or any part thereof on the books of THG, to
the name of the Agent or the Agent's nominee and thereafter exercise as to such
Pledged Securities all the rights, power and remedies of an owner. The power of
attorney granted pursuant to this Agreement and all authority hereby conferred
are granted and conferred solely to protect the Agent's interest in the Pledged
Securities and shall not impose any duty upon the Agent to exercise any power.
This power of attorney shall be irrevocable and coupled with an interest.
SECTION 9. INTERPRETATION OF AGREEMENT; DEFINITIONS.
Section 9.1 Definitions. Unless the context otherwise requires, the terms
hereinafter set forth when used herein shall have the following meanings and the
following definitions shall be equally applicable to both the singular and
plural forms of any of the terms herein defined:
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"Accreted Value" shall mean, with respect to each Note, as of any date of
determination (a) prior to July 31, 1999, the sum of (i) the Purchase Price of
such Note and (ii) the portion of the excess of the principal amount of such
Note over such Purchase Price that has been accreted thereon through such date,
such amount to be so accreted on a daily basis at the rate, compounded semi-
annually, such that the Accreted Value of the Note on July 31, 1999 shall equal
its principal amount and (b) from and after July 31, 1999, the principal amount
of such Note.
"Affiliate" shall mean any Person (a) that directly or indirectly through
one or more intermediaries controls, or is controlled by, or is under common
control with, any other Person or (b) is an officer, director or employee of any
such Affiliate. The term "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of Voting Stock, by contract
or otherwise.
"Agent" shall mean such party mutually agreed to by, and reasonably
satisfactory to, the Company and the Purchasers on or prior to the Closing Date,
which party shall execute and become a party to this Agreement (with such
changes to Section 8 hereof as such party shall reasonably request and which
changes are reasonably acceptable to the Company and the Purchasers).
"Board of Directors" shall mean, with respect to any Person, the Board of
Directors of such Person or any committee of the Board of Directors authorized
to act for it hereunder.
"Business Day" shall mean any day other than a Saturday, Sunday, statutory
holiday or other day on which banks in Los Angeles, California are required by
law to close or are customarily closed.
"Call Premium" shall mean:
(a) in connection with any prepayment prior to and on January 23,
2001, an amount equal to 5.0% of the amount of Accreted Value being
prepaid; and
(b) in connection with any prepayment after January 23, 2001, an
amount equal to 2.5% of the amount of Accreted Value being prepaid.
"Capitalized Lease Obligation" means, with respect to any Person, an
obligation of such Person to pay rent or other amounts under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP and the amount of such obligation shall be the capitalized amount thereof
determined in accordance with GAAP.
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"Change of Control" shall mean an event whereby a "person" or "group"
(within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) (other
than any Existing Stockholder) becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act) of more than 50% of the total voting power of
the then outstanding Voting Stock of FRI or the Company (calculated on a fully
diluted basis); provided, that a Change of Control shall be deemed not to have
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occurred if a "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Exchange Act) becomes the ultimate "beneficial owner" of more than 50% of the
total voting power of the then outstanding Voting Stock of FRI (calculated on a
fully diluted basis), so long as a majority of the voting power of the Voting
Stock of FRI ultimately "beneficially owned" by such "group" is ultimately
"beneficially owned" by any one or more of the Existing Stockholders.
"Closing Date" shall have the meaning provided in Section 1.2 herein.
"Company" shall mean FRI-MRD Corporation, a Delaware corporation.
"Credit Agreement" shall mean (i) the Loan and Security Agreement, dated as
of January 10, 1997, among the Company, certain of its Subsidiaries, FRI, and
Foothill Capital Corporation, as such agreement may be restated, amended,
supplemented or otherwise modified from time to time hereafter and (ii) any
refunding, refinancing or replacement of any agreement provided for in clause
(i) or this clause (ii).
"Default" shall mean any event or condition, the occurrence of which would,
with the lapse of time or the giving of notice, or both, constitute an Event of
Default as defined in Section 6.1.
"EBITDA" shall mean, for any Person, such Person's earnings (loss) before
(i) opening costs, (ii) gain (loss) on disposition of properties, (iii)
provision for divestitures and writedown of long-lived assets, (iv) writedown of
goodwill, (v) interest, (vi) taxes, (vii) depreciation, (viii) amortization,
(ix) gain (loss) on extinguishment of debt, and (x) extraordinary items, in each
case as determined in accordance with GAAP.
"Environmental Legal Requirement" shall mean any international, Federal,
state or local statute, law, regulation, order, consent decree, judgment,
permit, license, code, covenant, deed restriction, common law, treaty,
convention, ordinance or other requirement relating to public health, safety or
the environment, including, without limitation, those relating to releases,
discharges or emissions to air, water, land or groundwater, to the withdrawal or
use of groundwater, to the use and handling of polychlorinated biphenyls or
asbestos, to the disposal, treatment, storage or management of hazardous or
solid waste, or Hazardous Substances or crude oil, or any fraction thereof, or
to exposure to toxic or hazardous materials, to the handling, transportation,
discharge or release of gaseous or liquid Hazardous Substances and any
regulation, order, notice or demand issued pursuant to such law, statute or
ordinance, in each case applicable to the property of the Company or any of its
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Subsidiaries or the operation, construction or modification of any such
property, including without limitation the following: the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986, the Solid Waste
Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976
and the Hazardous and Solid Waste Amendments of 1984, the Hazardous Material
Transportation Act, as amended, the Federal Water Pollution Control Act, as
amended by the Clean Water Act of 1976, the Safe Drinking Water Act, the Clean
Air Act, as amended, the Toxic Substances Control Act of 1976, the Occupational
Safety and Health Act of 1977, as amended, the Emergency Planning and Community
Right-to-Know Act of 1986, the National Environmental Policy Act of 1975, the
Oil Pollution Act of 1990 and any similar or implementing state law, and any
state statute and any further amendments to these laws providing for financial
responsibility for cleanup or other actions with respect to the release or
threatened release of Hazardous Substances or crude oil, or any fraction thereof
and all rules and regulations promulgated thereunder.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended, and any successor statute of similar import, together with the
regulations thereunder, in each case as in effect from time to time. References
to sections of ERISA shall be construed to also refer to any successor sections.
"Event of Default" shall have the meaning set forth in Section 6.1 hereof.
"Excess EBITDA" means, on any date, the amount, if any, by which the
product of six (6) times the consolidated EBITDA of the Company and its
Subsidiaries, on a pro forma basis for the most recent fiscal year of the
Company ending on or prior to such date exceeds the sum of the accreted
Indebtedness outstanding on such date under the Existing Discount Notes and the
Notes and funded Indebtedness outstanding on such date under the Credit
Agreement.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and any successor statute thereto.
"Existing Discount Note Agreement" means the FRI-MRD Corporation Note
Agreement, dated as of August 12, 1997, Re: up to $75,000,000 15.0% Senior
Discount Notes due January 24, 2002, as amended by the First Amendment to Note
Agreement, dated as of June 9, 1998, and as further amended from time to time in
accordance with the terms thereof, and includes the Joinder Agreement, dated
January 14, 1998, among FRI-MRD Corporation and each of the purchasers listed
therein.
"Existing Discount Notes" means the 15% Senior Discount Notes of the
Company due January 24, 2002 issued pursuant to the Existing Discount Note
Agreement, as such Notes may be restated, amended, supplemented or otherwise
modified from time to time hereafter and any refunding, refinancing or
replacement of any such Indebtedness.
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"Existing Stockholder" means (i) with respect to FRI, the stockholders of
FRI on the date hereof including (without limitation) Apollo FRI Partners, L.P.
and Green Equity Investors, L.P. and the Related Persons of such stockholders
and (ii) with respect to the Company, FRI and each Person specified in clause
(i) above.
"FRI" means Family Restaurants, Inc., a Delaware corporation.
"FRI Notes" shall mean the Senior Notes, the Subordinated Notes and any
other general unsecured Indebtedness of FRI, which may be in one or more classes
or series and may include zero coupon notes.
"GAAP" shall mean generally accepted accounting principles in the United
States as in effect on the date of this Agreement and not including any
interpretations or regulations that have been proposed but that have not been
enacted.
"Hamlet Acquisition Agreement" shall mean the Stock Purchase Agreement,
dated as of June 9, 1998, between the Company and KKR, the final form of which
has been provided to counsel to the Purchasers.
"Hazardous Substance" shall mean any hazardous or toxic material, substance
or waste, pollutant or contaminant which is regulated under any statute, law,
ordinance, rule or regulation of any local, state, regional or federal authority
having jurisdiction over the property of the Company and it Subsidiaries or its
use, including but not limited to any material, substance or waste which is:
(a) defined as a hazardous substance under Section 31 1 of the Federal Water
Pollution Control Act (33 U.S.C. SS1317) as amended; (b) regulated as a
hazardous waste under Section 1004 or Section 3001 of the Federal Solid Waste
Disposal Act, as amended by the Resource Conservation and Recovery Act (42
U.S.C. Section 6901 et seq.) as amended; (c) defined as a hazardous substance
under Section 101 of the Comprehensive Environmental Response, Compensation and
Liability Act (42 U.S.C. Section 9601 et seq.) or (d) defined or regulated as a
hazardous substance or hazardous waste under any rules or regulations
promulgated under any of the foregoing statutes.
"Hedging Obligations" with respect to any Person, means the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or currency exchange rates.
"Indebtedness" of any Person as of any date means and includes, without
duplication, (i) all debt of such Person, (ii) all obligations of such Person in
respect of letters of credit or letter of credit reimbursement obligations
(whether or not such items would appear on the balance sheet of such Person) and
(iii) all guarantees by such Person of items that would constitute Indebtedness
under this definition (whether or not such items would appear on such balance
sheet). The amount of Indebtedness of any Person at any date shall be, without
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duplication, the principal amount that would be shown on a balance sheet of such
Person prepared as of such date in accordance with GAAP and the maximum
liability of any contingent obligations referred to in clauses (i) through (iii)
above at such date.
"Information" shall have the meaning provided under Section 3.2 of this
Agreement.
"Interest Rate" shall have the meaning provided under Section 1.1 of this
Agreement.
"Investment" shall mean the sum of all investments, made in cash or by
delivery of property on or prior to the applicable date of determination, by the
Company or any of its Subsidiaries in any Unrestricted Subsidiary, whether by
acquisition of stock, Indebtedness, or other obligation or security of such
Unrestricted Subsidiary, or by loan, advance, capital contribution or otherwise,
less the aggregate amount by which such investments have been reduced by
repayment, sale of such Unrestricted Subsidiary, redesignation of such
Unrestricted Subsidiary as a Subsidiary or otherwise.
"KKR" shall mean Koo Koo Roo, Inc.
"Lien" shall mean any lien, security interest, charge or encumbrance of any
kind (including any conditional sale or other title retention agreement, any
lease in the nature thereof, and any agreement to give any security interest).
"Material Subsidiary" shall mean a Subsidiary of the Company that is a
"significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X
promulgated under the Securities Act.
"Maximum Amount" on any date shall mean, if such date is (a) on or prior
to December 31, 1999, $55,000,000, or (b) during any fiscal year thereafter, the
sum of (i) $35,000,000 and (ii) the Excess EBITDA; provided, that the Maximum
--------
Amount shall in no event exceed $55,000,000.
"Merger Agreement" shall mean the Agreement and Plan of Merger, dated as of
June 9, 1998, by and among Family Restaurants, Inc., FRI-Sub, Inc. and KKR, the
final form of which has been provided to counsel to the Purchasers.
"Note" shall have the meaning provided in Section 1.1 of this Agreement.
"Note Register" shall have the meaning provided in Section 10.1 of this
Agreement.
"Note Registrar" shall have the meaning provided in Section 10.1 of this
Agreement.
"Noteholder" shall mean any of the holders of one or more Notes from time
to time.
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"Officer" shall mean the Chairman of the Board, the President, any Vice
President, the Treasurer, the Secretary or the Controller of any Person.
"Permitted Lien" means (i) (a) Liens existing on the date of, or pursuant
to, this Agreement and (b) Liens existing upon the assets of KKR, THG, and each
of their subsidiaries, which Liens are in existence on the date hereof or
incurred in the ordinary course of business consistent with past practice on or
prior to the Closing Date and that were not created in connection with, or in
anticipation of, the transactions contemplated by the Merger Agreement and the
Hamlet Acquisition Agreement; (ii) Liens for taxes, assessments or governmental
charges or claims that are not yet due or delinquent or that are being contested
in good faith by appropriate proceedings if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made therefor; (iii) statutory Liens or landlords', carriers', warehousemen's,
mechanics', suppliers', materialmen's, repairmen's or other like Liens arising
in the ordinary course of business with respect to amounts not yet overdue for a
period of 45 days or amounts being contested in good faith by appropriate
proceedings if a reserve or other appropriate provision, if any, as shall be
required by GAAP shall have been made therefor; (iv) Liens incurred by or
deposits made in connection with workers' compensation, unemployment insurance
and other types of social security benefits; (v) Liens incurred or deposits made
to secure the performance of tenders, bids, leases, statutory obligations,
surety and appeal bonds, government contracts, performance and return-of-money
bonds and other obligations of like nature incurred in the ordinary course of
business; (vi) attachment or judgment Liens not giving rise to a Default or an
Event of Default; (vii) easements, rights-of-way, restrictions and other similar
charges or encumbrances not interfering with the ordinary conduct of the
business of the Company or any of its Subsidiaries; (viii) leases or subleases
granted to others incurred in the ordinary course of business; (ix) purchase
money Liens incurred to secure the purchase price of property (and Liens on
property existing at the time of the acquisition thereof), which Lien shall not
cover any property other than that being acquired, purchased, improved or
constructed, and shall not cover property purchased, acquired, constructed or
improved more than 12 months before the creation of such Lien; (x) title defects
or irregularities that do not in the aggregate materially impair the use of the
property; (xi) obligations with respect to Capitalized Lease Obligations; (xii)
Liens pursuant to sale and leaseback transactions incurred in the ordinary
course of business; (xiii) Liens securing obligations under the Credit Agreement
and the documents entered into in connection therewith; (xiv) Liens in favor of
the Company or any wholly owned Subsidiary of the Company; (xv) any other Liens
imposed by operation of law that do not materially affect the Company's ability
to perform its obligations under the Notes and this Agreement; (xvi) extensions
(but not expansions that are not otherwise Permitted Liens), renewals,
refinancings or refundings of any Liens referred to in clauses (i) through (xv)
above; and (xvii) Liens in addition to the foregoing, provided that the amount
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of the obligations secured by such Liens does not exceed in the aggregate
$29,000,000.
"Person" shall mean an individual, partnership, corporation, trust or
unincorporated organization, and a government or agency or political subdivision
thereof.
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"Pledged Collateral" shall mean:
(a) the Pledged Securities and the certificates representing the
Pledged Securities and any interest of the Company in the entries on the
books of any financial intermediary pertaining to the Pledged Securities,
and all dividends or distributions of any kind whatsoever (other than cash
or cash equivalents) from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of the Pledged
Securities;
(b) all additional shares of, and all securities convertible into, or
exchangeable into or exercisable for, warrants, options and other rights to
purchase, stock (whether certificated or uncertificated and now existing or
hereafter created) of THG from time to time acquired by the Company in any
manner (which shares shall be deemed to be part of the Pledged Securities),
the certificates or other instruments representing such additional shares,
securities, warrants, options or other rights and any interest of the
Company in the entries on the books of any financial intermediary
pertaining to such additional shares, and all dividends or distributions of
any kind whatsoever (other than cash or cash equivalents) from time to time
received, receivable or otherwise distributed in respect of or in exchange
for any or all of such additional shares, securities, warrants, options or
other rights; and
(c) to the extent not covered above, all Proceeds thereof (other than
dividends or distributions of cash or cash equivalents).
"Pledged Securities" shall mean all the shares of capital stock of THG,
which are evidenced by the certificates identified on a Schedule to be delivered
on or prior to the Closing Date.
"Proceeds" shall have the meaning assigned that term under the Uniform
Commercial Code as in effect in any relevant jurisdiction or under relevant law.
"Purchase Price" with respect to any Note shall mean the Purchase Price
thereof, which shall equal the amount that provides a yield to July 31, 1999 of
14% per annum.
"Purchaser" shall mean the Persons listed under Schedule I attached hereto.
"Related Person" shall mean, with respect to any Person, (A) an Affiliate
of such Person, (B) any investment manager, investment advisor or general
partner of such Person, and (C) any investment fund, investment account or
investment entity whose investment manager, investment advisor or general
partner is such Person or a Related Person of such Person.
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"Securities Act" shall have the same meaning as in Section 3.2(h).
"Senior Notes" means (i) the 9 3/4% Senior Notes of FRI due February 1,
2002 as such Notes may be restated, amended, supplemented or otherwise modified
from time to time hereafter and (ii) any refunding or replacement of any
Indebtedness provided for in clause (i) or this clause (ii).
"Stock" means all shares, options, warrants, interests, participations, or
other equivalents (regardless of how designated) of or in a corporation or
equivalent entity, whether voting or nonvoting, including common stock,
preferred stock, or any other "equity security" (as such term is defined in Rule
3a11-1 of the General Rules and Regulations promulgated by the Securities and
Exchange Commission under the Exchange Act).
"Stock Based Plan" means any stock option plan, stock appreciation rights
plan or other similar plan or supplement relating to capital Stock of FRI or any
of its Subsidiaries, whether in effect on the date hereof or established
hereafter, established for the benefit of employees of FRI or of any Subsidiary
of FRI.
"Subordinated Notes" mean (i) the 10 7/8% Senior Subordinated Discounts
Notes of FRI due February 1, 2004 as such Notes may be restated, amended,
supplemented or otherwise modified from time to time hereafter (ii) and any
refunding or replacement of any Indebtedness provided for in clause (i) or this
clause (ii).
The term "subsidiary" shall mean, as to any particular parent corporation,
any corporation, partnership, limited liability company, business trust or other
entity of which more than 50% (by number of votes) of the Voting Stock shall be
owned by such parent corporation and/or one or more corporations which are
themselves Subsidiaries of such parent corporation. The term "Subsidiary" shall
mean a subsidiary of the Company other than an Unrestricted Subsidiary.
"Transaction" shall have the meaning provided under Section 5.9 herein.
"Value Creation Units Plan" shall mean the Family Restaurants, Inc. and
FRI-MRD Corporation Value Creation Units Plan.
"Unrestricted Subsidiary" shall mean any Subsidiary of the Company (whether
now existing or hereafter created) that is designated an Unrestricted Subsidiary
by the Board of Directors of the Company and not thereafter redesignated as a
Subsidiary. Upon designation of a Subsidiary as an Unrestricted Subsidiary the
Company shall be deemed to have made an Investment in such Unrestricted
Subsidiary equal to the fair market value of the net assets thereof as
determined in good faith by the Board of Directors of the Company. There are no
Unrestricted Subsidiaries as of the Closing Date.
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"Voting Stock" shall mean securities of any class or classes the holders of
which are ordinarily, in the absence of contingencies, entitled to elect a
majority of the corporate directors (or Persons performing similar functions).
Section 9.2. Accounting Principles. Where the character or amount of any
asset or liability or item of income or expense is required to be determined or
any consolidation or other accounting computation is required to be made for the
purposes of this Agreement, the same shall be done in accordance with GAAP, to
the extent applicable, except where such principles are inconsistent with the
requirements of this Agreement.
SECTION 10. MISCELLANEOUS.
Section 10.1. Note Register. The Company, in its capacity as note registrar
(the "Note Registrar") shall cause to be kept a register (the "Note Register")
for the registration and transfer of the Notes; provided, however, the Company
may at any time designate and cause any other Person to act as the Note
Registrar in order to maintain the Note Register pursuant to the terms of this
Note Agreement. The Note Registrar will register or transfer or cause to be
registered or transferred, as hereinafter provided and under such reasonable
regulations as it may prescribe, any Note issued pursuant to this Agreement.
At any time, and from time to time, the holder of any Note which has been
duly registered as herein above provided may transfer such Note upon surrender
thereof with the Note Registrar duly endorsed or accompanied by a written
instrument of transfer duly executed by the holder of such Note or its attorney
duly authorized in writing and, unless transferred pursuant to an effective
registration statement under the Securities Act, by an opinion of counsel in
form and substance satisfactory to the Company to the effect that such transfer
will be made in compliance with an exemption from the registration requirements
of the Securities Act. Notes shall not be transferred in denominations of less
than $100,000. Notwithstanding any other provision of this Note Agreement, the
Company shall not be required to issue, transfer or exchange any Note for a
denomination of less than $1,000,000 if immediately after such issue, transfer
or exchange there would be issued and outstanding more than twenty Notes in a
denomination of less than $1,000,000.
Promptly upon request of a Noteholder, the Company shall provide such
holder, and any qualified institutional buyer designated by such holder, such
financial and other information as is necessary in order to permit compliance
with the information requirements of Rule 144A(d)(4) under the Securities Act in
connection with the resale of Notes, except at such times as the Company is
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act. For purposes of this paragraph, the term "qualified institutional buyer"
shall have the meaning specified in Rule 144A under the Securities Act.
The Person in whose name any Note shall be registered shall be deemed and
treated as the owner and holder thereof for all purposes of this Agreement.
Payment of or on account of
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the principal, premium and interest, if any, on any Note shall be made to or
upon the written order of such holder.
Section 10.2. Exchange of Notes. At any time and from time to time, upon
not less than ten days' notice given by the holder of any Note initially
delivered or of any Note substituted therefor pursuant to Section 10.1, this
Section 10.2 or Section 10.3, and, upon surrender of such Note at its office,
the Company will deliver in exchange therefor, without expense to the holder,
except as set forth below, Notes for the same aggregate Accreted Value as the
then unpaid Accreted Value of the Note so surrendered, in the denomination of
$1,000,000 or any amount in excess thereof as such holder shall specify, dated
as of the date to which interest has been paid on the Note so surrendered or, if
such surrender is prior to the payment of any interest thereon, then dated as of
the date of issue, registered in the name of such Person or Persons as may be
designated by such holder, and otherwise of the same form and tenor as the Notes
so surrendered for exchange. The Company may require the payment of a sum
sufficient to cover any stamp tax or governmental charge imposed upon such
exchange or transfer.
Section 10.3. Loss, Theft, Etc. of Notes. Upon receipt of evidence
satisfactory to the Company of the loss, theft, mutilation or destruction of any
Note, and in the case of any such loss, theft, or destruction upon delivery of a
bond or indemnity in such form and amount as shall be reasonably satisfactory to
the Company, or in the event of such mutilation upon surrender and cancellation
of any Note, the Company will make and deliver without expense to the holder
thereof, a new Note, of like tenor, in lieu of such lost, stolen, destroyed or
mutilated Note.
Section 10.4. Powers and Rights Not Waived; Remedies Cumulative. No delay
or failure on the part of the holder of any Note in the exercise of any power or
right shall operate as a waiver thereof; nor shall any single or partial
exercise of the same preclude any other or further exercise thereof, or the
exercise of any other power or right, and the rights and remedies of the holder
of any Note are cumulative to and are not exclusive of any rights or remedies
any such holder would otherwise have, and no waiver or consent, given or
extended pursuant to Section 7 hereof or otherwise, shall extend to or affect
any obligation or right not expressly waived or consented to.
Section 10.5. Notices. All communications provided for hereunder shall be
in writing and, if to any Purchaser, delivered or mailed by prepaid overnight
air courier, or by facsimile communication, in each case addressed to such
Purchaser at its address appearing on Schedule I to this Agreement or such other
address as such Purchaser or subsequent holder may designate to the Company in
writing, if to the Company, delivered and mailed by prepaid overnight air
courier, or by facsimile
29
<PAGE>
communication, in each case to the Company at 18831 Von Karman Avenue, Irvine,
California 92612, Attention: General Counsel or to such other address as the
Company may in writing designate to such Purchaser or subsequent holder, and if
to the Agent, delivered and mailed by prepaid overnight air courier, or by
facsimile communication, in each case to the Agent at the address set forth on
the signature pages hereto or to such other address as the Agent may in writing
designate to such Purchaser or subsequent holder; provided, however, that a
notice sent by overnight air courier shall only be effective if delivered at a
street address designated for such purpose in Schedule I, and a notice to such
Purchaser by facsimile communication shall only be effective if confirmed by a
copy thereof by prepaid overnight air courier, in either case, as such Purchaser
or a subsequent holder of any Note may designate to the Company in writing.
Section 10.6. Successors and Assigns. This Agreement shall be binding upon
the Company and its successors and assigns and shall inure to each Purchaser's
and the Agent's benefit and to the benefit of their respective successors and
assigns, including each successive holder or holders of any Notes.
Section 10.7. Integration and Severability. This Agreement embodies the
entire agreement and understanding between the Purchasers, the Agent and the
Company, and supersedes all prior agreements and understandings relating to the
subject matter hereof. Should any part of this Agreement for any reason be
declared invalid or unenforceable, such decision shall not affect the validity
of any remaining portion, which remaining portion shall remain in force and
effect as if this Agreement had been executed with the invalid or unenforceable
portion thereof eliminated (or, if possible, rewritten to the extent necessary
to eliminate such invalidity or unenforceability) and it is hereby declared the
intention of the parties hereto that they would have executed the remaining
portion of this Agreement without including therein any such part, parts or
portion which may, for any reason, be hereafter declared invalid or
unenforceable.
Section 10.8. Governing Law. THIS AGREEMENT AND THE NOTES ISSUED AND SOLD
HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK INCLUDING, WITHOUT LIMITATION, SECTIONS 5-1401 AND 5-1402 OF
THE NEW YORK GENERAL OBLIGATIONS LAW AND NEW YORK CIVIL PRACTICE LAWS AND RULES
327(b). EACH PARTY HERETO HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF
THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR
PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT
AND THE NOTES OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY HERETO
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH
IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING
BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A
COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
30
<PAGE>
Section 10.9. Captions. The descriptive headings of the various Sections
or parts of this Agreement are for convenience only and shall not affect the
meaning or construction of any of the provisions hereof.
Section 10.10. Brokerage Fees. Libra Investments, Inc. has acted as agent
for the Company in connection with the transactions contemplated hereby and is
being paid a commission by the Company pursuant to a separate letter agreement.
Section 10.11 Termination. This Agreement shall terminate at any time
prior to the satisfaction or waiver of the conditions set forth in Section 4
hereof if (i) the Merger shall not have been consummated before December 18,
1998 or (ii) the Merger Agreement is otherwise terminated in accordance with its
terms. In either such event, this Agreement shall forthwith become void and have
no effect, without any liability on the part of any party hereto.
Notwithstanding the foregoing, nothing contained in this Section shall relieve
any party from liability for any material breach of any covenant, representation
or warranty contained herein.
31
<PAGE>
The execution hereof by you shall constitute a contract between us for the
uses and purposes herein above set forth, and this Agreement may be executed in
any number of counterparts, each executed counterpart constituting an original
but all together only one agreement.
FRI-MRD CORPORATION, as Company
By /s/ R.T. Trebing, Jr.
----------------------------------
Name: R.T. Trebing, Jr.
Title: President
S-1
<PAGE>
Agreed to and Accepted
_________________________, as Agent
By _____________________________
Name:
Title:
Address:
___________________________
___________________________
___________________________
___________________________
[signature pages continued on next page]
S-2
<PAGE>
THE BROWN & WILLIAMSON MASTER RETIREMENT TRUST
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ Steven A. Tananbaum
---------------------------------
Name: Steven A. Tananbaum
Title: Director
[signature pages continued on next page]
S-3
<PAGE>
THE MAINSTAY FUNDS, ON BEHALF OF ITS STRATEGIC
INCOME FUND SERIES
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ Steven A. Tananbaum
------------------------------
Name: Steven A. Tananbaum
Title: Director
[signature pages continued on next page]
S-4
<PAGE>
HIGHBRIDGE CAPITAL CORPORATION
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ Steven A. Tananbaum
--------------------------------
Name: Steven A. Tananbaum
Title: Director
[signature pages continued on next page]
S-5
<PAGE>
THE MAINSTAY FUNDS, ON BEHALF OF ITS HIGH YIELD
CORPORATE BOND FUND SERIES
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ Steven A. Tananbaum
--------------------------------
Name: Steven A. Tananbaum
Title: Director
[signature pages continued on next page]
S-6
<PAGE>
MAINSTAY VP SERIES FUND, INC., ON BEHALF OF HIGH
YIELD CORPORATE BOND PORTFOLIO
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ Steven A. Tananbaum
--------------------------------
Name: Steven A. Tananbaum
Title: Director
[signature pages continued on next page]
S-7
<PAGE>
POLICE OFFICERS PENSION SYSTEM OF THE CITY OF
HOUSTON
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ Steven A. Tananbaum
-----------------------------
Name: Steven A. Tananbaum
Title: Director
[signature pages continued on next page]
S-8
<PAGE>
VULCAN MATERIALS COMPANY HIGH YIELD ACCOUNT
By: MacKay-Shields Financial Corporation
Its: Investment Advisor
By: /s/ Steven A. Tananbaum
------------------------------
Name: Steven A. Tananbaum
Title: Director
S-9
<PAGE>
SCHEDULE I TO NOTE AGREEMENT
Purchaser: THE BROWN & WILLIAMSON MASTER RETIREMENT TRUST
1. Principal Amount of Notes being acquired: $400,000
-------
2. In the case of payments on account of the Notes:
By wire transfer of Federal or other immediately available funds
---- --------
(identifying each payment as to issuer, security and principal or interest)
to:
ABA # 011000028
STATE STREET BANK AND TRUST COMPANY
BOSTON, MASS 02101
FOR CREDIT TO:
ACCT NAME: BROWN & WILLIAMSON MASTER RETIREMENT TRUST
DDA # 09237520
ACCT # ZH23
3. All communications shall be delivered or mailed to:
MacKay-Shields Financial Corporation
9 West 57th Street
New York, New York 10019
Attn: Steven Tananbaum
Fax: (212) 758-4735
with a copy to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Attn: Fredric A. Kleinberg, Esq.
Fax: (212) 986-8866
4. Tax I.D. #: 043216086
<PAGE>
Purchaser: THE MAINSTAY FUNDS, ON BEHALF OF ITS STRATEGIC INCOME FUND SERIES
1. Principal Amount of Notes being acquired: $100,000
-------
2. In the case of payments on account of the Notes:
By wire transfer of Federal or other immediately available funds
---- --------
(identifying each payment as to issuer, security and principal or interest)
to:
ABA # 021000018
BANK OF NEW YORK/CUST.
GLA 111612
FOR CREDIT TO:
ACCT NAME: MAINSTAY STRATEGIC INCOME FUND
ACCT # 267451
3. All communications shall be delivered or mailed to:
MacKay-Shields Financial Corporation
9 West 57th Street
New York, New York 10019
Attn: Steven Tananbaum
Fax: (212) 758-4735
with a copy to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Attn: Fredric A. Kleinberg, Esq.
Fax: (212) 986-8866
4. Tax I.D. #: 133924140
<PAGE>
Purchaser: THE MAINSTAY FUNDS, ON BEHALF OF ITS HIGH YIELD CORPORATE BOND FUND
SERIES
1. Principal Amount of Notes being acquired: $19,410,000
----------
2. In the case of payments on account of the Notes:
By wire transfer of Federal or other immediately available funds
---- --------
(identifying each payment as to issuer, security and principal or interest)
to:
ABA # 011000028
STATE STREET BANK AND TRUST COMPANY
BOSTON, MASS 02101
FOR CREDIT TO:
ACCT NAME: MAINSTAY HIGH YIELD CORPORATE BOND FUND
DDA # 4266 0761
ACCT # SN04
3. All communications shall be delivered or mailed to:
MacKay-Shields Financial Corporation
9 West 57th Street
New York, New York 10019
Attn: Steven Tananbaum
Fax: (212) 758-4735
with a copy to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Attn: Fredric A. Kleinberg, Esq.
Fax: (212) 986-8866
4. Tax I.D. #: 04-2910780
<PAGE>
Purchaser: MAINSTAY VP SERIES FUND, INC., ON BEHALF OF HIGH YIELD CORPORATE
BOND PORTFOLIO
1. Principal Amount of Notes being acquired: $3,700,000
---------
2. In the case of payments on account of the Notes:
By wire transfer of Federal or other immediately available funds
---- --------
(identifying each payment as to issuer, security and principal or interest)
to:
ABA # 021000018
BANK OF NEW YORK/CUST.
GLA 111612
FOR CREDIT TO:
ACCT NAME: MAINSTAY V.P. SERIES HIGH YIELD CORPORATE BOND FUND
ACCT # 274467
3. All communications shall be delivered or mailed to:
MacKay-Shields Financial Corporation
9 West 57th Street
New York, New York 10019
Attn: Steven Tananbaum
Fax: (212) 758-4735
with a copy to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Attn: Fredric A. Kleinberg, Esq.
Fax: (212) 986-8866
4. Tax I.D. #: 13-3818793
<PAGE>
Purchaser: POLICE OFFICERS PENSION SYSTEM OF THE CITY OF HOUSTON
1. Principal Amount of Notes being acquired: $350,000
2. In the case of payments on account of the Notes:
By wire transfer of Federal or other immediately available funds
---- --------
(identifying each payment as to issuer, security and principal or interest)
to:
ABA # 071-000-152
NORTHERN TRUST/CHGO TRUST
FOR CREDIT TO:
ACCT # 5186061000
ACCT NAME: POLICE OFFICERS PENSION SYSTEM OF THE CITY OF HOUSTON
ACCT # 26-41113
3. All communications shall be delivered or mailed to:
MacKay-Shields Financial Corporation
9 West 57th Street
New York, New York 10019
Attn: Steven Tananbaum
Fax: (212) 758-4735
with a copy to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Attn: Fredric A. Kleinberg, Esq.
Fax: (212) 986-8866
4. Tax I.D. #: 74-6036541
<PAGE>
Purchaser: VULCAN MATERIALS COMPANY HIGH YIELD ACCOUNT
1. Principal Amount of Notes being acquired: $40,000
2. In the case of payments on account of the Notes:
By wire transfer of Federal or other immediately available funds
---- --------
(identifying each payment as to issuer, security and principal or interest)
to:
ABA # 071-000-152
NORTHERN TRUST/CHGO TRUST
FOR CREDIT TO:
ACCT # 5186061000
ACCT NAME: VULCAN MATERIALS
ACCT # 26-00065
3. All communications shall be delivered or mailed to:
MacKay-Shields Financial Corporation
9 West 57th Street
New York, New York 10019
Attn: Steven Tananbaum
Fax: (212) 758-4735
with a copy to:
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Attn: Fredric A. Kleinberg, Esq.
Fax: (212) 986-8866
4. Tax I.D. #: 751867619
<PAGE>
EXHIBIT 10.1
________________________________________________________________________________
STOCK PURCHASE AGREEMENT
by and between
FRI-MRD CORPORATION
and
KOO KOO ROO, INC.
Dated as of June 9, 1998
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
DEFINITIONS......................................................... 1
SECTION 1.1 Definitions......................................... 1
-----------
ARTICLE II
PURCHASE AND SALE OF HAMLET SHARES.................................. 1
SECTION 2.1 Purchase and Sale................................... 1
-----------------
SECTION 2.2 Purchase Price...................................... 2
--------------
ARTICLE III
THE CLOSING......................................................... 2
SECTION 3.1 Closing Date........................................ 2
------------
SECTION 3.2 Transactions To Be Effected at the Closing.......... 2
------------------------------------------
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FRI-MRD........................... 2
SECTION 4.1 Incorporation of Representations and Warranties..... 3
------------------------------------------------
SECTION 4.2 Purchase For Investment............................. 3
-----------------------
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF KKR............................... 3
SECTION 5.1 Incorporation of Representation and Warranties...... 3
-----------------------------------------------
SECTION 5.2 Capitalization...................................... 4
---------------
ARTICLE VI
COVENANTS OF FRI-MRD................................................ 4
SECTION 6.1 Merger Agreement.................................... 4
----------------
SECTION 6.2 Reasonable Efforts.................................. 4
------------------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE VII
COVENANTS OF KKR.................................................... 4
SECTION 7.1 Merger Agreement.................................... 4
-----------------
SECTION 7.2 Reasonable Efforts.................................. 4
------------------
ARTICLE VIII
CONDITIONS......................................................... 5
SECTION 8.1 Conditions to Each Party's Obligation to
-----------------------------------------
Effect the Acquisition............................ 5
----------------------
SECTION 8.2 Conditions of Obligations of FRI-MRD................ 5
------------------------------------
SECTION 8.3 Conditions of Obligations of KKR.................... 6
--------------------------------
ARTICLE IX
TERMINATION AND AMENDMENT........................................... 6
SECTION 9.1 Termination......................................... 6
-----------
SECTION 9.2 Effect of Termination............................... 6
---------------------
SECTION 9.3 Amendment........................................... 6
---------
SECTION 9.4 Extension; Waiver................................... 7
-----------------
ARTICLE X
MISCELLANEOUS....................................................... 7
SECTION 10.1 Notices............................................ 7
-------
SECTION 10.2 Descriptive Headings............................... 7
--------------------
SECTION 10.3 Counterparts....................................... 7
------------
SECTION 10.4 Entire Agreement; Assignment....................... 7
----------------------------
SECTION 10.5 Governing Law...................................... 7
-------------
SECTION 10.6 Specific Performance............................... 7
--------------------
SECTION 10.7 Publicity.......................................... 8
---------
SECTION 10.8 Parties in Interest................................ 8
-------------------
SECTION 10.9 Attorneys' Fees.................................... 8
---------------
SECTION 10.10 Survival of Representations and Warranties........ 8
------------------------------------------
SECTION 10.11 Closing of Merger Agreement....................... 8
---------------------------
</TABLE>
ii
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT (the "Agreement"), dated as of June 9, 1998, by
and between, FRI-MRD CORPORATION ("FRI-MRD"), a Delaware corporation, and direct
wholly owned subsidiary of Family Restaurants, Inc., a Delaware corporation
("FRI"), and Koo Koo Roo, Inc., a Delaware corporation ("KKR").
WHEREAS, KKR owns all of the outstanding shares of capital stock (the
"Hamlet Shares") of The Hamlet Group, Inc., a California corporation ("Hamlet"
or the "Company");
WHEREAS, KKR desires to sell to FRI-MRD, and FRI-MRD desires to purchase
from KKR, all of the Hamlet Shares, upon the terms and subject to the conditions
set forth herein.
This Agreement is made pursuant to the Agreement and Plan of Merger dated
as of the date hereof (the "Merger Agreement"), between FRI and FRI-Sub, Inc.,
a Delaware corporation and indirect wholly owned subsidiary of FRI, and KKR.
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. Capitalized terms used herein without
-----------
definition shall have the respective meaning given to such terms in the Merger
Agreement.
ARTICLE II
PURCHASE AND SALE OF HAMLET SHARES
SECTION 2.1 Purchase and Sale. Upon the terms and subject to the
-----------------
conditions set forth herein, KKR agrees to sell, assign, transfer, convey and
deliver to FRI-MRD, and FRI-MRD agrees to purchase and accept from KKR, on the
Closing Date (as defined below), all of KKR's rights, title and interest in and
to the Hamlet Shares (the "Acquisition").
<PAGE>
SECTION 2.2 Purchase Price. In consideration for the purchase by
--------------
FRI-MRD of the Hamlet Shares, FRI-MRD shall pay to KKR on the Closing Date $22.2
million (the "Purchase Price") in cash, payable by wire transfer of immediately
available funds to such account or accounts of KKR as it shall designate in
writing at least one business day prior to the Closing Date.
ARTICLE III
THE CLOSING
SECTION 3.1 Closing Date. The consummation of the Acquisition (the
------------
"Closing") shall take place at the offices of Skadden, Arps, Slate, Meagher &
Flom LLP, 300 South Grand Avenue, Los Angeles, California 90071, or such other
place as the parties shall mutually agree, at 10:00 a.m. (local time) on the
date on which the conditions set forth in Article VIII (other than those
conditions to be satisfied or waived on the Closing Date) shall be satisfied or
waived, or such other date as the parties shall mutually agree upon (the date of
the Closing being herein referred to as the "Closing Date").
SECTION 3.2 Transactions To Be Effected at the Closing. At the
------------------------------------------
Closing:
(a) KKR shall deliver to FRI-MRD (i) certificates representing
the Hamlet Shares, duly endorsed by KKR in such name or names as directed by
FRI-MRD not later than two business days prior to the Closing Date, (ii) the
stock books, stock ledgers, minute books and corporate seals of the Company and
(iii) such other documents as provided in Article VIII hereof; and
(b) FRI-MRD shall deliver to KKR (i) payment of the Purchase
Price as provided in Section 2.2 and (ii) such other documents as provided in
Article VIII hereof.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF FRI-MRD
FRI-MRD hereby represents and warrants as to KKR follows:
2
<PAGE>
SECTION 4.1 Incorporation of Representations and Warranties. The
-----------------------------------------------
representations and warranties set forth in Article IV of the Merger Agreement
relating to FRI-MRD and its subsidiaries are hereby incorporated by reference as
though fully set forth herein.
SECTION 4.2 Purchase For Investment. FRI-MRD is acquiring the Hamlet
-----------------------
Shares for investment (for its own account or for accounts over which it
exercises investment control), and not with a view to, or for offer or sale in
connection with, any distribution thereof that would be in violation of the
Securities Act, or any applicable state securities law, without prejudice,
however, to FRI-MRD's right at all times to sell or otherwise dispose of all or
any part of said Hamlet Shares pursuant to an effective registration statement
under the Securities Act and applicable state securities laws, or under an
exemption from such registration available under the Securities Act and other
applicable state securities laws. FRI-MRD (i) is knowledgeable, sophisticated
and experienced in business and financial matters and fully understands the
limitations on transfer described above; and (ii) is an "accredited investor" as
such term is defined in Rule 501(a) of Regulation D under the Securities Act.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF KKR
KKR hereby represents and warrants to FRI-MRD as follows:
SECTION 5.1 Incorporation of Representation and Warranties. The
----------------------------------------------
representations and warranties set forth in Article V of the Merger Agreement
relating to Hamlet and its subsidiaries are hereby incorporated by reference as
though fully set forth herein.
SECTION 5.2 Capitalization.
--------------
(a) The total authorized capital stock of Hamlet consists of
100,000 shares of common stock, no par value per share, 1,000 shares of which
are issued and outstanding as of the date hereof.
(b) Each Hamlet Share that is issued and outstanding (i) has been
duly authorized and validly issued, (ii) is fully paid and nonassessable and
free of preemptive and similar rights, and (iii) immediately prior to the
Closing Date will be free
3
<PAGE>
and clear of all Liens and restrictions on voting and transfer other than
restrictions on transfer imposed by Federal and state securities laws. Upon
consummation of the Acquisition, FRI-MRD will acquire valid title to the Hamlet
Shares, free and clear of all Liens and restrictions on voting and transfer
other than restrictions on transfer imposed by Federal and state securities
laws.
ARTICLE VI
COVENANTS OF FRI-MRD
SECTION 6.1 Merger Agreement. The covenants relating to actions and
----------------
restrictions on actions by FRI-MRD and its subsidiaries set forth in Article VI
and Article VIII of the Merger Agreement are hereby incorporated by reference
herein as though fully set forth herein.
SECTION 6.2 Reasonable Efforts. Subject to the terms and conditions
------------------
of this Agreement, FRI-MRD agrees to use commercially reasonable efforts to
take, or cause to be taken, all actions, and to do, or cause to be done, all
things necessary, proper or advisable to assure that all conditions to Closing
set forth in Article VIII of this Agreement are satisfied as expeditiously as
possible. FRI-MRD shall promptly consult with KKR with respect to, provide any
necessary information with respect to and provide KKR (or its counsel) copies
of, all filings made by it with any Governmental Authority in connection with
this Agreement and the transactions contemplated hereby.
ARTICLE VII
COVENANTS OF KKR
KKR covenants and agrees as follows:
SECTION 7.1 Merger Agreement. The covenants relating to actions and
-----------------
restrictions on actions by Hamlet and its subsidiaries set forth in Article VII
and Article VIII of the Merger Agreement are hereby incorporated by reference
herein as though fully set forth herein.
SECTION 7.2 Reasonable Efforts. Subject to the terms and conditions
------------------
of this Agreement, KKR agrees to use commercially reasonable efforts to take, or
cause
4
<PAGE>
to be taken, all actions, and to do, or cause to be done, all things necessary,
proper or advisable to assure that all conditions to Closing set forth in
Article VIII of this Agreement are satisfied as expeditiously as possible. KKR
shall promptly consult with FRI-MRD with respect to, provide any necessary
information with respect to and provide FRI-MRD (or its counsel) copies of, all
filings made by it with any Governmental Authority in connection with this
Agreement and the transactions contemplated hereby.
ARTICLE VIII
CONDITIONS
SECTION 8.1 Conditions to Each Party's Obligation to Effect the
---------------------------------------------------
Acquisition. The respective obligations of each party to effect the Acquisition
- -----------
shall be subject to the satisfaction at or prior to the Closing Date of the
following conditions:
(a) The applicable waiting period with respect to the Acquisition
under the HSR Act shall have expired or been terminated.
(b) Each party hereto shall have obtained all consents,
approvals, authorizations and permits required from third parties and any
Governmental Authority necessary for the consummation of the transactions
contemplated by this Agreement.
(c) The conditions set forth in Section 9.1 of the Merger
Agreement shall have been satisfied in all material respects.
SECTION 8.2 Conditions of Obligations of FRI-MRD. The obligation of
------------------------------------
FRI-MRD to effect the Acquisition are further subject to the satisfaction at or
prior to the Closing Date of the following conditions, unless waived by FRI-MRD:
(a) The representations and warranties of KKR set forth in this
Agreement shall be true and correct in all material respects as of the date of
this Agreement and as of the Closing Date, as if made as of such time.
(b) KKR shall have performed and complied, in all material
respects, with all obligations and covenants required to be performed or
complied with by it under this Agreement at or prior to the Closing Date.
5
<PAGE>
(c) The conditions set forth in Section 9.2 of the Merger
Agreement shall have been satisfied in all material respects.
SECTION 8.3 Conditions of Obligations of KKR. The obligation of KKR
--------------------------------
to effect the Acquisition is further subject to the satisfaction at or prior to
the Closing Date of the following conditions, unless waived by KKR:
(a) The representations and warranties of FRI-MRD set forth in
this Agreement shall be true and correct in all material respects as of the date
of this Agreement and as of the Closing Date, as if made as of such time.
(b) FRI-MRD shall have performed and complied, in all material
respects, with all obligations and covenants required to be performed or
complied with by it under this Agreement at or prior to the Closing Date.
(c) The conditions set forth in Section 9.3 of the Merger
Agreement shall have been satisfied in all material respects.
ARTICLE IX
TERMINATION AND AMENDMENT
SECTION 9.1 Termination. This Agreement shall terminate, without any
-----------
action on the part of KKR or FRI-MRD, only upon the termination of the Merger
Agreement in accordance with the terms thereof.
SECTION 9.2 Effect of Termination. In the event of the termination
---------------------
and abandonment of this Agreement pursuant to Section 9.1 hereof, this Agreement
shall forthwith become void and have no effect, without any liability hereunder
on the part of any party hereto or its affiliates, directors, officers or
stockholders.
SECTION 9.3 Amendment. This Agreement may be amended by the parties
---------
hereto at any time before or after approval of the matters presented in
connection with the Merger by the stockholders of KKR and FRI but, after any
such approvals, no amendment shall be made that by law requires further
approvals by such stockholders without such further approvals. This Agreement
may not be amended except by an instrument in writing signed on behalf of each
of the parties hereto.
6
<PAGE>
SECTION 9.4 Extension; Waiver. At any time prior to the Closing
-----------------
Date, the parties hereto may, to the extent legally allowed, (i) extend the time
for the performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties of the
other parties hereto contained herein or in any document delivered pursuant
hereto and (iii) waive compliance with any of the agreements or conditions
contained herein by the other parties hereto. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid only if set forth in
a written instrument signed on behalf of each party hereto.
ARTICLE X
MISCELLANEOUS
SECTION 10.1 Notices. All notices and other communications hereunder
-------
shall be given in accordance with provisions of the Merger Agreement.
SECTION 10.2 Descriptive Headings. The descriptive headings herein
--------------------
are inserted for convenience only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
SECTION 10.3 Counterparts. This Agreement may be executed in two or
------------
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when two or more counterparts have been signed by
each of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
SECTION 10.4 Assignment. This Agreement shall not be assigned by
----------
operation of law or otherwise.
SECTION 10.5 Governing Law. This Agreement shall be governed and
-------------
construed in accordance with the laws of the State of Delaware without regard to
any applicable principles of conflicts of law.
SECTION 10.6 Specific Performance. The parties hereto agree that if
--------------------
any of the provisions of this Agreement were not performed in accordance with
their specific terms or were otherwise breached, irreparable damage would occur,
no adequate remedy at law would exist and damages would be difficult to
determine, and that the
7
<PAGE>
parties shall be entitled to specific performance of the terms hereof, in
addition to any other remedy at law or equity.
SECTION 10.7 Publicity. Except as permitted in the Merger Agreement,
---------
neither KKR nor FRI-MRD shall, or shall permit any of its subsidiaries to, issue
or cause the publication of any press release or other public announcement with
respect to the transactions contemplated by this Agreement without prior
approval of the other party (which approval shall not be unreasonably withheld).
SECTION 10.8 Parties in Interest. This Agreement shall be binding
-------------------
upon and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person or persons any rights, benefits or remedies of any nature whatsoever
under or by reason of this Agreement.
SECTION 10.9 Attorneys' Fees. In any suit or action brought by any
---------------
party hereto to enforce this Agreement, the prevailing party shall be entitled
to reasonable attorneys' fees and costs incurred by the prevailing party in
connection therewith.
SECTION 10.10 Survival of Representations and Warranties. The
------------------------------------------
representations and warranties made in this Agreement shall not survive beyond
the Closing Date and shall be deemed to have terminated at and as of the Closing
Date.
SECTION 10.11 Closing of Merger. If the Effective Time has not
-----------------
occurred within twenty-four (24) hours of the Closing, KKR shall upon request of
FRI-MRD immediately pay to FRI-MRD by wire transfer of immediately available
funds to such account or accounts as FRI-MRD may designate, the Purchase Price
it received pursuant to Section 3.2, in cash, and in exchange therefor FRI-MRD
shall immediately sell, assign, transfer, convey and deliver to KKR, all of FRI-
MRD's rights, title and interest in and to the Hamlet Shares by delivering to
KKR the certificates representing the Hamlet Shares it received pursuant to
Section 3.2, duly endorsed by FRI-MRD in such name or names as directed by KKR
as well as any stock books, stock ledgers, minute books and corporate seals of
the Company it received pursuant to Section 3.2). The foregoing right to
terminate and rescind the transaction contemplated hereby must be exercised
within two business days of payment of the Purchase Price.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed by their respective officers thereunto duly authorized as of the date
first written above.
KOO KOO ROO, INC.
By: /s/ A. William Allen III
---------------------------
Name: A. William Allen III
Title: C.E.O.
FRI-MRD CORPORATION
By: /s/ R.T. Trebing, Jr.
---------------------------
Name: R.T. Trebing, Jr.
Title: President
9
<PAGE>
EXHIBIT 10.2
================================================================================
$3,000,000
BRIDGE LOAN AGREEMENT
dated as of
June 9, 1998
among
THE HAMLET GROUP, INC.
as Borrower
KOO KOO ROO, INC.,
H.H.K. OF VIRGINIA, INC.
and
H.H. OF MARYLAND, INC.,
as Guarantors
and
FRI-MRD CORPORATION,
as Lender
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I
Definitions
-----------
Section 1.1 Defined Terms................................................... 1
Section 1.2 Terms Generally................................................. 11
Section 1.3 Accounting Terms; GAAP.......................................... 12
ARTICLE II
The Bridge Loan
---------------
Section 2.1 Bridge Loan..................................................... 12
Section 2.2 Funding of Borrowings........................................... 12
Section 2.3 Notes........................................................... 12
Section 2.4 Repayment of Loan on Maturity Date; Mandatory Prepayment........ 13
Section 2.5 Optional Prepayment of Loan..................................... 13
Section 2.6 Interest........................................................ 13
Section 2.7 Taxes........................................................... 14
Section 2.8 Payments Generally; Pro Rata Treatment; Sharing of Set-offs..... 14
ARTICLE III
Guarantee
---------
Section 3.1 The Guarantee................................................... 15
Section 3.2 Obligations Unconditional....................................... 15
Section 3.3 Reinstatement................................................... 16
Section 3.4 Subrogation..................................................... 17
Section 3.5 Remedies........................................................ 17
Section 3.6 Continuing Guarantee............................................ 17
Section 3.7 General Limitation on Guarantee Obligations..................... 17
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE IV
Representations and Warranties
------------------------------
Section 4.1 Borrower's Representations and Warranties..................... 18
Section 4.2 Lender's Representations and Warranties....................... 19
ARTICLE V
Conditions.................................... 20
----------
ARTICLE VI
Affirmative Covenants
---------------------
Section 6.1 Financial Statements and Other Information.................... 21
Section 6.2 Notices of Material Events.................................... 22
Section 6.3 Existence; Conduct of Business................................ 23
Section 6.4 Payment of Obligations........................................ 23
Section 6.5 Maintenance of Properties; Insurance.......................... 23
Section 6.6 Books and Records; Inspection Rights.......................... 23
Section 6.7 Compliance with Laws.......................................... 23
Section 6.8 Use of Proceeds............................................... 24
Section 6.9 Further Assurances............................................ 24
Section 6.10 Conduct of Business........................................... 24
ARTICLE VII
Negative Covenants
------------------
Section 7.1 Debt.......................................................... 24
Section 7.2 Liens......................................................... 25
Section 7.3 Fundamental Changes........................................... 25
Section 7.4 Investments, Loans, Advances, Suretyship Liabilities and
Acquisitions.................................................. 26
Section 7.5 Hedging Agreements............................................ 26
Section 7.6 Restricted Payments........................................... 26
Section 7.7 Transactions with Affiliates.................................. 26
Section 7.8 Restrictive Agreements........................................ 26
ARTICLE VIII
Events of Default............................... 27
-----------------
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE IX
Miscellaneous
-------------
Section 9.1 Notices....................................................... 29
Section 9.2 Waivers; Amendments........................................... 31
Section 9.3 Expenses; Indemnity; Damage Waiver............................ 31
Section 9.4 Successors and Assigns........................................ 31
Section 9.5 Survival...................................................... 32
Section 9.6 Counterparts; Integration; Effectiveness...................... 32
Section 9.7 Marshalling; Recapture........................................ 32
Section 9.8 Severability.................................................. 33
Section 9.9 Right of Setoff............................................... 33
Section 9.10 Governing Law; Jurisdiction; Consent to Service of Process.... 33
Section 9.11 Headings...................................................... 34
SCHEDULES AND EXHIBITS
Schedule 6.1 Additional Information
Schedule 7.1 Debt
Schedule 7.2 Liens
Schedule 7.4 Investments
Schedule 7.8 Restrictive Agreements
Exhibit A Bridge Note
Exhibit B Opinion of Latham & Watkins, Counsel to the Borrower
Exhibit C Pledge Agreement
Exhibit D Security Agreement
Exhibit E Assignment of Leases
</TABLE>
iii
<PAGE>
BRIDGE LOAN AGREEMENT dated as of June 9, 1998, among THE HAMLET
GROUP, INC., as Borrower, H.H.K. OF VIRGINIA, INC., H.H. OF MARYLAND, INC. and
KOO KOO ROO, INC., as Guarantors, and FRI-MRD CORPORATION, as Lender.
The parties hereto agree as follows:
ARTICLE I
Definitions
-----------
Section 1.1 Defined Terms. As used in this Agreement, the following
-------------
terms have the meanings specified below:
"Affiliate" means, with respect to a specified Person, another Person
---------
that directly, or indirectly through one or more intermediaries, Controls or is
Controlled by or is under common Control with the Person specified.
"Agreement" means this Bridge Loan Agreement, as amended from time to
---------
time.
"Assignment of Leases" means that certain Assignment of Leases, dated
--------------------
as of the date hereof, executed by the Borrower and the Subsidiary Guarantors in
favor of Lender, in substantially the form of Exhibit E.
"Bankruptcy Code" means Title 11 of the United States Code entitled
---------------
Bankruptcy, as now or hereafter in effect.
"Board" means the Board of Governors of the Federal Reserve System of
-----
the United States of America.
"Borrower" means The Hamlet Group, Inc., a California corporation.
--------
"Bridge Note" has the meaning assigned to such term in Section 2.3(a).
-----------
"Business Day" means any day that is not a Saturday, Sunday or other
------------
day on which commercial banks in Los Angeles, California are authorized or
required by law to remain closed.
<PAGE>
BRIDGE LOAN AGREEMENT
"Capital Lease Obligations" of any Person means the obligations of
-------------------------
such Person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such Person under GAAP,
and the amount of such obligations shall be the capitalized amount thereof
determined in accordance with GAAP.
"Change in Control" means (a) the acquisition of ownership, directly
-----------------
or indirectly, beneficially or of record, by any Person or group (within the
meaning of Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934
and the rules of the Securities and Exchange Commission thereunder as in effect
on the date hereof), of shares representing more than 25% of the aggregate
ordinary voting power represented by the issued and outstanding capital stock of
KKR (other than Lender or any Affiliate of Lender); (b) occupation of a majority
of the seats (other than vacant seats) on the board of directors of KKR by
Persons who were neither (i) nominated by the board of directors of KKR nor (ii)
appointed by directors so nominated; or (c) the failure by KKR to beneficially
own 100% of the outstanding capital stock of the Borrower and each Subsidiary
Guarantor.
"Closing Date" means the date on which the Loan is advanced hereunder.
------------
"Code" means the Internal Revenue Code of 1986, as amended from time
----
to time.
"Collateral" means the collateral identified in the Security Agreement
----------
and the Pledge Agreement.
"Compliance Certificate" means a certificate signed by a Responsible
----------------------
Officer of the Borrower certifying as to the matters set forth in subsection (c)
of Article V.
"Control" means the possession, directly or indirectly, of the power
-------
to direct or cause the direction of the management or policies of a Person,
whether through the ability to exercise voting power, by contract or otherwise;
provided that beneficial ownership of 10% or more of the voting stock or equity
interests of a Person will be deemed to be Control of such Person. "Controlling"
-----------
and "Controlled" have meanings correlative thereto.
----------
"Debt" of any Person means, without duplication, (a) all obligations
----
of such Person for borrowed money, whether or not evidenced by bonds,
debentures, notes or similar instruments, (b) all Capital Lease Obligations of
such Person, (c) all obligations of such Person to pay the deferred purchase
price of property or services (other than current accounts payable in the
ordinary course of business), (d) all indebtedness secured by a Lien on the
property of such Person, whether or not such indebtedness shall have been
assumed by such
2
<PAGE>
BRIDGE LOAN AGREEMENT
Person (it being understood that if such Person has not assumed or otherwise
become personally liable for any such indebtedness, the amount of the Debt of
such Person in connection therewith shall be limited to the lesser of the face
amount of such indebtedness or the fair market value of all property of such
Person securing such indebtedness), (e) all obligations, contingent or
otherwise, with respect to the face amount of all letters of credit (whether or
not drawn) and banker's acceptances issued for the account of such Person, (f)
all Suretyship Liabilities of such Person, (g) all other obligations of such
Person upon which interest charges are customarily paid (other than accounts
payable in the ordinary course of business which are not more than 90 days past
due), (h) all obligations of such Person under conditional sale or other title
retention agreements relating to property acquired by such Person and (i) all
Debt (as defined above) of any partnership in which such Person is a general
partner (except to the extent such Debt is not recourse to such Person).
"Debt for Borrowed Money" of any Person means all Debt of such Person
-----------------------
described in (without duplication) clauses (a), (b), (c), (d), (g) and, to the
extent constituting a Suretyship Liability in respect of Debt for Borrowed Money
of another Person, (f), of the definition of Debt.
"Default" means any event or condition which constitutes an Event of
-------
Default or which upon notice, lapse of time or both would, unless cured or
waived, become an Event of Default.
"Default Rate" has the meaning assigned such term in Section 2.6(b).
------------
"dollars" or "$" refers to lawful money of the United States of
------- -
America.
"Environmental Laws" means all laws, statutes, ordinances, judgments,
------------------
injunctions, decrees, writs, regulations, notice requirements, rules or orders
of any court or Governmental Authority relating to pollution or the protection
of human health or the environment or to emissions, discharges, releases or
threatened releases of any Hazardous Materials into the environment (including
without limitation ambient air, surface water, ground water, or land), or
otherwise relating to the manufacture, processing, distribution, generation,
treatment, storage, disposal, transport or handling of any Hazardous Materials.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended, and the rules and regulations promulgated thereunder.
"ERISA Affiliate" means with respect to any Person, any other Person
---------------
that is a member of such Person's controlled group, or under common control with
such Person, within the meaning of the Code, and includes any trade or business
whether or not incorporated, that
3
<PAGE>
BRIDGE LOAN AGREEMENT
together with such Person would be deemed a "single employer" within the meaning
of Section 4001 of ERISA.
"ERISA Event" means (a) any "reportable event", as defined in Section
-----------
4043 of ERISA or the regulations issued thereunder with respect to a Plan (other
than an event for which the 30-day notice period is waived); (b) the existence
with respect to any Plan of an "accumulated funding deficiency" (as defined in
Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the
filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an
application for a waiver of the minimum funding standard with respect to any
Plan; (d) the incurrence by the Borrower or any of its ERISA Affiliates of any
liability under Title IV of ERISA with respect to the termination of any Plan;
(e) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan
administrator of any notice relating to an intention to terminate any Plan or
Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the
Borrower or any of its ERISA Affiliates of any liability with respect to the
withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the
receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by
any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice,
concerning the imposition of Withdrawal Liability or a determination that a
Multiemployer Plan is, or is expected to be, insolvent or in reorganization,
within the meaning of Title IV of ERISA.
"Event of Default" has the meaning assigned to such term in Article
----------------
VIII.
"Exchange Act" has the meaning assigned to such term in Section
------------
6.1(a).
"Financial Officer" means the chief financial officer, principal
-----------------
accounting officer, treasurer or controller of the Borrower.
"FRI-Sub" means FRI-Sub, Inc., a Delaware corporation and an indirect
-------
subsidiary of Lender, and its successors and assigns.
"GAAP" means generally accepted accounting principles in the United
----
States of America.
"Governmental Authority" means the government of the United States of
----------------------
America, any other nation or any political subdivision thereof, whether state or
local, and any agency, authority, instrumentality, regulatory body, court,
central bank or other entity exercising executive, legislative, judicial,
taxing, regulatory or administrative powers or functions of or pertaining to
government.
"Guaranteed Obligations" has the meaning assigned to such term in
----------------------
Section 3.1 hereof.
4
<PAGE>
BRIDGE LOAN AGREEMENT
"Guarantors" means, collectively, KKR and the Subsidiary Guarantors
----------
and each of their respective successors and assigns.
"Hazardous Materials" means any regulated quantity of asbestos in any
-------------------
form, urea formaldehyde, lead-based paint, PCBs, radon gas, crude oil or any
fraction thereof, all regulated forms of natural gas, petroleum products or by-
products, any regulated radioactive substance, any regulated toxic, infectious,
reactive, corrosive, ignitable or flammable chemical or chemical compound and
any other regulated hazardous substance, material or waste (as defined in or for
purposes of any Environmental Law), whether solid, liquid or gas.
"Hedging Agreement" means any interest rate protection agreement,
-----------------
foreign currency exchange agreement, commodity price protection agreement or
other interest or currency exchange rate or commodity price hedging arrangement.
"Initial Period" means the period from the Closing Date until the
--------------
later of the Maturity Date and the date all Obligations are paid in full;
provided, that if the Maturity Date is extended pursuant to clause (a) or (b) of
the definition thereof, Initial Period shall mean the period from the Closing
Date until the date the Merger Agreement is terminated.
"Interest Payment Date" means the last day of each March, June,
---------------------
September and December.
"KKR" means Koo Koo Roo, Inc., a Delaware corporation.
---
"Lender" means FRI-MRD Corporation, a Delaware corporation and its
------
permitted successors and assigns hereunder.
"Lien" means, with respect to any asset, (a) any mortgage, deed of
----
trust, lien, pledge, hypothecation, encumbrance, charge or security interest in,
on or of such asset, (b) the interest of a vendor or a lessor under any
conditional sale agreement, capital lease or title retention agreement (or any
Capital Lease Obligation having substantially the same economic effect as any of
the foregoing) relating to such asset and (c) in the case of securities, any
purchase option, call or similar right of a third party with respect to such
securities.
"Loan Documents" means this Agreement, the Bridge Note and the
--------------
Security Documents.
"Loan" has the meaning assigned to such term in Section 2.1(a).
----
"Margin Stock" shall have the meaning provided such term in Regulation
------------
U of the Federal Reserve Board.
5
<PAGE>
BRIDGE LOAN AGREEMENT
"Material Adverse Change" means, with respect to any Person, the
-----------------------
occurrence of any event or condition that has, or could reasonably be expected
to have, a Material Adverse Effect.
"Material Adverse Effect" means, with respect to any Person, a
-----------------------
material adverse effect on (i) the financial position, results of operations,
revenues, assets, liabilities, or business of such Person and its Subsidiaries,
taken as a whole, (ii) the ability of such Person or any of its Affiliates to
perform its material obligations hereunder or under any other Loan Document or
(iii) the validity or enforceability of this Agreement or any other Loan
Document; provided, that, in the case of KKR, a fluctuation or fluctuations in
--------
the trading price of the KKR Common Shares occurring other than as a result of
KKR's willful misconduct cannot, in and of itself, constitute a Material
Adverse Effect.
"Maturity Date" means the Effective Time (as defined in the Merger
-------------
Agreement); provided, that (a) (x) if the Merger Agreement is terminated due to
a material breach by Lender of any of its representations, warranties or
covenants contained therein, Maturity Date shall mean the earlier of (i) June 9,
2000 and (ii) the date on which KKR enters into an agreement that includes any
substantive terms with respect to an Acquisition Proposal (as defined in the
Merger Agreement) with any other Person (other than an agreement relating solely
to the treatment of confidential information), and (y) if the Merger Agreement
is terminated pursuant to Section 10.1(b) of the Merger Agreement and any of the
consents set forth on Schedule 4.4 to the Merger Agreement have not been
obtained, Maturity Date shall mean June 9, 2000, (b) if the Merger Agreement is
terminated pursuant to Section 10.1(d) of the Merger Agreement, Maturity Date
shall mean June 9, 1999, (c) if the Merger Agreement is terminated pursuant to
Section 10.1(e) of the Merger Agreement, Maturity Date shall mean thirty (30)
days after the date on which the Merger Agreement is terminated, and (d) if the
Merger Agreement is terminated for any other reason, Maturity Date shall mean
sixty (60) days after the date on which the Merger Agreement is terminated.
"Merger" means the merger of FRI-Sub with and into KKR, as
------
contemplated by the Merger Agreement.
"Merger Agreement" means that certain Agreement and Plan of Merger,
----------------
dated as of the date hereof, among Lender, FRI-Sub and KKR, as the same may be
amended from time to time.
"Moody's" means Moody's Investors Service, Inc.
-------
"Multiemployer Plan" means with respect to any Person, on any date, a
------------------
multiemployer plan defined as such in Section 3(37) of ERISA to which
contributions have
6
<PAGE>
BRIDGE LOAN AGREEMENT
been made at any time during the six-year period ending on or prior to such
date, by such Person or any of its ERISA Affiliates and that is covered by Title
IV of ERISA.
"Obligations" means all obligations, liabilities and indebtedness of
-----------
every nature of the Borrower from time to time owing to Lender under or in
connection with any Loan Documents, excluding, however, Obligations owing to
Lender under the Merger Agreement.
"PBGC" means the Pension Benefit Guaranty Corporation referred to and
----
defined in ERISA and any successor entity performing similar functions.
"Permitted Affiliate Transactions" means (i) advances of payroll
--------------------------------
payments and expenses to employees in the ordinary course of business, (ii) the
provision of administrative or management services by KKR or any of its officers
to any of its Subsidiaries in the ordinary course of business, (iii) any
employment agreement entered into by KKR or any of its Subsidiaries in the
ordinary course of business and (iv) Permitted Transfers.
"Permitted Encumbrances" means:
----------------------
(a) Liens imposed by law for taxes that are not yet due or are
being contested in compliance with Section 6.4;
(b) carriers', warehousemen's, mechanics', materialmen's,
repairmen's and other like Liens imposed by law, arising in the ordinary course
of business and securing obligations that are not overdue by more than 30 days
or are being contested in compliance with Section 6.4;
(c) pledges and deposits made in the ordinary course of business
in compliance with workers' compensation, unemployment insurance and other
social security laws or regulations;
(d) deposits to secure the performance of bids, trade contracts,
leases, statutory obligations, surety and appeal bonds, performance bonds and
other obligations of a like nature, in each case in the ordinary course of
business; provided that the aggregate amount of deposits at any time permitted
under this clause (d) shall not exceed $50,000;
(e) customary rights of landlords under the leases; and
(f) easements, zoning restrictions, rights-of-way and similar
encumbrances on real property imposed by law or arising in the ordinary course
of business that do not secure any monetary obligations and do not materially
detract from the value of the
7
<PAGE>
BRIDGE LOAN AGREEMENT
affected property or interfere with the ordinary conduct of business of KKR, the
Borrower or any Subsidiary;
provided that the term "Permitted Encumbrances" shall not include any Lien
- --------
securing Debt for Borrowed Money.
"Permitted Investments" means:
---------------------
(a) direct obligations of, or obligations the principal of and
interest on which are unconditionally guaranteed by, the United States of
America (or by any agency thereof to the extent such obligations are backed by
the full faith and credit of the United States of America), in each case
maturing within one year from the date of acquisition thereof;
(b) investments in commercial paper maturing within 270 days
from the date of acquisition thereof and having, at such date of acquisition,
the two highest credit ratings obtainable from S&P or from Moody's;
(c) investments in certificates of deposit, banker's acceptances
and time deposits maturing within 180 days from the date of acquisition thereof
issued or guaranteed by or placed with, and money market deposit accounts issued
or offered by, any domestic office of any commercial bank organized under the
laws of the United States of America or any State thereof which has a combined
capital and surplus and undivided profits of not less than $500,000,000;
(d) fully collateralized repurchase agreements with a term of
not more than 30 days for securities described in clause (a) above and entered
into with a financial institution satisfying the criteria described in clause
(c) above; and
(e) intercompany notes payable by KKR issued in connection with
Permitted Transfers.
"Permitted Transfers" means transfers of cash between KKR and the
-------------------
Borrower for cash management purposes, whether by intercompany note, capital
contribution or dividend; provided that the net aggregate amount of cash
transferred to KKR by the Borrower during any period shall not exceed the
Borrower's current operating earnings during such period.
"Person" means any natural person, corporation, limited liability
------
company, trust, joint venture, association, company, partnership, Governmental
Authority or other entity.
8
<PAGE>
BRIDGE LOAN AGREEMENT
"Plan" means any employee pension benefit plan (other than a
----
Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section
412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or
any ERISA Affiliate is, or, if such plan were terminated, would under Section
4069 of ERISA be deemed to be, an "employer" as defined in Section 3(5) of
ERISA.
"Pledge Agreement" means that certain Pledge Agreement, dated as of
----------------
the date hereof, in substantially the form of Exhibit C executed by the Borrower
in favor of Lender.
"Prime Rate" means the rate of interest per annum publicly announced
----------
from time to time by Bank of America National Trust and Savings Association as
its prime rate in effect at its principal office in Los Angeles (the Prime Rate
not being intended to be the lowest rate of interest charged by Bank of America
National Trust and Savings Association in connection with extensions of credit
to debtors); each change in the Prime Rate shall be effective on the date such
change is publicly announced as effective.
"Related Parties" means, with respect to any specified Person, such
---------------
Person's Affiliates and the respective directors, officers, employees, agents
and advisors of such Person and such Person's Affiliates.
"Responsible Officer" means any of the following directors or officers
-------------------
of the Borrower: the Chairman or Vice Chairman of the Board of Directors, the
Chairman or Vice Chairman of the Executive Committee of the Board of Directors,
the President, any Senior Vice President or Executive Vice President, the Chief
Financial Officer, the Chief Operating Officers, the Chief Accounting Officer,
the Vice President/Treasurer or any Assistant Treasurer responsible for
compliance with this Agreement.
"Restricted Payment" means, with respect to any Person, any dividend
------------------
or other distribution (whether in cash, securities or other property, but
excluding any payment made solely in non-redeemable common stock of such Person)
with respect to any shares of any class of capital stock of such Person or any
subsidiary of such Person, or any payment (whether in cash, securities or other
property, but excluding any payment made solely in non-redeemable common stock
of such Person), including any sinking fund or similar deposit, on account of
the purchase, redemption, retirement, acquisition, cancellation or termination
of any such shares of capital stock of such Person or any subsidiary of such
Person or any option, warrant or other right to acquire any such shares of
capital stock of such Person or any subsidiary of such Person.
"Security Agreement" means that certain Security Agreement, dated as
------------------
of the date hereof, executed by the Borrower and the Subsidiary Guarantors in
favor of Lender, in substantially the form of Exhibit D.
9
<PAGE>
BRIDGE LOAN AGREEMENT
"Security Documents" means (i) the Security Agreement, (ii) the Pledge
------------------
Agreement, (iii) the Assignment of Leases, and (iv) the Trademark Security
Agreement, if any, executed by the Borrower and the Subsidiary Guarantors in
favor of Lender, substantially in the form of Exhibit I to the Security
Agreement.
"Significant Subsidiary" means (a) any "significant subsidiary" within
----------------------
the meaning provided in Article 1, Rule 1-02 of Regulation S-X promulgated by
the Securities and Exchange Commission and (b) any other subsidiary that is
material to the applicable Person's condition (financial or otherwise), results
of operations, revenues, assets, liabilities, prospects or business.
"Solvent" as to any Person, as of any date, means (i) the sum of the
-------
assets of such Person, at present fair salable value, will exceed its
liabilities, including contingent liabilities as they become absolute and
matured, (ii) such Person has, in its reasonable judgment, sufficient capital
with which to conduct its business as presently conducted and (iii) such Person
has not incurred debts, and does not intend to incur debts, beyond its ability
to pay such debts as they mature. For purposes of this definition, "debt" means
any liability on a claim, and "claim" means (x) a right to payment, whether or
not such right is reduced to judgment, liquidated, unliquidated, fixed,
contingent, legal, equitable, secured or unsecured, or (y) a right to an
equitable remedy for breach of performance if such breach gives rise to a
payment, whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured,
or unsecured. With respect to any contingent liabilities, such liabilities
shall be computed at the amount which, in light of all the facts and
circumstances existing at the time, represents the amount which can reasonably
be expected to become an actual or matured liability.
"S&P" means Standard & Poor's Corporation.
---
"subsidiary" means, with respect to any Person (the "parent") at any
---------- ------
date, any corporation, limited liability company, partnership, association or
other entity the accounts of which are required to be consolidated with those of
the parent in the parent's consolidated financial statements if such financial
statements were prepared in accordance with GAAP as of such date, as well as,
with respect to any Person, any Person of which such Person and/or its
subsidiaries own, directly or indirectly, such number of outstanding shares (or
similar equity interest) as have more than 50% of the ordinary voting power for,
in the case of a corporation, the election of directors or, in all other cases,
the management of such Person.
"Subsidiary" means any subsidiary of KKR other than Color Me Mine,
----------
Inc., Arrosto Coffee Company and their respective subsidiaries.
10
<PAGE>
BRIDGE LOAN AGREEMENT
"Subsidiary Guarantors" means H.H.K. of Virginia, Inc., a Virginia
---------------------
corporation, and H.H. of Maryland, Inc., a Maryland corporation.
"Suretyship Liability" means any agreement, undertaking or other
--------------------
contractual arrangement by which any Person guarantees, endorses or otherwise
becomes or is contingently liable upon (by direct or indirect agreement,
contingent or otherwise, to provide funds for payment, to supply funds to or
otherwise to invest in a debtor, or otherwise to assure a creditor against loss)
any Debt of any other Person (other than by endorsements of instruments in the
course of collection), or guarantees the payment of dividends or other
distributions upon the shares of any other Person. The amount of any Person's
obligation under any Suretyship Liability shall (subject to any limitation set
forth therein) be deemed to be the principal amount of the indebtedness,
obligation or other liability guaranteed thereby.
"Taxes" means any and all present or future taxes, levies, imposts,
-----
duties, deductions, charges or withholdings imposed by any Governmental
Authority.
"Transactions" means the execution, delivery and performance by the
------------
Borrower and the Guarantors of this Agreement and the other Loan Documents, the
borrowing of the Loan and the use of the proceeds thereof.
"Withdrawal Liability" means liability to a Multiemployer Plan as a
--------------------
result of a complete or partial withdrawal from such Multiemployer Plan, as such
terms are defined in Part I of Subtitle E of Title IV of ERISA.
Section 1.2 Terms Generally. The definitions of terms herein shall
---------------
apply equally to the singular and plural forms of the terms defined. Whenever
the context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words "include", "includes" and "including" shall
be deemed to be followed by the phrase "without limitation". The word "will"
shall be construed to have the same meaning and effect as the word "shall".
Unless the context requires otherwise (a) any definition of or reference to any
agreement, instrument or other document herein shall be construed as referring
to such agreement, instrument or other document as from time to time amended,
supplemented or otherwise modified (subject to any restrictions on such
amendments, supplements or modifications set forth herein), (b) any reference
herein to any Person shall be construed to include such Person's successors and
assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar
import, shall be construed to refer to this Agreement in its entirety and not to
any particular provision hereof, (d) all references herein to Articles,
Sections, Exhibits and Schedules shall be construed to refer to Articles and
Sections of, and Exhibits and Schedules to, this Agreement and (e) the words
"asset" and "property" shall be construed to have the same meaning and effect
and to refer to any and all tangible and intangible assets and properties,
including cash, securities, accounts and contract rights.
11
<PAGE>
BRIDGE LOAN AGREEMENT
Section 1.3 Accounting Terms; GAAP. Except as otherwise expressly
----------------------
provided herein, all terms of an accounting or financial nature shall be
construed in accordance with GAAP, as in effect from time to time; provided that
--------
for purposes of determining compliance with any covenant set forth in Article
VII, such terms shall be construed in accordance with GAAP as in effect on the
date of this Agreement applied on a basis consistent with the application used
in preparing the Borrower's audited financial statements referred to in Section
6.1.
ARTICLE II
The Bridge Loan
---------------
Section 2.1 Bridge Loan. (a) Subject to the terms and conditions
-----------
set forth herein, Lender agrees to make a term loan (the "Loan") to the Borrower
----
on the Closing Date, which Loan shall not exceed $3,000,000 in aggregate
principal amount at any time outstanding.
(b) All or any portion of the Loan may be voluntarily prepaid
pursuant to Section 2.5. The Loan shall mature on and be payable in full on the
Maturity Date, without further action on the part of the Lender.
Section 2.2 Funding of Borrowings. Subject to the terms hereof,
---------------------
Lender shall make the Loan by wire transfer of immediately available funds by
2:00 p.m., Los Angeles time, on the Closing Date to the account of the Borrower
set forth below:
Union Bank of California
ABA # 121000496
LA Headquarters Office
Account # 2100692328
ref: The Hamlet Group, Inc. - concentration
Section 2.3 Notes. (a) The Loan shall be evidenced by a non-
-----
negotiable promissory note in the form of Exhibit A (the "Bridge Note"). The
-----------
Bridge Note shall be dated the Closing Date and mature on the Maturity Date.
(b) Lender is hereby authorized, at its option, either (i) to
endorse on the schedule attached to the Bridge Note (or on a continuation of
such schedule attached to such Bridge Note and made a part thereof) an
appropriate notation evidencing the date and amount of the Loan evidenced
thereby and the date and amount of each principal and interest payment in
respect thereof, or (ii) to record such Loan and such payments in its books and
records.
12
<PAGE>
BRIDGE LOAN AGREEMENT
Such schedule or such books and records, as the case may be, shall constitute
prima facie evidence of the accuracy of the information contained therein;
provided that any errors with respect to such schedule, books or records shall
not affect the Borrower's obligations to repay amounts owing hereunder.
Section 2.4 Repayment of Loan on Maturity Date; Mandatory Prepayment.
--------------------------------------------------------
(a) Subject to paragraphs (b) and (c) of this Section 2.4, the Borrower hereby
unconditionally promises to pay to Lender the then unpaid principal amount of
the Loan, all accrued and unpaid interest thereon, and all other Obligations on
the Maturity Date.
(b) If the Maturity Date is determined pursuant to clause (d) of
the definition thereof, the Borrower hereby unconditionally promises to pay to
Lender $1.0 million principal amount of the Loan and all accrued and unpaid
interest thereon on the thirtieth day after the date on which the Merger
Agreement is terminated.
(c) If the Maturity Date is determined pursuant to clause (a)(y)
of the definition thereof, the principal amount of the Loan shall be reduced by
$2.0 million on the date on which the Merger Agreement is terminated (with the
reduction constituting a forgiveness of such principal). Interest shall accrue
on such reduced principal amount from and after the date on which the Merger
Agreement is terminated until the Maturity Date.
Section 2.5 Optional Prepayment of Loan. (a) The Borrower shall
---------------------------
have the right at any time and from time to time to prepay, without penalty, the
Loan in whole or in part, subject to prior notice in accordance with paragraph
(b) of this Section.
(b) The Borrower shall notify Lender in writing of any
prepayment hereunder not later than 12:00 p.m. (noon), Los Angeles time, one
Business Day before the date of prepayment. Each such notice shall be
irrevocable and shall specify the prepayment date and the principal amount of
the Loan or portion thereof to be prepaid. Each partial prepayment of principal
of the Loan shall be in an amount of at least $300,000 or an integral multiple
of $50,000 in excess thereof. Prepayments shall be accompanied by accrued
interest on the principal amount prepaid.
Section 2.6 Interest. (a) The Loan shall bear interest at an annual
--------
rate of interest equal to the Prime Rate; provided, however, that if the
-------- -------
Maturity Date is extended pursuant to clauses (b) or (c) of the definition
thereof, the Loan shall, from and after the date on which the Merger Agreement
is terminated, bear interest at an annual rate of interest equal to the Prime
Rate plus 3%.
----
(b) Notwithstanding the foregoing, if any principal of or
interest on the Loan or any fee or other amount payable by the Borrower
hereunder is not paid when due,
13
<PAGE>
BRIDGE LOAN AGREEMENT
whether at stated maturity, upon acceleration or otherwise, such overdue amount
shall bear interest, after as well as before judgment, at a rate per annum equal
to 1.5% plus the rate otherwise applicable to the Loan as provided in the
preceding paragraph of this Section (the "Default Rate").
------------
(c) Accrued interest on the Loan shall be payable in arrears on
each Interest Payment Date for the Loan and upon termination of this Agreement;
provided that (i) interest accrued pursuant to paragraph (b) of this Section
- --------
shall be payable on demand and (ii) in the event of any repayment or prepayment
of the Loan, accrued interest on the principal amount repaid or prepaid shall be
payable on the date of such repayment or prepayment.
(d) All interest hereunder shall be computed on the basis of a
year of 360 days of twelve 30-day months, provided, however, that in the case of
a payment on any day other than an Interest Payment Date, interest shall be
payable for the actual number of days elapsed since the last Interest Payment
Date (including the first day but excluding the last day).
Section 2.7 Taxes. Any and all payments by or on account of any
-----
Obligation of the Borrower or the Guarantors hereunder shall be made free and
clear of and without deduction for any Taxes (other than taxes based on the net
income of Lender). Lender confirms that it is a United States Person for
federal income tax purposes.
Section 2.8 Payments Generally. (a) The Borrower shall make each
------------------
payment required to be made by it hereunder (whether of principal, interest,
fees, or of amounts payable under Section 2.9, or otherwise) prior to 12:00
noon, Los Angeles time, on the date when due, by wire transfer, in immediately
available funds, without set-off or counterclaim. Any amounts received after
such time on any date may, in the discretion of Lender, be deemed to have been
received on the next succeeding Business Day for purposes of calculating
interest thereon. All such payments shall be made to the account of Lender
specified below or to such other account designated by Lender in a written
notice to the Borrower not later than two Business Days prior to the date such
amount is due:
Bank of America
Concord, California
ABA # 121000358
Account Name: FRI-MRD Corporation
Account # 12359-00417
Attention: Laurie Warner
Account Administration, No. 5693
14
<PAGE>
BRIDGE LOAN AGREEMENT
(b) If any payment hereunder shall be due on a day that is not a
Business Day, the date for payment shall be extended to the next succeeding
Business Day, and, in the case of any payment accruing interest, interest
thereon shall be payable for the period of such extension. All payments
hereunder shall be made in dollars.
ARTICLE III
Guarantee
---------
Section 3.1 The Guarantee. Each Guarantor hereby jointly and
-------------
severally guarantees to Lender (a) the prompt payment in full when due (whether
at stated maturity, by acceleration or otherwise) of the principal and interest
payable on the Loan, (b) the payment of all other Obligations (including,
without limitation, indemnities, fees and interest thereon and all Obligations
which, but for the automatic stay under Section 362(a) of the Bankruptcy Code
and the operation of Sections 502(b) and 506(b) of the Bankruptcy Code would
become due, and all interest accruing on the Obligations after the filing of a
petition by or against the Borrower or any of its subsidiaries under the
Bankruptcy Code, in accordance with and at the rate (including the Default Rate)
specified in this Agreement whether or not the claim for such interest is
allowed as a claim after such filing in any proceeding under the Bankruptcy
Code) of the Borrower now existing or hereafter incurred under, arising out of,
or in connection with any of the Loan Documents, (c) the due performance and
compliance by the Borrower with all of the terms, conditions and agreements
contained in any of the Loan Documents, (d) the payment of all sums advanced by
Lender under or pursuant hereto, with interest thereon from the due date
thereof, until paid, at the applicable rate specified in Section 2.6 and (e) all
renewals, extensions, amendments and changes of, or substitutions or
replacements for, all or any part of the foregoing (all such principal,
interest, obligations, indebtedness, performance, compliance and payments,
collectively, the "Guaranteed Obligations"). Each Guarantor hereby jointly and
----------------------
severally further agrees that if the Borrower shall fail to pay in full when due
(after giving effect to any cure periods) (whether at stated maturity, by
acceleration or otherwise) any of the Guaranteed Obligations, such Guarantor
will promptly pay the same, without any demand or notice whatsoever. Each
Guarantor's guarantee provided herein is a guarantee of payment and not of
collection.
Section 3.2 Obligations Unconditional. The joint and several
-------------------------
obligations of the Guarantors under Section 3.1 are absolute and unconditional,
irrespective of the value, genuineness, validity, regularity or enforceability
of the obligations of the Borrower under this Agreement or any other agreement
or instrument referred to herein or therein, or any substitution, release or
exchange of any other guarantee of or security for any of the Guaranteed
Obligations, and, to the fullest extent permitted by applicable law and subject
to Section 3.7 hereof, irrespective of any other circumstance whatsoever that
might otherwise
15
<PAGE>
BRIDGE LOAN AGREEMENT
constitute a legal or equitable discharge or defense of a surety or guarantor,
it being the intent of this Section that the joint and several obligations of
the Guarantors hereunder shall be absolute and unconditional under any and all
circumstances. Without limiting the generality of the foregoing, it is agreed
that the occurrence of any one or more of the following shall not alter or
impair the liability of any Guarantor hereunder, which shall remain absolute and
unconditional as described above:
(a) at any time or from time to time, without notice to any
Guarantor, the time for any performance of or compliance with any of the
Guaranteed Obligations shall be extended, or such performance or compliance
shall be waived;
(b) any of the acts mentioned in any of the provisions of this
Agreement or any other agreement or instrument referred to herein shall be done
or omitted;
(c) any invalidity, irregularity or unenforceability of all or
part of the Guaranteed Obligations or of any security therefor;
(d) the maturity of any of the Guaranteed Obligations shall be
accelerated, or any of the Guaranteed Obligations shall be modified,
supplemented or amended in any respect, or any right under this Agreement or any
other agreement or instrument referred to herein shall be waived or any other
guarantee of any of the Guaranteed Obligations or any security therefor shall be
released or exchanged in whole or in part or otherwise dealt with;
(e) any lien or security interest granted to, or in favor of,
Lender as security for any of the Guaranteed Obligations shall fail to be
perfected or shall be released;
(f) the bankruptcy or insolvency of the Borrower; or
(g) any of the Guaranteed Obligations or any security therefor
shall be settled, compromised or released.
Each Guarantor hereby expressly waives diligence, presentment, demand of
payment, protest and all notices whatsoever, and any requirement that Lender
exhaust any right, power or remedy or proceed against the Borrower under this
Agreement or any other agreement or instrument referred to herein, or against
any other Person under any other guarantee of, or security for, any of the
Guaranteed Obligations.
Section 3.3 Reinstatement. If claim is ever made upon Lender for
-------------
repayment or recovery of any amount or amounts received in payment or on account
of any of the Guaranteed Obligations and Lender repays all or part of said
amount by reason of (a) any
16
<PAGE>
BRIDGE LOAN AGREEMENT
judgment, decree or order of any court or administrative body having
jurisdiction over such payee or any of its property or (b) any settlement or
compromise of any such claim effected by Lender with any such claimant
(including the Borrower), then and in such event each Guarantor jointly and
severally agrees that any such judgment, decree, order, settlement or compromise
shall be binding upon it, notwithstanding any revocation hereof or the
cancellation of this Agreement or other instrument evidencing any liability of
the Borrower, and each Guarantor shall be and remain jointly and severally
liable to Lender hereunder for the amount so repaid or recovered to the same
extent as if such amount had never originally been received by Lender.
Section 3.4 Subrogation. Each Guarantor hereby agrees that until the
-----------
Maturity Date and the payment and satisfaction in full of all Guaranteed
Obligations, it shall not exercise any right or remedy arising by reason of any
performance by it of their guarantee in Section 3.1, whether by subrogation or
otherwise, against the Borrower or any other guarantor of any of the Guaranteed
Obligations or any security for any of the Guaranteed Obligations.
Section 3.5 Remedies. Each Guarantor agrees that, as between it and
--------
Lender, the obligations of the Borrower under this Agreement may be declared to
be forthwith due and payable as provided in Article VIII (and shall be deemed to
have become automatically due and payable as provided in Article VIII) for
purposes of Section 3.1 notwithstanding any stay, injunction or other
prohibition preventing such declaration (or such obligations from becoming
automatically due and payable) as against the Borrower and that, in the event of
such declaration (or such obligations being deemed to have become automatically
due and payable), such obligations (whether or not due and payable by the
Borrower) shall forthwith become due and payable by such Guarantor for purposes
of Section 3.1.
Section 3.6 Continuing Guarantee. The guarantee in this Article is a
--------------------
continuing guarantee and shall apply to all Guaranteed Obligations whenever
arising.
Section 3.7 General Limitation on Guarantee Obligations. Each
-------------------------------------------
Guarantor confirms that it is the intention of all parties to this Agreement
that neither the guarantee by such Guarantor nor any liability or payment by it
hereunder shall (i) render such Guarantor "insolvent," or (ii) constitute a
fraudulent transfer or conveyance, or (iii) constitute a transaction at an
undervalue or preference, or (iv) give rise to any similar or analogous event,
thing or circumstance, in each case, for purposes of the Bankruptcy Code, the
Uniform Fraudulent Conveyances Act, the Uniform Fraudulent Transfer Act or any
similar federal or state law. To effectuate the foregoing intention, Lender and
each Subsidiary Guarantor hereby irrevocably agree that the Guaranteed
Obligations shall be limited to the maximum amount as will, after giving effect
to all other contingent and fixed liabilities of such Subsidiary Guarantor and
after giving effect to any collections from or payments made by or on behalf of
any other guarantor in respect of the Guaranteed Obligations, result in the
Guaranteed
17
<PAGE>
BRIDGE LOAN AGREEMENT
Obligations of such Subsidiary Guarantor hereunder neither rendering such
Subsidiary Guarantor "insolvent" nor constituting such fraudulent transfer or
conveyance, such transaction at an undervalue or preference or such other event,
thing or circumstance, in each case, under any such law.
ARTICLE IV
Representations and Warranties
------------------------------
Section 4.1 Borrower's Representations and Warranties. Each of the
-----------------------------------------
Borrower and the Guarantors jointly and severally represent and warrant to
Lender that:
(a) Authorization; Enforceability. Each of the Borrower and
-----------------------------
each of the Guarantors has all requisite power and authority to enter into each
of the Loan Documents such Person is party to and to consummate the
Transactions. The use of proceeds of the Loan will be within the Borrower's
corporate powers and will have been duly authorized as of the time of such use.
Each of the Loan Documents has been duly authorized, executed and delivered by
the Borrower and each Guarantor and constitutes a legal, valid and binding
obligation of the Borrower and each Guarantor, enforceable in accordance with
its terms, subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights generally and subject to
general principles of equity, regardless of whether considered in a proceeding
in equity or at law. The Borrower has no equity interest in any Person other
than the Subsidiary Guarantors.
(b) Financial Condition. KKR has heretofore made available to
-------------------
Lender consolidated balance sheets and statements of operations, stockholders
equity and cash flows for KKR and its Subsidiaries, as of and for the fiscal
year ended December 31, 1997, reported on by BDO Seidman LLP, independent public
accountants of KKR, and the condensed consolidated balance sheet and statements
of operations and cash flows for KKR and its Subsidiaries, as of and for the
fiscal quarter and the portion of the fiscal year ended March 31, 1998, as filed
in KKR's Forms 10-K and 10-Q with the Securities and Exchange Commission. Such
financial statements present fairly, in all material respects, the financial
position and results of operations and cash flows of KKR and its Subsidiaries as
of such dates and for such periods in accordance with GAAP, subject to year-end
audit adjustments and the limited condensed footnotes in the case of the
condensed statements for the fiscal quarter ended March 31, 1998.
(c) Solvency. On the Closing Date and after giving effect to
--------
the Transactions, each of the Borrower and each of the Guarantors will be
Solvent.
18
<PAGE>
BRIDGE LOAN AGREEMENT
(d) Use of Proceeds; Margin Regulations. All proceeds of the
-----------------------------------
Loan will be used by the Borrower only in accordance with the provisions of
Section 6.8. No part of the proceeds of the Loan will be used by the Borrower to
purchase or carry any Margin Stock or to extend credit to others for the purpose
of purchasing or carrying any Margin Stock. Neither the making of the Loan nor
the use of the proceeds thereof will violate or be inconsistent with the
provisions of Regulations T, U or X of the Federal Reserve Board.
(e) Security Interests. (i) The provisions of the Security
------------------
Agreement are effective to create in favor of the Lender a legal, valid and
enforceable security interest in all right, title and interest of the Borrower
in the Collateral described therein, and the Security Agreement, upon the filing
of Form UCC-1 financing statements or the appropriate equivalent, creates a
fully perfected first lien on, and security interest in, all right, title and
interest in all of the Collateral described therein, subject to no Liens other
than Permitted Liens. The Borrower and the Subsidiary Guarantors have good and
indefeasible title to all Collateral described in the Security Agreement free
and clear of all Liens.
(ii) The security interests created in favor of Lender under the
Pledge Agreement constitute first priority perfected security interests in the
Collateral described in the Pledge Agreement, subject to no security interests
of any other Person. No filings or recordings are required in order to perfect
(or maintain the perfection or priority of) the security interests created in
the Collateral described in the Pledge Agreement and the proceeds thereof.
(f) Additional Representations and Warranties. As of the date
-----------------------------------------
hereof, the representations and warranties contained in the Merger Agreement are
true and correct in all material respects and are incorporated herein by
reference with the same force and effect as though herein set forth in full
(regardless of any termination of the Merger Agreement).
Section 4.2 Lender's Representations and Warranties. Lender
---------------------------------------
represents and warrants to the Borrower and the Guarantors that (a) it has all
requisite power and authority to enter into each of the Loan Documents to which
it is a party and to consummate the Transactions contemplated hereby and
thereby; (b) each of the Loan Documents to which it is a party has been duly
authorized, executed and delivered by Lender and constitutes a legal, valid and
binding obligation of Lender, enforceable in accordance with its terms, subject
to applicable bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally and subject to general principles of
equity, regardless of whether considered in a proceeding in equity or at law and
(c) the execution and performance by Lender of each of the Loan Documents to
which it is a party will not constitute a breach or a violation under the
charter or bylaws of Lender or constitute a violation of any Applicable Law (as
defined in the Merger Agreement).
19
<PAGE>
BRIDGE LOAN AGREEMENT
ARTICLE V
Conditions
----------
The obligations of Lender to make the Loan hereunder shall not become
effective until the date on which each of the following conditions is satisfied
(or waived in accordance with Section 9.2):
(a) Lender shall have received from each party hereto and thereto a
counterpart of the Merger Agreement and each of the Loan Documents signed on
behalf of such party.
(b) Lender shall have received a favorable written opinion (addressed
to Lender and dated the Closing Date) of Latham & Watkins, counsel for the
Borrower, substantially in the form of Exhibit B. The Borrower hereby requests
such counsel to deliver such opinion.
(c) Lender shall have received such documents and certificates as
Lender or its counsel may reasonably request relating to the organization,
existence and good standing of the Borrower and each Guarantor, the
authorization of the Transactions and any other legal matters relating to the
Borrower, each Guarantor, the Loan Documents or the Transactions, all in form
and substance reasonably satisfactory to Lender and its counsel.
(d) Lender shall have received a certificate from the Borrower and
each Guarantor, dated the Closing Date and executed on behalf of the Borrower by
the President, a Vice President or a Financial Officer of the Borrower and each
Guarantor, respectively, confirming compliance with the conditions set forth in
paragraphs (h), (i) and (j) of this Article V.
(e) Lender shall have received acknowledgment copies (or other
evidence of filing) of each filed UCC-1 financing statement signed by the
Borrower as debtor naming Lender as secured party. Such UCC-1 financing
statements shall have been filed in each jurisdiction as may be necessary or, in
the reasonable opinion of Lender, desirable to perfect the security interests
created by the Security Agreement.
(f) Lender shall have received the original stock certificates
evidencing the stock pledged pursuant to the Pledge Agreement, together with
undated stock powers duly executed in blank in connection therewith.
(g) The Closing Date shall occur on or prior to June 30, 1998.
20
<PAGE>
BRIDGE LOAN AGREEMENT
(h) The representations and warranties of the Borrower and the
Guarantors set forth in Article IV shall be true and correct on and as of the
date of the Loan (other than those, if any, which by their terms specifically
relate only to a different date).
(i) At the time of and immediately after giving effect to the Loan,
no Default or Event of Default shall have occurred and be continuing.
(j) From March 31, 1998 through the date of the Loan, neither the
Borrower nor any Guarantor shall have suffered a Material Adverse Change.
The Loan shall be deemed to constitute a representation and warranty by the
Borrower on the date thereof as to the matters specified in paragraphs (h), (i)
and (j) of this Article V.
ARTICLE VI
Affirmative Covenants
---------------------
Until the Maturity Date and the principal of and interest on the Loan
and all other Obligations payable hereunder shall have been paid in full, the
Borrower and each Guarantor jointly and severally covenant and agree with Lender
that:
Section 6.1 Financial Statements and Other Information. KKR will
------------------------------------------
furnish to Lender:
(a) within 90 days after the end of each fiscal year, its
audited consolidated balance sheet and related statements of operations,
stockholders' equity and cash flows as of the end of and for such year, setting
forth in each case in comparative form the figures for the previous fiscal year,
all reported on by independent public accountants of recognized national
standing (without a "going concern" or like qualification or exception and
without any qualification or exception as to the scope of such audit) to the
effect that such consolidated financial statements present fairly in all
material respects the financial condition and results of operations of KKR and
its consolidated Subsidiaries on a consolidated basis in accordance with GAAP;
provided, however, that for as long as KKR is subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the obligation of KKR to deliver the reports referenced in this Section
6.1(a) shall be satisfied by the timely filing by Edgar of its Form 10-K with
respect to such fiscal year;
(b) within 45 days after the end of each of the first three
fiscal quarters of each fiscal year, its condensed consolidated balance sheet
and related statements of operations, stockholders' equity and cash flows as of
the end of and for such fiscal quarter and
21
<PAGE>
BRIDGE LOAN AGREEMENT
the then elapsed portion of the fiscal year, setting forth in each case in
comparative form the figures for the corresponding period or periods of (or, in
the case of the balance sheet, as of the end of) the previous fiscal year, all
certified by one of its Financial Officers as presenting fairly in all material
respects the financial condition and results of operations of KKR and its
consolidated Subsidiaries on a consolidated basis in accordance with GAAP,
subject to normal year-end audit adjustments and the absence of footnotes;
provided, however, that for as long as KKR is subject to the reporting
requirements of the Exchange Act, the obligation of KKR to deliver the reports
referenced in this Section 6.1(b) shall be satisfied by the timely filing by
Edgar of its Form 10-Q with respect to such fiscal quarter;
(c) concurrently with any delivery of financial statements under
clause (a) above, a Compliance Certificate (i) certifying as to whether a
Default or Event of Default has occurred and, if a Default or Event of Default
has occurred, specifying the details thereof and any action taken or proposed to
be taken with respect thereto and (ii) stating whether any change in GAAP or in
the application thereof has occurred since December 31, 1997 and, if any such
change has occurred, specifying the effect of such change on the financial
statements accompanying such certificate;
(d) promptly after the same become publicly available, copies
of all periodic and other reports, proxy statements and other materials filed by
KKR or any Subsidiary with the Securities and Exchange Commission, or any
Governmental Authority succeeding to any or all of the functions of said
Commission, or with any national securities exchange, or distributed by KKR to
its shareholders generally, as the case may be; provided, however, that the
obligation of KKR or any such Subsidiary to deliver the reports, proxy
statements and materials referenced in this Section 6.1(d) shall be satisfied by
the filing by Edgar of such materials with the Securities and Exchange
Commission or the dissemination of such materials by Business Wire; and
(e) as promptly as practicable, such other information set forth
on Schedule 6.1.
Section 6.2 Notices of Material Events. The Borrower will furnish to
---------------------------
Lender prompt written notice of the following:
(a) the occurrence of any Default or Event of Default upon
actual knowledge of a Responsible Officer of the Borrower;
(b) the filing or commencement of any action, suit or proceeding
by or before any arbitrator or Governmental Authority against or affecting the
Borrower or any Affiliate thereof that, if adversely determined, would
reasonably be expected to result in a Material Adverse Effect; and
22
<PAGE>
BRIDGE LOAN AGREEMENT
(c) the occurrence of any ERISA Event that, alone or together
with any other ERISA Events that have occurred, would reasonably be expected to
result in material liability of KKR or any Subsidiary.
Each notice delivered under this Section shall be accompanied by a statement of
a Financial Officer or other executive officer of the Borrower setting forth the
details of the event or development requiring such notice and any action taken
or proposed to be taken with respect thereto.
Section 6.3 Existence; Conduct of Business. The Borrower and each
------------------------------
Guarantor will, and will cause each of the Subsidiaries to, do or cause to be
done all things necessary to preserve, renew and keep in full force and effect
its legal existence and the rights, licenses, permits, privileges and franchises
material to the conduct of the business of the Borrower and its subsidiaries,
taken as a whole.
Section 6.4 Payment of Obligations. The Borrower and each Guarantor
----------------------
will, and will cause each of the Subsidiaries to, pay its obligations, including
Tax liabilities before the same shall become delinquent or in default, except
where (a) the validity or amount thereof is being contested in good faith by
appropriate proceedings, (b) KKR has set aside on its books adequate reserves
with respect thereto in accordance with GAAP and (c) the failure to make payment
pending such contest could not reasonably be expected to result in a Material
Adverse Effect.
Section 6.5 Maintenance of Properties; Insurance. The Borrower and
------------------------------------
each Guarantor will, and will cause each of the Subsidiaries to, (a) keep and
maintain all property material to the conduct of its business in good working
order and condition in all material respects, ordinary wear and tear excepted,
and (b) maintain, with financially sound and reputable insurance companies,
insurance in such amounts and against such risks (and having such deductibles
and self-insurance) as are customarily maintained by companies engaged in the
same or similar businesses operating in the same or similar locations.
Section 6.6 Books and Records; Inspection Rights. The Borrower and
------------------------------------
each Guarantor will, and will cause each of the Subsidiaries to, keep proper
books of record and account in which full, true and correct entries in
accordance with GAAP are made of all dealings and transactions in relation to
its business and activities.
Section 6.7 Compliance with Laws. The Borrower and each Guarantor
--------------------
will, and will cause each of the Subsidiaries to, comply in all material
respects with all laws, rules, regulations and orders of any Governmental
Authority applicable to it or its property, including without limitation ERISA
and all Environmental Laws.
23
<PAGE>
BRIDGE LOAN AGREEMENT
Section 6.8 Use of Proceeds. The proceeds of the Loan will be used
---------------
only for general corporate purposes. No part of the proceeds of any Loan will
be used, whether directly or indirectly, for any purpose that entails a
violation of any of the Regulations of the Board, including Regulations U and X.
Section 6.9 Further Assurances. The Borrower and each Guarantor
------------------
will, and will cause each of the Subsidiaries to, cooperate with Lender and
shall execute and pay for the filing of all such further instruments and
documents, including UCC financing statements and other security documents, as
Lender shall reasonably deem appropriate in order to effectuate the grant of the
Liens and security interests to Lender contemplated by the Loan Documents.
Section 6.10 Conduct of Business. During the Initial Period, the
-------------------
Borrower and each Guarantor will, and will cause each of the Subsidiaries to,
comply in all material respects with the covenants set forth in Section 7.3 of
the Merger Agreement, which covenants are incorporated herein by reference with
the same force and effect as though herein set forth in full; provided, however,
that a violation of such Section 7.3 after the termination of the Merger
Agreement for the purpose of completing a financing, the proceeds of which are
used to repay the Borrower's Obligations hereunder, shall not violate this
Section 6.10.
ARTICLE VII
Negative Covenants
------------------
Until the Maturity Date and the principal of and interest on each Loan
and all other Obligations payable hereunder shall have been paid in full, the
Borrower and each Guarantor jointly and severally covenant and agree with Lender
that:
Section 7.1 Debt. The Borrower and the Subsidiary Guarantors will
----
not create, incur, assume or permit to exist any Debt, except:
(a) Debt owed to the Borrower or any Subsidiary Guarantor;
(b) Debt owed to KKR in connection with Permitted Transfers;
(c) Debt existing on the date hereof, which is identified in
Schedule 7.1;
(d) Debt secured by Permitted Encumbrances;
(e) Capital Lease Obligations not to exceed $50,000 in the
aggregate at any time outstanding; and
24
<PAGE>
BRIDGE LOAN AGREEMENT
(f) other Debt not to exceed $50,000 in the aggregate at any
time outstanding.
Section 7.2 Liens. The Borrower and the Subsidiary Guarantors will
-----
not, and will not permit any of the Subsidiaries to, create, incur, assume or
permit to exist any Lien on any property or asset now owned or hereafter
acquired by it, or assign or sell any income or revenues (including accounts
receivable) or rights in respect of any thereof, except:
(a) Permitted Encumbrances; and
(b) any Lien on any property or asset of any Subsidiary
Guarantor existing on the date hereof (including Liens created pursuant to the
Security Agreement) and set forth in Schedule 7.2; provided that (i) such Lien
--------
shall not apply to any other property or asset of any Subsidiary and (ii) such
Lien shall secure only those obligations which it secures on the date hereof.
Section 7.3 Fundamental Changes. The Borrower and the Guarantors
-------------------
will not:
(a) merge into or consolidate with any other Person, or permit
any other Person to merge into or consolidate with it, or sell, transfer, lease
or otherwise dispose of (in one transaction or in a series of transactions) all
or any substantial part of its assets, or all or substantially all of the stock
of any of its subsidiaries (in each case, whether now owned or hereafter
acquired), or liquidate or dissolve, except that, if at the time thereof and
immediately after giving effect thereto no Default shall have occurred and be
continuing (i) any Subsidiary Guarantor may merge into any other Subsidiary
Guarantor in a transaction in which the surviving entity is a Subsidiary
Guarantor, (ii) any Subsidiary Guarantor may sell, transfer, lease or otherwise
dispose of its assets to the Borrower or to any other Subsidiary Guarantor,
(iii) any Subsidiary Guarantor may liquidate or dissolve if the Borrower
determines in good faith that such liquidation or dissolution is in the best
interests of the Borrower and is not materially disadvantageous to Lender, (iv)
this covenant shall not prohibit KKR from taking any of the foregoing actions if
(1) the successor corporation is KKR or a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia; (2) the successor corporation expressly assumes the Obligations of KKR
hereunder and (3) the successor corporation shall have consolidated net worth,
immediately after such transaction equal to or greater than the consolidated net
worth of KKR immediately preceding such transaction, and (v) the provisions of
this clause (a) shall not apply to the transactions contemplated by the Merger
Agreement; or
(b) engage in any business other than restaurant businesses and
related ancillary businesses of the type conducted by the Borrower and the
Guarantors on the date of execution of this Agreement.
25
<PAGE>
BRIDGE LOAN AGREEMENT
Section 7.4 Investments, Loans, Advances, Suretyship Liabilities and
--------------------------------------------------------
Acquisitions. The Borrower and the Subsidiary Guarantors will not purchase,
- ------------
hold or acquire (including pursuant to any merger) any capital stock, evidences
of indebtedness or other securities (including any option, warrant or other
right to acquire any of the foregoing) of, make or permit to exist any loans or
advances to, incur Suretyship Liabilities in respect of any obligations of, or
make or permit to exist any investment or any other interest in, any other
Person, or purchase or otherwise acquire (in one transaction or a series of
transactions) any assets of any other Person constituting a business unit,
except:
(a) Permitted Investments;
(b) investments by the Borrower or any Subsidiary Guarantor in
any Subsidiary Guarantor; and
(c) investments existing on the date hereof and identified in
Schedule 7.4.
Section 7.5 Hedging Agreements. The Borrower and the Subsidiary
------------------
Guarantors will not enter into any Hedging Agreement.
Section 7.6 Restricted Payments. (a) The Borrower and the Subsidiary
-------------------
Guarantors will not declare or make, or agree to pay or make, directly or
indirectly, any Restricted Payment, except that, so long as no Default or Event
of Default has occurred and is continuing, (i) any Subsidiary Guarantor may
declare and pay Restricted Payments to the Borrower and (ii) the Borrower may
make Permitted Transfers to KKR.
(b) KKR will, and will cause each of the Subsidiaries to, comply
with Section 7.5 of the Securities Purchase Agreement, dated as of August 12,
1997 (the "Securities Purchase Agreement"), as in effect on the date hereof, by
and between KKR and B III Capital Partners, L.P., regardless of whether such
Securities Purchase Agreement is in effect or is subsequently amended or
modified.
Section 7.7 Transactions with Affiliates. The Borrower and the
----------------------------
Subsidiary Guarantors will not sell, lease or otherwise transfer any property or
assets to, or purchase, lease or otherwise acquire any property or assets from,
or otherwise engage in any other transactions with, any of their Affiliates,
except (a) transactions between or among the Borrower and the Subsidiary
Guarantors not involving any other Affiliate and (b) Permitted Affiliate
Transactions.
Section 7.8 Restrictive Agreements. The Borrower and the Subsidiary
----------------------
Guarantors will not, directly or indirectly, enter into, incur or permit to
exist any agreement
26
<PAGE>
BRIDGE LOAN AGREEMENT
or other arrangement that prohibits, restricts or imposes any condition upon the
ability of any Subsidiary Guarantor to pay dividends or other distributions with
respect to any shares of its capital stock or to make or repay loans or advances
to the Borrower or any other Subsidiary Guarantor; provided that the foregoing
--------
shall not apply to (i) restrictions and conditions imposed by law or by this
Agreement and (ii) restrictions and conditions existing on the date hereof and
identified on Schedule 7.8 (but shall apply to any extension or renewal of, or
any amendment or modification expanding the scope of, any such restriction or
condition).
ARTICLE VIII
Events of Default
-----------------
If any of the following events ("Events of Default") shall occur:
-----------------
(a) the Borrower shall fail to pay any principal of any Loan
when and as the same shall become due and payable, whether at the due date
thereof or at a date fixed for prepayment thereof or otherwise; or
(b) the Borrower shall fail to pay any interest on any Loan or
any other amount (other than an amount referred to in clause (a) of this
Article) payable under this Agreement, when and as the same shall become due and
payable, and such failure shall continue unremedied for a period of ten (10)
Business Days; or
(c) any Guarantor shall fail to pay any amount owing pursuant to
Article III hereof when due or shall disavow or disaffirm any of its obligations
under Article III hereof;
(d) any representation or warranty made by or on behalf of the
Borrower or any Guarantor in or in connection with any Loan Document or any
amendment or modification hereof or thereof or waiver hereunder or thereunder,
or in any report, certificate, financial statement or other document furnished
pursuant to or in connection with any Loan Document or any amendment or
modification hereof or thereof or waiver hereunder or thereunder, shall prove to
have been incorrect in any material respect when made or deemed made; or
(e) the Borrower or any Guarantor shall fail to observe or
perform any covenant, condition or agreement contained in Sections 6.3 or 6.8 or
in Article VII; or
(f) the Borrower or any Guarantor shall fail to observe or
perform any covenant, condition or agreement contained in this Agreement (other
than those specified
27
<PAGE>
BRIDGE LOAN AGREEMENT
in clauses (a), (b), (d) or (e) of this Article), and such failure shall
continue unremedied for a period of 30 days; or
(g) KKR or any Subsidiary shall default in any obligation
(payment or otherwise) that results in any Debt of $1,500,000 or more in the
aggregate becoming due prior to its scheduled maturity or that results in the
holder or holders of any Debt of $1,500,000 or more in the aggregate or any
trustee or agent on its or their behalf causing any such Debt to become due, or
requiring the prepayment, repurchase, redemption or defeasance thereof, prior to
its scheduled maturity; or
(h) an involuntary proceeding shall be commenced or an
involuntary petition shall be filed seeking (i) liquidation, reorganization or
other relief in respect of the Borrower, any Guarantor or any Significant
Subsidiary of KKR or their respective debts, or of a substantial part of their
respective assets, under any Federal, state or foreign bankruptcy, insolvency,
receivership or similar law now or hereafter in effect or (ii) the appointment
of a receiver, trustee, custodian, sequestrator, conservator or similar official
for the Borrower, any Guarantor or any Significant Subsidiary of KKR or for a
substantial part of their respective assets, and, in any such case, such
proceeding or petition shall continue undismissed for 90 days or an order or
decree approving or ordering any of the foregoing shall be entered; or
(i) the Borrower, any Guarantor or any Significant Subsidiary of
KKR shall (i) voluntarily commence any proceeding or file any petition seeking
liquidation, reorganization or other relief under any Federal, state or foreign
bankruptcy, insolvency, receivership or similar law now or hereafter in effect,
(ii) consent to the institution of, or fail to contest in a timely and
appropriate manner, any proceeding or petition described in clause (h) of this
Article, (iii) apply for or consent to the appointment of a receiver, trustee,
custodian, sequestrator, conservator or similar official for the Borrower, any
Guarantor or any Significant Subsidiary of KKR or for a substantial part of
their respective assets, (iv) file an answer admitting the material allegations
of a petition filed against it in any such proceeding, (v) make a general
assignment for the benefit of creditors or (vi) take any action for the purpose
and intent of effecting any of the foregoing; or
(j) the Borrower, any Guarantor, or any Significant Subsidiary
of KKR shall become unable, admit in writing or fail generally to pay its debts
as they become due; or
(k) one or more judgments for the payment of money in an
aggregate amount in excess of $1,500,000 shall be rendered against KKR, any
Subsidiary or any combination thereof and the same shall remain undischarged for
a period of 90 consecutive days during which execution shall not be effectively
stayed, or any action shall be legally taken by a judgment creditor to attach or
levy upon any assets of KKR or any Subsidiary to enforce any such judgment; or
28
<PAGE>
BRIDGE LOAN AGREEMENT
(l) an ERISA Event shall have occurred that, in the opinion of
Lender, when taken together with all other ERISA Events that have occurred,
could reasonably be expected to result in liability of KKR and its Subsidiaries
in an aggregate amount exceeding $1,500,000; or
(m) a Change in Control shall occur; or
(n) any of the Security Documents shall for any reason cease to
be in full force and effect (other than in accordance with its terms), or shall
cease to give Lender the Liens, rights, powers and privileges purported to be
created thereby including, without limitation, a perfected first priority
security interest in, and Lien on, all of the Collateral in accordance with the
terms thereof;
then, and in every such event (other than an event described in clause (h) or
(i) of this Article), and at any time thereafter during the continuance of such
event, Lender may, by notice to the Borrower, take any or all of the following
actions, at the same or different times: (i) terminate its obligation to make
the Loan and (ii) declare the Loan then outstanding to be due and payable in
whole or in part (in which case any principal not so declared to be due and
payable may thereafter be declared to be due and payable), and thereupon (a) the
principal of the Loan so declared to be due and payable, together with accrued
interest thereon and all fees and other obligations of the Borrower accrued
hereunder, shall become due and payable immediately, without presentment,
demand, protest or other notice of any kind, all of which are hereby waived by
the Borrower and (b) Lender shall have no further obligations hereunder; and in
case of any event described in clause (h) or (i) of this Article, (a) Lender's
obligation to make the Loan shall automatically terminate and the principal of
the Loan then outstanding, together with accrued interest thereon, and all fees
and other obligations of the Borrower accrued hereunder, shall automatically
become due and payable, without presentment, demand, protest or other notice of
any kind, all of which are hereby waived by the Borrower and (b) Lender shall
have no further obligations hereunder.
ARTICLE XI
Miscellaneous
-------------
Section 9.1 Notices. Except in the case of notices and other
-------
communications expressly permitted to be given by telephone, all notices and
other communications provided for herein shall be in writing and shall be
delivered by hand or overnight courier service, mailed by certified or
registered mail or sent by facsimile, as follows:
(a) if to the Borrower or any Guarantor, to it at:
29
<PAGE>
BRIDGE LOAN AGREEMENT
c/o Koo Koo Roo, Inc.
11075 Santa Monica Boulevard, Suite 225
Los Angeles, California 90025
Attention: A. William Allen, III, Chief Executive Officer and
Ronald D. Garber, Esquire, General Counsel
Facsimile No.: (310) 479-4221
with copies to:
Latham & Watkins
633 West 5th Street, Suite 4000
Los Angeles, California 90071
Attention: Anthony J. Richmond
J. Scott Hodgkins
Facsimile No.: (213) 891-8763
(b) if to Lender, to it at:
FRI-MRD Corporation
18831 Von Karman Avenue, 3/rd/ Floor
Irvine, California 92612
Attention: Todd E. Doyle, Secretary and Robert T. Trebing, Jr.,
President
Facsimile No.: (949) 757-8076
with copies to:
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue
Los Angeles, California 90071
Attention: Michael Woronoff
Facsimile No.: (213) 687-5600
Any party hereto may change its address or facsimile number for notices and
other communications hereunder by notice to the other parties hereto. All
notices and other communications given to any party hereto in accordance with
the provisions of this Agreement shall be deemed to have been at the time
delivered by hand, if personally delivered; the date receipt is acknowledged, if
mailed by registered or certified mail; when answered back, if telecopied; and
the next Business Day after timely delivery to the courier, if sent by overnight
air courier guaranteeing next day delivery. It is understood and agreed that
the delivery of copies of notices to counsel as set forth above is for courtesy
purposes only and any failure to
30
<PAGE>
BRIDGE LOAN AGREEMENT
deliver such copy shall not constitute failure with respect to any obligation to
provide notices hereunder.
Section 9.2 Waivers; Amendments. Neither this Agreement nor any
-------------------
terms hereof may be changed, waived, discharged, or terminated, nor any
Collateral released, unless such change, waiver, discharge, termination or
release is in writing signed by Lender. No failure or delay by Lender in
exercising any right or power hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right or power, or any
abandonment or discontinuance of steps to enforce such a right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. The rights and remedies of Lender hereunder are cumulative and
are not exclusive of any rights or remedies that Lender would otherwise have. A
waiver of any provision of this Agreement or consent to any departure by the
Borrower or any Guarantor therefrom shall be effective only in the specific
instance and for the specific purpose for which given. Without limiting the
generality of the foregoing, the making of a Loan shall not be construed as a
waiver of any Default or Event of Default regardless of whether Lender may have
had notice or knowledge of such Default or Event of Default at the time.
Section 9.3 Expenses. The Borrower shall pay (i) all reasonable out-
--------
of-pocket expenses incurred by Lender and its Affiliates, including the
reasonable fees, charges and disbursements of counsel for Lender, in connection
with any amendments, modifications or waivers of the provisions hereof (but not
origination) and (ii) all out-of-pocket expenses reasonably incurred by Lender,
including the fees, charges and disbursements of any counsel for Lender, in
connection with the enforcement or protection of its rights in connection with
the Loan Documents, including its rights under this Section, or in connection
with the Loan made hereunder, including all such out-of-pocket expenses
reasonably incurred during any workout, restructuring or negotiations in
respect of such Loan.
Section 9.4 Successors and Assigns. The provisions of this Agreement
----------------------
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns permitted hereby, except that neither the
Borrower nor any Guarantor may assign, encumber or otherwise transfer any of its
rights or obligations hereunder without the prior written consent of Lender (and
any attempted assignment or transfer by the Borrower or any Guarantor without
such consent shall be null and void). Lender may not, without the consent of
the Borrower (which may be withheld in its sole discretion), assign or otherwise
transfer any of its rights and obligations to any other Person other than a
wholly-owned Subsidiary of Lender or Family Restaurants, Inc.; provided,
--------
however, that the foregoing restriction shall not prohibit the pledge of the
- -------
Bridge Note or any rights, duties or obligations in connection therewith, as
collateral security in a bona fide loan transaction. The Borrower shall,
promptly following a request therefor by Lender, exercise such additional or
replacement Bridge Notes as may be requested in connection with any such
permitted assignment or transfer. Nothing in
31
<PAGE>
BRIDGE LOAN AGREEMENT
this Agreement, expressed or implied, shall be construed to confer upon any
Person (other than the parties hereto, their respective successors and assigns
permitted hereby and, to the extent expressly contemplated hereby, any Related
Party of Lender) any legal or equitable right, remedy or claim under or by
reason of this Agreement.
Section 9.5 Survival. All covenants, agreements, representations and
--------
warranties made by the Borrower and the Guarantors herein and in the
certificates or other instruments delivered in connection with or pursuant to
this Agreement shall be considered to have been relied upon by Lender and shall
survive the execution and delivery of this Agreement and the making of any Loan,
regardless of any investigation made by Lender or on its behalf and
notwithstanding that Lender may have had notice or knowledge of any Default or
Event of Default or incorrect representation or warranty at the time any credit
is extended hereunder, and shall continue in full force and effect through the
Maturity Date as long as the principal of or any accrued interest on any Loan or
any fee or any other amount payable under this Agreement is outstanding and
unpaid. The provisions of Sections 2.9 and 9.3 shall survive and remain in full
force and effect regardless of the consummation of the transactions contemplated
hereby, the repayment of the Loan or the termination of this Agreement or any
provision hereof.
Section 9.6 Counterparts; Integration; Effectiveness. This Agreement
----------------------------------------
may be executed in counterparts (and by different parties hereto on different
counterparts), each of which shall constitute an original, but all of which when
taken together shall constitute a single contract. This Agreement and the other
Loan Documents constitute the entire contract among the parties relating to the
subject matter hereof and supersede any and all previous agreements and
understandings, oral or written, relating to the subject matter hereof.
Delivery of an executed counterpart of a signature page of this Agreement by
facsimile shall be as effective as delivery of a manually executed counterpart
of this Agreement.
Section 9.7 Marshalling; Recapture. Lender shall not be under any
----------------------
obligation to marshall any assets in favor of the Borrower or any of the
Guarantors or any other party or against or in payment of any or all of the
obligations, liabilities and indebtedness of every nature of the Borrower or any
of the Guarantors from time to time owing to Lender under or in connection with
this Agreement or the other Loan Documents. To the extent Lender receives any
payment by or on behalf of the Borrower or any of the Guarantors, which payment
or any part thereof is subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to such Borrower or Guarantors
or its estate, trustee, receiver, custodian or any other party under any
bankruptcy law, state or federal law, common law or equitable cause, then to the
extent of such payment or repayment, the obligation or part thereof which has
been paid, reduced or satisfied by the amount so repaid shall be reinstated by
the amount so repaid and shall be included within the liabilities of the
32
<PAGE>
BRIDGE LOAN AGREEMENT
Borrower and the Guarantors to Lender as of the date such initial payment,
reduction or satisfaction occurred.
Section 9.8 Severability. Any provision of this Agreement held to be
------------
invalid, illegal or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such invalidity, illegality or
unenforceability without affecting the validity, legality and enforceability of
the remaining provisions hereof; and the invalidity of a particular provision in
a particular jurisdiction shall not invalidate such provision in any other
jurisdiction.
Section 9.9 Right of Setoff. If a Default or Event of Default shall
---------------
have occurred and be continuing, Lender and each of its Affiliates is hereby
authorized at any time and from time to time, to the fullest extent permitted by
law, to set off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and other obligations at any time
owing by Lender or such Affiliate to or for the credit or the account of the
Borrower or any Guarantor against any and all of the obligations of the Borrower
or any Guarantor now or hereafter existing under this Agreement held by Lender,
irrespective of whether or not Lender shall have made any demand under this
Agreement and although such obligations may be unmatured. The rights of Lender
under this Section are in addition to other rights and remedies (including other
rights of setoff) which Lender may have.
Section 9.10 Governing Law; Jurisdiction; Consent to Service of
--------------------------------------------------
Process.
- -------
(a) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF CALIFORNIA (WITHOUT GIVING EFFECT TO THE PRINCIPLES THEREOF RELATING TO
CONFLICTS OF LAW).
(b) Any legal action or proceeding with respect to this
Agreement and any action for enforcement of any judgment in respect thereof may
be brought in the courts of the State of California or of the United States of
America for the Central District of California, and, by execution and delivery
of this Agreement, each of the Borrower and the Guarantors hereby accepts for
itself and in respect of its property, generally and unconditionally, the non-
exclusive jurisdiction of the aforesaid courts and any appellate courts from any
thereof. Each of the parties hereto agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Nothing in this Agreement shall affect any right that Lender may otherwise have
to bring any action or proceeding relating to this Agreement against the
Borrower, any Guarantor or their properties in the courts of any jurisdiction.
33
<PAGE>
BRIDGE LOAN AGREEMENT
(c) Each of the Borrower and each Guarantor hereby irrevocably
and unconditionally waives, to the fullest extent it may legally and effectively
do so, any objection which it may now or hereafter have to the laying of venue
of any suit, action or proceeding arising out of or relating to this Agreement
in any court referred to in paragraph (b) of this Section. Each of the parties
hereto hereby irrevocably waives, to the fullest extent permitted by law, the
defense of an inconvenient forum to the maintenance of such action or proceeding
in any such court.
(d) Each party to this Agreement irrevocably consents to service
of process in the manner provided for notices in Section 9.1. Nothing in this
Agreement will affect the right of any party to this Agreement to serve process
in any other manner permitted by law.
Section 9.11 Headings. Article and Section headings and the Table of
--------
Contents used herein are for convenience of reference only, are not part of this
Agreement and shall not affect the construction of, or be taken into
consideration in interpreting, this Agreement.
[Remainder of page intentionally left blank]
34
<PAGE>
BRIDGE LOAN AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
THE HAMLET GROUP, INC.,
as Borrower
By: /s/ A. William Allen III
--------------------------
Name: A. William Allen III
Title: C.E.O.
KOO KOO ROO, INC.,
as Guarantor
By: /s/ A. William Allen III
----------------------------
Name: A. William Allen III
Title: C.E.O.
H.H.K. OF VIRGINIA, INC.,
as Subsidiary Guarantor
By: /s/ Ronald D. Garber
----------------------------
Name: Ronald D. Garber
Title: Corporate Secretary
H.H. OF MARYLAND, INC.,
as Subsidiary Guarantor
By: /s/ Ronald D. Garber
----------------------------
Name: Ronald D. Garber
Title: Corporate Secretary
S-1
<PAGE>
FRI-MRD CORPORATION,
as Lender
By: /s/ R.T. Trebing, Jr.
----------------------------
Name: R.T. Trebing, Jr.
Title: President
S-2
<PAGE>
EXHIBIT 10.29
AMENDMENT NUMBER THREE TO
LOAN AND SECURITY AGREEMENT
This AMENDMENT NUMBER THREE TO LOAN AND SECURITY AGREEMENT (this
"Amendment") is entered into as of June 30, 1998, by and between Foothill
Capital Corporation, a California corporation ("Foothill"), on the one hand, and
FRI-MRD Corporation, a Delaware corporation ("FRI-MRD"), El Torito Restaurants,
Inc., a Delaware corporation ("El Torito"), and Chi-Chi's, Inc., a Delaware
corporation ("Chi-Chi's"), on the other hand, with reference to the following
facts:
A. Foothill, on the one hand, and El Torito, Chi-Chi's, FRI-MRD, and
certain of their Affiliates, on the other hand, heretofore have
entered into that certain Loan and Security Agreement, dated as of
January 10, 1997 (as heretofore amended, supplemented, or otherwise
modified, the "Agreement");
B. El Torito and Chi-Chi's (individually and collectively, jointly and
severally, "Borrower") and FRI-MRD have requested Foothill to modify
certain financial covenants in the Agreement and to modify Schedules
C-1 and R-1 to the Agreement, in each case, as set forth in this
Amendment;
C. Foothill is willing to so modify the Agreement and such schedules in
accordance with the terms and conditions hereof; and
D. All capitalized terms used herein and not defined herein shall have
the meanings ascribed to them in the Agreement, as amended hereby.
NOW, THEREFORE, in consideration of the above recitals and the mutual
premises contained herein, Foothill, Borrower and FRI-MRD hereby agree as
follows:
1. Amendments to the Agreement.
---------------------------
a. Section 7.20(a) of the Agreement hereby is amended and
restated in its entirety to read as follows:
(a) EBITDA - Chi-Chi's. In the case of Chi-Chi's, fail to
maintain EBITDA for the Relevant Measuring Period of not less than the
relevant amount set forth in the following table, measured on a fiscal
quarter-end basis:
<TABLE>
<CAPTION>
============================================================================
Period Ending Minimum EBITDA
- ----------------------------------------------------------------------------
<S> <C>
12/31/96 ($2,000,000)
- ----------------------------------------------------------------------------
3/31/97 ($2,000,000)
- ----------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
============================================================================
Period Ending Minimum EBITDA
- ----------------------------------------------------------------------------
<S> <C>
6/30/97 ($2,000,000)
- ----------------------------------------------------------------------------
9/30/97 -0-
- ----------------------------------------------------------------------------
12/31/97 -0-
- ----------------------------------------------------------------------------
03/31/98 $500,000
- ----------------------------------------------------------------------------
06/30/98 $500,000
- ----------------------------------------------------------------------------
09/30/98 $500,000
- ----------------------------------------------------------------------------
12/31/98 $1,000,000
- ----------------------------------------------------------------------------
03/31/99 $1,000,000
- ----------------------------------------------------------------------------
quarterly thereafter $2,000,000
============================================================================
</TABLE>
b. Section 7.20(b) of the Agreement hereby is amended and
restated in its entirety to read as follows:
(b) EBITDA - El Torito. In the case of El Torito, fail to
maintain EBITDA for the Relevant Measuring Period of not less than the
relevant amount set forth in the following table, measured on a fiscal
quarter-end basis:
<TABLE>
<CAPTION>
============================================================================
Period Ending Minimum EBITDA
- ----------------------------------------------------------------------------
<S> <C>
12/31/96 $8,500,000
- ----------------------------------------------------------------------------
3/31/97 $9,000,000
- ----------------------------------------------------------------------------
6/30/97 $9,000,000
- ----------------------------------------------------------------------------
9/30/97 $9,000,000
- ----------------------------------------------------------------------------
12/31/97 $9,000,000
- ----------------------------------------------------------------------------
03/31/98 $12,000,000
- ----------------------------------------------------------------------------
06/30/98 $12,000,000
- ----------------------------------------------------------------------------
09/30/98 $12,000,000
- ----------------------------------------------------------------------------
12/31/98 $12,000,000
- ----------------------------------------------------------------------------
03/31/99 $13,000,000
- ----------------------------------------------------------------------------
quarterly thereafter $13,000,000
============================================================================
</TABLE>
2
<PAGE>
c. Section 7.20(c) of the Agreement hereby is amended and
restated in its entirety to read as follows:
(c) EBITDA - Combined. In the case of Chi-Chi's and El
Torito, on a combined basis, fail to maintain EBITDA for the Relevant
Measuring Period of not less than the relevant amount set forth in the
following table, measured on a fiscal quarter-end basis:
<TABLE>
<CAPTION>
============================================================================
Period Ending Minimum EBITDA
- ----------------------------------------------------------------------------
<S> <C>
12/31/96 n/a
- ----------------------------------------------------------------------------
3/31/97 n/a
- ----------------------------------------------------------------------------
6/30/97 n/a
- ----------------------------------------------------------------------------
9/30/97 $10,000,000
- ----------------------------------------------------------------------------
12/31/97 $12,000,000
- ----------------------------------------------------------------------------
03/31/98 $15,500,000
- ----------------------------------------------------------------------------
06/30/98 $15,500,000
- ----------------------------------------------------------------------------
09/30/98 $15,500,000
- ----------------------------------------------------------------------------
12/31/98 $15,500,000
- ----------------------------------------------------------------------------
03/31/99 $16,500,000
- ----------------------------------------------------------------------------
quarterly thereafter $16,500,000
============================================================================
</TABLE>
2. Amendments to Schedules C-1 and R-1 to the Agreement.
----------------------------------------------------
a. Amended and Restated Schedule C-1 to the Agreement hereby is
---------------------------------
modified to add thereto the following properties:
<TABLE>
<CAPTION>
============================================================================
Concept Unit No. City State Legal Owner
============================================================================
<S> <C> <C> <C> <C>
Chi-Chi's 34 Deerfield IL Chi-Chi's
- ----------------------------------------------------------------------------
Chi-Chi's 388 Bloomington IL Chi-Chi's
- ----------------------------------------------------------------------------
Chi-Chi's 86 Champaign IL Chi-Chi's
============================================================================
</TABLE>
3
<PAGE>
b. Schedule R-1 to the Agreement hereby is modified to delete
------------
therefrom the following properties:
<TABLE>
<CAPTION>
============================================================================
Concept Unit No. City State Legal Owner
============================================================================
<S> <C> <C> <C> <C>
Chi-Chi's 34 Deerfield IL Chi-Chi's
- ----------------------------------------------------------------------------
Chi-Chi's 388 Bloomington IL Chi-Chi's
- ----------------------------------------------------------------------------
Chi-Chi's 86 Champaign IL Chi-Chi's
============================================================================
</TABLE>
3. Conditions Precedent to the Effectiveness of this Amendment. The
-----------------------------------------------------------
effectiveness of this Amendment is subject to the fulfillment, to the
satisfaction of Foothill and its counsel, of each of the following conditions:
a. Foothill shall have received an amendment fee of Fifty
Thousand Dollars ($50,000), which fee is earned in full by Foothill, due and
payable by Borrower to Foothill concurrently with the execution and delivery of
this Amendment by Borrower, and non-refundable when paid;
b. Foothill shall have received the reaffirmation and consent
attached hereto as Exhibit A, duly executed by each Guarantor, and such document
---------
shall be in full force and effect;
c. The representations and warranties in this Amendment, the
Agreement as amended by this Amendment, and the other Loan Documents shall be
true and correct in all respects on and as of the date hereof, as though made on
such date (except to the extent that such representations and warranties relate
solely to an earlier date);
d. After giving effect hereto, no Event of Default or event
which with the giving of notice or passage of time would constitute an Event of
Default shall have occurred and be continuing on the date hereof, nor shall
result from the consummation of the transactions contemplated herein;
e. No injunction, writ, restraining order, or other order of
any nature prohibiting, directly or indirectly, the consummation of the
transactions contemplated herein shall have been issued and remain in force by
any governmental authority against Borrower, FRI-MRD, any Guarantor, Foothill,
or any of their Affiliates; and
f. No material adverse change shall have occurred in the
financial condition of Borrower, FRI-MRD, any Guarantor, or in the value of the
Collateral.
4. Representations and Warranties. Each of Borrower and FRI-MRD
------------------------------
hereby represents and warrants to Foothill that: (a) the execution, delivery,
and performance of this
4
<PAGE>
Amendment and of the Agreement, as amended by this Amendment, are within its
corporate powers, have been duly authorized by all necessary corporate action,
and are not in contravention of any law, rule, or regulation, or any order,
judgment, decree, writ, injunction, or award of any arbitrator, court, or
governmental authority, or of the terms of its charter or bylaws, or of any
contract or undertaking to which it is a party or by which any of its properties
may be bound or affected; (b) this Amendment and the Agreement, as amended by
this Amendment, constitute Borrower's and FRI-MRD's legal, valid, and binding
obligation, enforceable against Borrower and FRI-MRD in accordance with its
terms.
5. Effect on Agreement. The Agreement, as amended hereby, shall be
-------------------
and remain in full force and effect in accordance with its respective terms and
hereby is ratified and confirmed in all respects. The execution, delivery, and
performance of this Amendment shall not operate as a waiver of or, except as
expressly set forth herein, as an amendment, of any right, power, or remedy of
Foothill under the Agreement, as in effect prior to the date hereof.
6. Miscellaneous.
-------------
a. Upon the effectiveness of this Amendment, each reference in
the Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of
like import referring to the Agreement shall mean and refer to the Agreement as
amended by this Amendment.
b. Upon the effectiveness of this Amendment, each reference in
the Loan Documents to the "Agreement", "thereunder", "therein", "thereof" or
words of like import referring to the Agreement shall mean and refer to the
Agreement as amended by this Amendment.
c. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Amendment by signing
any such counterpart. Delivery of an executed counterpart of this Amendment by
telefacsimile shall be equally as effective as delivery of a manually executed
counterpart of this Amendment. Any party delivering an executed counterpart of
this Amendment by telefacsimile also shall deliver a manually executed
counterpart of this Amendment but the failure to deliver a manually executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Amendment.
[remainder of page intentionally left blank]
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first written above.
FRI-MRD CORPORATION,
a Delaware corporation
By /s/ Robert Gonda
---------------------------
Title: Treasurer
-----------------------
EL TORITO RESTAURANTS, INC.,
a Delaware corporation
By /s/ Robert Gonda
---------------------------
Title: Treasurer
-----------------------
CHI-CHI'S INC.,
a Delaware corporation
By /s/ Robert Gonda
---------------------------
Title: Treasurer
-----------------------
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/
---------------------------
Title:
-----------------------
-S-1-
<PAGE>
EXHIBIT A
----------
Reaffirmation and Consent
All capitalized terms used herein but not otherwise defined herein
shall have the meanings ascribed to them in that certain Amendment Number Three
to Loan and Security Agreement, dated as of April __, 1998 (the "Amendment").
Each of the undersigned hereby (a) represents and warrants to Foothill that the
execution, delivery, and performance of this Reaffirmation and Consent are
within its corporate powers, have been duly authorized by all necessary
corporate action, and are not in contravention of any law, rule, or regulation,
or any order, judgment, decree, writ, injunction, or award of any arbitrator,
court, or governmental authority, or of the terms of its charter or bylaws, or
of any contract or undertaking to which it is a party or by which any of its
properties may be bound or affected; (b) consents to the amendment of the
Agreement by the Amendment; (c) acknowledges and reaffirms its obligations owing
to Foothill under the Guaranty and any other Loan Documents to which it is
party; and (d) agrees that each of the Guaranty and any other Loan Documents to
which it is a party is and shall remain in full force and effect. Although each
of the undersigned has been informed of the matters set forth herein and has
acknowledged and agreed to same, it understands that Foothill has no obligation
to inform it of such matters in the future or to seek its acknowledgement or
agreement to future amendments, and nothing herein shall create such a duty.
This Reaffirmation and Consent may be executed in any number of counterparts and
by different parties on separate counterparts, each of which, when executed and
delivered, shall be deemed to be an original, and all of which, when taken
together, shall constitute but one and the same Reaffirmation and Consent.
Delivery of an executed counterpart of this Reaffirmation and Consent by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Reaffirmation and Consent. Any party delivering an executed
counterpart of this Reaffirmation and Consent by telefacsimile also shall
deliver an original executed counterpart of this Reaffirmation and Consent but
the failure to deliver an original executed counterpart shall not affect the
validity, enforceability, and binding effect of this Reaffirmation and Consent.
FAMILY RESTAURANTS, INC.,
a Delaware corporation
FRI-MRD CORPORATION,
a Delaware corporation
FRI-ADMIN CORPORATION,
a Delaware corporation
EL TORITO FRANCHISING COMPANY,
a Delaware corporation
CCMR OF TIMONIUM, INC.,
a Delaware corporation
CCMR OF MARYLAND, INC.,
a Delaware corporation
CHI-CHI'S OF KANSAS, INC.,
a Kansas corporation
-S-2-
<PAGE>
CHI-CHI'S OF GREENBELT, INC.,
a Kentucky corporation
CHI-CHI'S FRANCHISE OPERATIONS CORPORATION,
a Kentucky corporation
CCMR OF CATONSVILLE, INC.,
a Kentucky corporation
CCMR OF GREENBELT, INC.,
a Kentucky corporation
CCMR OF RITCHIE HIGHWAY, INC.,
a Kentucky corporation
CHI-CHI'S MANAGEMENT CORPORATION,
a Kentucky corporation
CCMR OF HARFORD COUNTY, INC.,
a Kentucky corporation
CHI-CHI'S OF SOUTH CAROLINA, INC.,
a Kentucky corporation
MAINTENANCE SUPPORT GROUP, INC.,
a Kentucky corporation
CCMR OF FREDERICK, INC.,
a Kentucky corporation
CCMR OF INNER HARBOR, INC.,
a Kentucky corporation
CHI-CHI'S OF WEST VIRGINIA, INC.,
a Kentucky corporation
CCMR ADVERTISING AGENCY, INC.,
a Kentucky corporation
CCMR OF GOLDEN RING, INC.,
a Kentucky corporation
By _____________________________
Title: _________________________
CCMR OF CUMBERLAND, INC.,
a Kentucky corporation
By _____________________________
Title: Authorized Signatory
-S-3-
<PAGE>
EXHIBIT 10.30
AMENDMENT NUMBER FOUR TO
LOAN AND SECURITY AGREEMENT
This AMENDMENT NUMBER FOUR TO LOAN AND SECURITY AGREEMENT (this
"Amendment") is entered into as of June 9, 1998, by and between Foothill Capital
Corporation, a California corporation ("Foothill"), on the one hand, and FRI-MRD
Corporation, a Delaware corporation ("FRI-MRD"), El Torito Restaurants, Inc., a
Delaware corporation ("El Torito"), and Chi-Chi's, Inc., a Delaware corporation
("Chi-Chi's"), on the other hand, with reference to the following facts:
A. Foothill, on the one hand, and El Torito, Chi-Chi's, FRI-MRD, and
certain of their Affiliates, on the other hand, heretofore have
entered into that certain Loan and Security Agreement, dated as of
January 10, 1997 (as heretofore amended, supplemented, or otherwise
modified, the "Agreement");
B. El Torito and Chi-Chi's (individually and collectively, jointly and
severally, "Borrower") and FRI-MRD have requested Foothill to consent
to (a) FRI-MRD's issuance of new Senior Secured Discount Notes in the
original principal amount at maturity of up to $24,000,000 (yielding
gross proceeds of approximately $21,000,000), (b) the acquisition by
FRI-MRD of all of the issued and outstanding capital Stock of The
Hamlet Group, Inc., a California corporation ("HGI"), (c) the merger
of FRI-Sub, Inc., a Delaware corporation ("FRI-Sub"), into Koo Koo
Roo, Inc., a Delaware corporation ("KKR"), with KKR as the survivor,
(d) increase the maximum line amount and subline amounts under the
Agreement by $20,000,000, (e) FRI-MRD or one of its Subsidiaries
providing loans or other advances to KKR or its Subsidiaries in an
amount not to exceed $3,000,000 outstanding at any one time, and (f)
certain other transactions as contemplated by the KKR Merger
Agreements as hereinafter defined.
C. Borrower and FRI-MRD have requested Foothill to amend the Agreement to
permit the foregoing transactions, as set forth in this Amendment;
D. Foothill is willing to so modify the Agreement in accordance with the
terms and conditions hereof; and
E. All capitalized terms used herein and not defined herein shall have
the meanings ascribed to them in the Agreement, as amended hereby.
NOW, THEREFORE, in consideration of the above recitals and the mutual
premises contained herein, Foothill, Borrower and FRI-MRD hereby agree as
follows:
<PAGE>
1. DEFINITIONS FOR THIS AMENDMENT.
------------------------------
Any and all initially capitalized terms used herein shall have the
meanings ascribed thereto in the Agreement, as amended hereby. For purposes of
this Fourth Amendment only, the following initially capitalized terms shall have
the following meanings:
"Effective Date" means the date of execution of this Amendment.
--------------
"HGI Closing Date" means the later to occur of (a) the Effective Date,
----------------
or (b) the date on which Foothill acknowledges, in writing, that each of the
conditions contained in Section 4 have been fulfilled or waived.
---------
"KKR Closing Date" means the later to occur of (a) the Effective Date,
----------------
or (b) the date on which Foothill acknowledges, in writing, that each of the
conditions contained in Section 5 have been fulfilled or waived.
---------
"KKR Senior Notes" means the 13% Senior Notes due August 14, 2000
----------------
issued by KKR.
2. AMENDMENTS TO THE AGREEMENT TO FACILITATE THE INCREASE IN THE
-------------------------------------------------------------
MAXIMUM AMOUNT AND TO PERMIT THE KKR CREDIT FACILITY.
----------------------------------------------------
a. All references to "Regulation G" of the Federal Reserve
Board hereby are deleted from the Agreement.
b. Section 1.1 of the Agreement hereby is amended by adding or
-----------
modifying, as the case may be, the following definitions:
"KKR" means Koo Koo Roo, Inc., a Delaware corporation.
---
"KKR Credit Facility" means the financial arrangement pursuant to
-------------------
which FRI-MRD or one of its Subsidiaries has agreed to make loans or other
advances to KKR or its Subsidiaries, in an amount not to exceed $3,000,000,
in the aggregate, outstanding at any one time, pursuant to a written
agreement, substantially in the form attached hereto as Exhibit A4-1.
------------
"Line Increase Blockage Amount" means $20,000,000; provided,
----------------------------- --------
however, that such amount shall be decreased, but not below zero, in an
-------
amount equal to $675,000 for each parcel of Real Property identified on
Schedule R-1, for which (a) Foothill has received an endorsement to the
------------
mortgage title insurance policy relative to such property, and (b) an
amendment to the Mortgage relative to such property has been recorded, in
each case, to reflect the increase in the Maximum Amount from $35,000,000
to $55,000,000, and in form and substance satisfactory to Foothill in its
reasonable credit judgment; provided further, however, that notwithstanding
---------------- -------
the foregoing, the Line Increase Blockage Amount shall remain at
$20,000,000 until the earlier to occur of (i) the HGI Acquisition and the
KKR Merger both having become effective, and (ii) the
2
<PAGE>
holders of the Senior Discount Notes having consented to the increase in
the Maximum Amount from $35,000,000 to $55,000,000.
"Maximum Amount" means, as of any date of determination, the
--------------
result of (a) $55,000,000, minus (b) 100% of the Net Proceeds in excess of
-----
$3,500,000 received by FRI-MRD or its Subsidiaries on or after the Closing
Date from Permitted Dispositions (other than (i) Asset Dispositions of
Dinnerhouse Assets, (ii) Asset Dispositions of Chi-Chi's Specified Assets,
(iii) Ordinary Course Dispositions, (iv) Permitted Sale and Lease-backs,
and (v) after the effective date of the HGI Acquisition, the HGI
Disposition), minus (c) the Line Increase Blockage Amount.
-----
"Maximum Chi-Chi's Amount" means (a) $55,000,000, minus (b) 100%
------------------------ -----
of the Net Proceeds in excess of $3,500,000 received by FRI-MRD or its
Subsidiaries on or after the Closing Date from Permitted Dispositions
(other than (i) Asset Dispositions of Dinnerhouse Assets, (ii) Asset
Dispositions of Chi-Chi's Specified Assets, (iii) Ordinary Course
Dispositions, (iv) Permitted Sale and Lease-backs, and (v) after the
effective date of the HGI Acquisition, the HGI Disposition), minus (c) the
-----
Line Increase Blockage Amount.
"Maximum Chi-Chi's Revolving Amount" means (a) $35,000,000, minus
---------------------------------- -----
(b) 100% of the Net Proceeds in excess of $3,500,000 received by FRI-MRD or
its Subsidiaries on or after the Closing Date from Permitted Dispositions
(other than (i) Asset Dispositions of Dinnerhouse Assets, (ii) Asset
Dispositions of Chi-Chi's Specified Assets, (iii) Ordinary Course
Dispositions, (iv) Permitted Sale and Lease-backs, and (v) after the
effective date of the HGI Acquisition, the HGI Disposition), minus (c) the
-----
Line Increase Blockage Amount.
"Maximum El Torito Amount" means (a) $55,000,000, minus (b) 100%
------------------------ -----
of the Net Proceeds in excess of $3,500,000 received by FRI-MRD or its
Subsidiaries on or after the Closing Date from Permitted Dispositions
(other than (i) Asset Dispositions of Dinnerhouse Assets, (ii) Asset
Dispositions of Chi-Chi's Specified Assets, (iii) Ordinary Course
Dispositions, (iv) Permitted Sale and Lease-backs, and (v) after the
effective date of the HGI Acquisition, the HGI Disposition), minus (c) the
-----
Line Increase Blockage Amount.
"Maximum El Torito Revolving Amount" means (a) $35,000,000, minus
---------------------------------- -----
(b) 100% of the Net Proceeds in excess of $3,500,000 received by FRI-MRD or
its Subsidiaries on or after the Closing Date from Permitted Dispositions
(other than (i) Asset Dispositions of Dinnerhouse Assets, (ii) Asset
Dispositions of Chi-Chi's Specified Assets, (iii) Ordinary Course
Dispositions, (iv) Permitted Sale and Lease-backs, and (v) after the
effective date of the HGI Acquisition, the HGI Disposition), minus (c) the
-----
Line Increase Blockage Amount.
"Permitted Investments" means (a) Permitted Ordinary Course
---------------------
Investments, (b) Permitted Acquisitions, (c) Permitted Dispositions, (d)
Investments existing on the Closing Date, (e) Permitted Toehold
Investments, (f) loans or other
3
<PAGE>
advances made from time to time to KKR and its Subsidiaries pursuant to the
KKR Credit Facility, (g) the HGI Acquisition, and (h) the KKR Merger.
c. Section 2.6(a) of the Agreement hereby is amended and
--------------
restated in its entirety to read as follows:
(a) Interest Rate. Except as provided in clause (b) below (i) at
such times as the aggregate amount of Advances outstanding hereunder is
less than $23,333,333, all monetary Obligations that are charged to the
Loan Account (except for undrawn Letters of Credit) shall bear interest at
a per annum rate of 1.875 percentage points above the Reference Rate, and
(ii) at such times as the aggregate amount of Advances outstanding
hereunder is equal to or greater than $23,333,333, all monetary Obligations
that are charged to the Loan Account (except for undrawn Letters of Credit)
in excess of $23,333,333 shall bear interest at a per annum rate of 2.875
percentage points above the Reference Rate and the portion of such monetary
Obligations not in excess of $23,333,333 shall bear interest at a per annum
rate of 1.875 percentage points above the Reference Rate.
3. AMENDMENTS TO THE AGREEMENT TO FACILITATE THE HGI ACQUISITION.
-------------------------------------------------------------
a. Section 1.1 of the Agreement hereby is amended by adding or
-----------
modifying, as the case may be, the following definitions:
"Acquisition Lien" means in respect of the assets of (i) any
----------------
Person that is the subject of a Permitted Acquisition, or (ii) HGI, after
giving effect to the HGI Acquisition, or (iii) KKR, after giving effect to
the KKR Merger, a Lien that attaches solely to such assets, is in
existence immediately prior to such Acquisition, the HGI Acquisition, or
the KKR Merger, as the case may be, and was not created in connection
with, or in anticipation of, the Acquisition of such Person, the HGI
Acquisition, or the KKR Merger, respectively.
"FRI-Sub" means FRI-Sub, Inc., a Delaware corporation.
-------
"Guarantors" means FRI, FRI-MRD, FRI-Admin, Franchising, upon the
----------
effectiveness of the HGI Acquisition, HGI, upon the effectiveness of the
KKR Merger, KKR, each of the Chi-Chi's Subsidiaries and each of the other
Subsidiaries of FRI-MRD from time to time party to one of the Guaranties.
"HGI" means The Hamlet Group, Inc., a California corporation.
---
"HGI Acquisition" means the acquisition by FRI-MRD from KKR of
---------------
all of the issued and outstanding shares of Stock of HGI.
"HGI Acquisition Agreements" means the Stock Purchase Agreement,
--------------------------
dated as of June 9, 1998, between FRI-MRD and KKR and all related
agreements,
4
<PAGE>
documents and instruments, as the same now exist or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced.
"HGI Disposition" means the sale, transfer or other disposition,
---------------
directly or indirectly, in one or a series of transactions, for cash or
other assets, by FRI-MRD of all or substantially all of the assets or Stock
of HGI.
"Net HGI Proceeds" means, (a) the gross cash proceeds received by
----------------
or on behalf of FRI-MRD or its Subsidiaries in respect of an HGI
Disposition, less (b) the sum of (i) the amount, if any, of all (y) taxes
----
(other than income taxes) payable by FRI-MRD or its Subsidiaries in
connection with such HGI Disposition and (z) FRI-MRD's good faith best
estimate of the amount of all income taxes payable in connection with such
HGI Disposition, (ii)(A) the amount of any reasonable reserve established
in accordance with GAAP against any liabilities associated with the assets
sold or disposed of and retained by FRI-MRD or its Subsidiaries (including
any post-closing adjustments, severance, relocation, pension, and closure
liabilities provided for under the applicable purchase documentation),
provided that the amount of any subsequent reduction of such reserve (other
than in connection with a payment in respect of any such liability) shall
be deemed to be Net Cash Proceeds of an HGI Disposition occurring on the
date of such reduction, and (B) the amount applied to repay any
Indebtedness to the extent such Indebtedness is required by its terms to be
repaid as a result of such HGI Disposition, and (iii) reasonable and
customary fees, commissions, and expenses and other costs paid by FRI-MRD
or its Subsidiaries in connection with such HGI Disposition (other than
those payable to FRI-MRD or any Affiliate of FRI-MRD), in each case only to
the extent not already deducted in arriving at the amount referred to in
clause (a).
----------
"Pledged HGI Collateral" means: (a) the Pledged HGI Securities
----------------------
and the certificates representing the Pledged HGI Securities and any
interest of FRI-MRD in the entries on the books of any financial
intermediary pertaining to the Pledged HGI Securities, and all dividends or
distributions of any kind whatsoever (other than cash or cash equivalents)
from time to time received, receivable or otherwise distributed in respect
of or in exchange for any or all of the Pledged HGI Securities; (b) all
additional shares of, and all securities convertible into, and warrants,
options and other rights to purchase, Stock (whether certificated or
uncertificated and now existing or hereafter created) of HGI from time to
time acquired by FRI-MRD in any manner (which shares shall be deemed to be
part of the Pledged HGI Securities), the certificates or other instruments
representing such additional shares, securities, warrants, options, or
other rights and any interest of FRI-MRD in the entries on the books of any
financial intermediary pertaining to such additional shares, and all
dividends or distributions of any kind whatsoever (other than cash or cash
equivalents) from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of such additional
shares, securities, warrants, options or other rights; and (c) to the
extent not covered in clause (a) or (b) hereof, all Proceeds thereof.
"Pledged HGI Securities" means all of the issued and outstanding
----------------------
shares of Stock of HGI as of the effective date of the HGI Acquisition.
5
<PAGE>
"Proceeds" shall have, for purposes of the definition of "Pledged
--------
HGI Collateral," the meaning ascribed thereto under the Uniform Commercial
Code as in effect in any relevant jurisdiction or under relevant law.
"Release Condition" means that (a) no Default or Event of Default
-----------------
has occurred and is continuing or would result therefrom, (b) with regard
to the HGI Disposition, the Senior Secured Discount Notes are prepaid in an
amount equal to 100% of the Net HGI Proceeds received from the HGI
Disposition in accordance with the provisions of the Senior Secured
Discount Note Agreement, (c) in all cases other than Asset Dispositions of
the Dinnerhouse Assets or the Chi-Chi's Specified Assets, FRI-MRD or its
Subsidiary is receiving at least fair value for the property or assets that
are the subject of the Asset Disposition, and (d) following such Asset
Disposition, the subject properties or assets are not to be the subject of
a lease (other than in connection with a Permitted Sale and Lease-back) by
FRI-MRD or any of its Subsidiaries.
"Relevant Measuring Period" means (a) as applied to (i) KKR, upon
-------------------------
the effectiveness of the KKR Merger, (ii) HGI, upon the effectiveness of
the HGI Acquisition, and (iii) the combined EBITDA covenant set forth in
Section 7.20(c): with respect to June 30, 1999, the three months then
---------------
ended, with respect to September 30, 1999, the six months then ended, with
respect to December 31, 1999, the nine months then ended, and, with respect
to any fiscal quarter ended thereafter, the twelve months then ended, and
(b) as applied to El Torito and Chi-Chi's, with respect to each Relevant
Measuring Period, the twelve months then ended.
"Senior Secured Discount Notes" means the 14.0% Senior Secured
-----------------------------
Discount Notes due January 24, 2002 to be issued by FRI-MRD, in an
aggregate principal amount not to exceed $24,000,000, the proceeds from the
sale of which are to be used to purchase the Pledged HGI Securities, and
thereafter to be secured by the Pledged HGI Collateral.
"Senior Secured Discount Note Agreement" means the Note Agreement
--------------------------------------
to be entered into between FRI-MRD and each of the purchasers referred to
therein in connection with the issuance of the Senior Secured Discount
Notes, and any other note agreement providing for the issuance of the
Senior Secured Discount Notes, in each case, in form and substance
satisfactory to Foothill.
b. The definition of "Permitted Liens" in Section 1.1 of the
-----------
Agreement is amended by replacing the final "." in clause (n) with ", and", and
adding the following as a new clause (m):
(m) the pledge of the Pledged HGI Security pursuant to the
Senior Discount Note Agreement.
c. The following is added as a new Section 5.15 to the Loan
------------
Agreement:
6
<PAGE>
5.15 ISSUANCE OF SENIOR SECURED DISCOUNT NOTES. The Senior
Secured Discount Note Agreement and the transactions contemplated
thereunder have been duly executed, delivered and performed in accordance
with their terms by the respective parties thereto in all respects,
including the fulfillment of all conditions precedent set forth therein.
All actions and proceedings required by the Senior Secured Discount Note
Agreement, applicable law or regulation have been taken and the
transactions required thereunder have been duly and validly taken and
consummated. No court of competent jurisdiction has issued any injunction,
restraining order or other order which prohibits consummation of the
transactions described in the Senior Secured Discount Note Agreement.
Borrower has received the proceeds pursuant to each issuance of the Senior
Secured Discount Notes. Borrower has delivered, or caused to be delivered,
to Foothill true, correct and complete copies of the Senior Secured
Discount Note Agreement.
d. The following is added as a new Section 5.16 to the Loan
------------
Agreement:
5.16 HGI ACQUISITION. The HGI Acquisition Agreements and the
transactions contemplated thereunder have been duly executed, delivered and
performed in accordance with their terms by the respective parties thereto
in all respects, including the fulfillment of all conditions precedent set
forth therein and giving effect to the terms of the HGI Acquisition
Agreements, FRI-MRD has acquired and has good and marketable title to all
of the issued and outstanding shares of Stock of HGI, free and clear of all
claims, liens, pledges and encumbrances of any kind, except for the pledge
to the holders of the Senior Secured Discount Notes pursuant to the Senior
Secured Discount Note Agreement. All actions and proceedings required by
the HGI Acquisition Agreements, applicable law or regulation (including
compliance with the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976,
as amended) have been taken and the transactions required thereunder have
been duly and validly taken and consummated. No court of competent
jurisdiction has issued any injunction, restraining order or other order
which prohibits consummation of the transactions described in the HGI
Acquisition Agreements. Borrower has delivered, or caused to be delivered,
to Foothill true, correct and complete copies of the HGI Acquisition
Agreements.
e. Section 6.5 of the Agreement hereby is amended and restated
-----------
in its entirety to read as follows:
6.5 TITLE TO EQUIPMENT. With the exception of Equipment of HGI,
in the event that the book value of all Equipment of Borrower and the
Guarantors the ownership of which is evidenced by a certificate of title or
similar form of evidence of ownership exceeds $200,000 in the aggregate,
then, upon Foothill's request, FRI-MRD and its Subsidiaries shall deliver
to Foothill, properly endorsed, any and all evidences of ownership of,
certificates of title, or applications for title to any items of Equipment
owned by Borrower or any Guarantor.
f. Subsections (c) and (d) of Section 6.8 of the Agreement
-----------
hereby are amended and restated in their entirety to read as follows:
7
<PAGE>
(c) All such policies of insurance shall be in such form, with
such companies, and in such amounts as may be reasonably satisfactory to
Foothill. Insurance policies covering property and assets against loss by
fire, lightning, windstorm, hail, explosion, aircraft, smoke damage,
earthquake, elevator collisions and other risks included under an "extended
coverage" endorsement shall contain a California Form 438BFU (NS) mortgagee
endorsement, or an equivalent endorsement satisfactory to Foothill, showing
Foothill as a loss payee thereof as its interests may appear, and shall
contain a waiver of warranties. All such insurance (with the exception of
workers' compensation and health insurance policies and policies of
insurance covering the property or assets of HGI) shall name Foothill as an
additional insured as its interest may appear. Every policy of insurance
referred to in this Section 6.8 (with the exception of workers'
-----------
compensation and health insurance policies and policies of insurance
covering the property or assets of HGI) shall contain an agreement by the
insurer that it will not cancel such policy except after 10 days prior
written notice to Foothill. Certified copies or originals of such policies
or certificates thereof satisfactory to Foothill evidencing such insurance
shall be delivered to Foothill prior to the expiration or cancellation of
the existing or preceding policies. Each of FRI-MRD and Borrower shall
deliver to Foothill, upon the request of Foothill, evidence of the payment
of all premiums for such policies of insurance.
(d) Each of FRI-MRD and Borrower shall give Foothill prompt
notice of any loss or damage to their properties and assets by fire,
lightning, windstorm, hail, explosion, aircraft, smoke damage, vehicle
damage, earthquake, elevator collision, and other risks included under an
"extended coverage" endorsement covered by such insurance in excess of
$250,000. With the exception of insurance policies covering the property
or assets of HGI, upon the occurrence and during the continuance of an
Event of Default, Foothill shall have the exclusive right to adjust all
losses payable under the applicable insurance policies without any
liability to FRI-MRD or Borrower, as applicable, whatsoever in respect of
such adjustments. Any monies received as payment for any loss or damage to
their properties and assets by fire, lightning, windstorm, hail, explosion,
aircraft, smoke damage, vehicle damage, earthquake, elevator collision, and
other risks included under an "extended coverage" endorsement under the
applicable insurance policy (exclusive of any casualty loss wherein the
insurance proceeds are less than $50,000 and excluding insurance proceeds
received with respect to the assets or properties of HGI), shall be paid
over to Foothill, and FRI-MRD and Borrower shall have the right to
designate in writing to Foothill within 45 days of such payment whether
such payment shall be (i) applied to the prepayment of the Obligations
without premium, in such order or manner as Foothill may elect (together
with a commensurate reduction of the Maximum Amount, the Maximum Chi-Chi's
Amount, the Maximum Chi-Chi's Revolving Amount, the Maximum El Torito
Amount, and the Maximum El Torito Revolving Amount), or (ii) disbursed to
FRI-MRD or its Subsidiary, as applicable, under staged payment terms
satisfactory to Foothill for application to the cost of repairs,
replacements, or restorations and subject to the conditions set forth in
this Section 6.8(d). In the event Foothill fails to receive timely such
--------------
written designation or the conditions set forth in the following sentence
are not satisfied, the payment shall be applied in the manner set forth in
clause (i) of the immediately preceding sentence. If FRI-MRD and
8
<PAGE>
Borrower elect to cause Foothill to disburse any monies received as payment
for any loss pursuant to this Section 6.8(d), Foothill only shall be
--------------
obligated to disburse such money for the repair, replacement or restoration
of the affected property or assets if all of the following conditions are
satisfied: (A) no Default or Event of Default has occurred and is
continuing or would result from the disbursement or application of such
monies; (B) FRI-MRD or Borrower have cash, cash equivalents, borrowing
availability under Section 2.1 or Section 2.3, and/or business interruption
----------- -----------
insurance proceeds in amounts sufficient, in Foothill's reasonable
judgment, to ensure that Borrower will be able to make payment as and when
due of each of its direct Obligations that will be payable during the
period of such repair, replacement, or restoration; (C) Foothill is
reasonably satisfied that the amount of such cash, cash equivalents,
borrowing availability, and/or insurance proceeds will be sufficient fully
to repair, replace, or restore the affected property or assets; (D)
construction, completion of the repair, replacement, or restoration of the
affected property or assets shall be completed in accordance with plans,
specifications, and drawings submitted to and approved by Foothill, which
approval shall not be unreasonably withheld or delayed; (E) all
construction and completion of the repair, replacement, or restoration
shall be effected with reasonable promptness and shall be of a value (the
"Replaced Value") (i) at least equal to the replacement value (the
"Destroyed Value") of such items of property destroyed or condemned prior
to such destruction or condemnation, or (ii) of a value less than the
Destroyed Value so long as the difference between the Destroyed Value and
the Replaced Value is applied to the prepayment of the Obligations without
premium, in such order or manner as Foothill may elect (together with a
commensurate reduction of the Maximum Amount, the Maximum Chi-Chi's Amount,
the Maximum Chi-Chi's Revolving Amount, the Maximum El Torito Amount, and
the Maximum El Torito Revolving Amount); and (f) all monies paid by
Borrower to Foothill may be commingled with other funds of Foothill and
will not bear interest pending disbursement hereunder. Upon the occurrence
and during the continuance of an Event of Default, Foothill shall have the
right to apply all prepaid premiums to the payment of the Obligations in
such order or form as Foothill shall determine.
g. Section 6.10 of the Agreement hereby is amended and restated
------------
in its entirety to read as follows:
6.10 LOCATION OF INVENTORY AND EQUIPMENT. With the exception of
the Inventory and Equipment of HGI, keep their Inventory and Equipment only
at or in-transit between the locations identified on Schedule 6.10;
-------------
provided, however, that Borrower may amend Schedule 6.10 so long as such
-------- ------- -------------
amendment occurs by written notice to Foothill not less than 30 days prior
to the date on which the Inventory or Equipment is moved to such new
location, so long as such new location is within the continental United
States, and so long as, at the time of such written notification, FRI-MRD
or its Subsidiary, as applicable, provides any financing statements or
fixture filings necessary to perfect and continue perfected Foothill's
security interests in such assets.
h. Section 7.1(b) of the Agreement hereby is amended and
--------------
restated in its entirety to read as follows:
9
<PAGE>
(b) Indebtedness set forth on the Second Amended and Restated
---------------------------
Schedule 7.1;
------------
i. Section 7.8 of the Agreement hereby is amended and restated
-----------
in its entirety to read as follows:
7.8 PREPAYMENTS AND AMENDMENTS.
(a) Except in connection with a refinancing permitted by Section
-------
7.1(h), prepay, redeem, retire, defease, purchase, or otherwise acquire the
------
Senior Discount Notes or the Senior Secured Discount Notes, provided,
--------
however, that so long as no Blockage Event exists, FRI-MRD may prepay,
-------
redeem, retire, defease, purchase, or otherwise acquire the Senior Discount
Notes or the Senior Secured Discount Notes; and
(b) Directly or indirectly, amend, modify, alter, increase, or
change any of the terms or conditions of the Senior Discount Note Agreement
or the Senior Secured Discount Note Agreement without the prior written
consent of Foothill.
j. The following is added as a new subsection (e) to Section 7.20 of
------------
the Agreement:
(e) EBITDA - HGI. In the case of HGI, fail to maintain EBITDA
(before deduction of general and administrative expenses allocated to HGI)
for the Relevant Measuring Period (and until such time as all or
substantially all of the assets or Stock of HGI is disposed of through one
or more HGI Dispositions) of not less than the relevant amount set forth in
the following table, measured on a fiscal quarter-end basis:
<TABLE>
<CAPTION>
========================================
Period Ending Minimum EBITDA
<S> <C>
- ----------------------------------------
06/30/99 -0-
- ----------------------------------------
09/30/99 $500,000
- ----------------------------------------
12/31/99 $500,000
- ----------------------------------------
quarterly thereafter $500,000
========================================
</TABLE>
k. final "or" in clause (b) of the first sentence thereof, replacing
the final "." in clause (c) with "," and by adding the following as new clauses
(d) and (e):
(d) Section 7.14 of the Agreement is hereby amended by deleting the
the payment by FRI or FRI-MRD of reasonable and customary director fees and
the reimbursement of expenses to directors of FRI and its Subsidiaries
(including such payments to Apollo Related Persons), or
10
<PAGE>
(e) the payment by FRI or FRI-MRD of such amounts, in cash, provided
that the cash portion does not exceed $6,000,000, and in the Stock of FRI,
necessary to terminate the Family Restaurants, Inc., FRI-MRD, Corporation,
Chi-Chi's, Inc. and El Torito Restaurants, Inc. Amended and Restated Value
Creation Units Plan.
l. Amended and Restated Schedule 7.1 of the Agreement is hereby
---------------------------------
amended, restated, and replaced in its entirety by the Second Amended and
------------------
Restated Schedule 7.1 attached hereto.
- ---------------------
4. AMENDMENTS TO THE AGREEMENT TO FACILITATE THE KKR MERGER.
--------------------------------------------------------
a. Section 1.1 of the Agreement hereby is amended by adding or
-----------
modifying, as the case may be, the following definitions:
"KKR Merger" means the merger of FRI-Sub with and into KKR with KKR as
----------
the surviving corporation pursuant to the terms of the KKR Merger
Agreements.
"KKR Merger Agreements" means the Agreement and Plan of Merger by and
---------------------
among FRI, KKR, and FRI-Sub, and all related agreements (other than the KKR
Credit Facility), documents and instruments, as the same now exist or may
hereafter be amended, modified, supplemented, extended, renewed, restated
or replaced.
"Permitted KKR Capital Expenditures" means capital expenditures
----------------------------------
directly related to the operations of KKR and its Subsidiaries, plus new
unit expansion, in an amount not to exceed the amounts, and for the
periods, set forth below:
<TABLE>
<CAPTION>
================================================================
Fiscal Year Ended Maximum Capital Expenditures
<S> <C>
- ----------------------------------------------------------------
12/31/1999 $ 6,000,000
- ----------------------------------------------------------------
12/31/2000 $18,000,000
- ----------------------------------------------------------------
12/31/2001 and thereafter $30,000,000
================================================================
</TABLE>
b. The definition of "Change of Control" in Section 1.1 of the
-----------
Agreement is amended by deleting the final "or" in clause (f), replacing the
final "." in clause (g) with ", or", and adding the following as a new clause
(h):
(h) FRI-MRD shall fail to own free and clear of any consensual Liens of any
Person (other than Liens in favor of Foothill) and control (without being
subject to any voting trust, voting agreement, shareholders agreement, or
any other agreement or arrangement limiting or affecting the voting of such
Voting Stock) at any time 100% of the outstanding Voting Stock of KKR by
vote (other than directors qualifying shares and
11
<PAGE>
assuming that all convertible instruments, warrants, or options then
outstanding have been exercised).
c. The following is added as a new Section 5.17 to the Loan
------------
Agreement:
5.17 KKR MERGER. The KKR Merger is valid and effective in
accordance with the terms of the KKR Merger Agreements, and the corporation
statutes of the State of Delaware and KKR is the surviving corporation
pursuant to the merger. All actions, proceedings required by the KKR
Merger Agreements, applicable law and regulation (including but not limited
to, compliance with the Hart-Scott-Rodino Anti-Trust Improvements Act of
1976, as amended) have been taken and the transactions required thereunder
have been duly and validly taken and consummated. No court of competent
jurisdiction has issued any injunction, restraining order or other order
which prohibits consummation of the transactions described in the KKR
Merger Agreements and no governmental action or proceeding has been
threatened or commenced seeking an injunction, restraining order or other
order which seeks to void or otherwise materially modify the transactions
described in the KKR Merger Agreements. Borrower has delivered, or caused
to be delivered, to Foothill, true, correct and complete copies of the KKR
Merger Agreements.
d. Section 7.3 of the Agreement hereby is amended and restated
-----------
in its entirety to read as follows:
7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES. Except to the extent
otherwise permitted by Section 7.13, enter into any Acquisition, merger,
------------
consolidation, reorganization, or recapitalization, or reclassify its
capital Stock, or liquidate, wind up, or dissolve itself (or suffer any
liquidation or dissolution), or convey, sell, assign, lease, transfer, or
otherwise dispose of, in one transaction or a series of related
transactions, all or substantially all of its property or assets; provided,
--------
however, that: (i) any Chi-Chi's Subsidiary may be merged with any other
-------
Chi-Chi's Subsidiary or with Chi-Chi's; and (ii) any Subsidiary of FRI-MRD
(other than one of the Chi-Chi's Subsidiaries, one of the Debtors or HGI)
may be merged with FRI-MRD or any of its Subsidiaries (other than the Chi-
Chi's Subsidiaries, one of the Debtors or HGI); and (iii) one Debtor may be
merged with the other Debtor.
e. Section 7.7 of the Agreement hereby is amended and restated
-----------
in its entirety to read as follows:
7.7 NATURE OF BUSINESS. With the exception of the lines of
business currently operated by Color Me Mine, Inc., and Arrosto Coffee
Company, Inc., each a wholly owned subsidiary of KKR, make any change in
the principal nature of FRI-MRD's or any of its Subsidiaries' business.
f. The following is added as a new subsection (e) to Section
-------
7.11 of the Agreement:
- ----
12
<PAGE>
(e) FRI-MRD may make loans to or declare and pay dividends or
other distributions in cash to FRI to (i) pay, to the extent required to be
paid by applicable law, appraisal rights of dissenting KKR shareholders
upon the effectiveness of the KKR Merger, (ii) redeem shares of Stock of
KKR held by its officers, directors, or employees or its former officers,
directors, or employees (or their estates or beneficiaries under their
estates) that were issued pursuant to any stock option plan, restricted
stock plan, or similar arrangement pursuant to the terms under which such
shares of Stock were issued; provided, however, that the aggregate amount
-------- -------
of such dividends or other distributions shall not exceed $5,000,000, or
(iii) to reimburse FRI for reasonable costs and expenses paid or incurred
in connection with the HGI Acquisition or the KKR Merger.
g. Section 7.20(c) of the Agreement hereby is amended and
---------------
restated in its entirety to read as follows:
(c) EBITDA - Combined. In the case of Chi-Chi's, El Torito,
HGI, and KKR, on a combined basis, fail to maintain EBITDA for the Relevant
Measuring Period of not less than the relevant amount set forth in the
following table, measured on a fiscal quarter-end basis:
<TABLE>
<CAPTION>
========================================
Period Ending Minimum EBITDA
<S> <C>
- ----------------------------------------
09/30/98 $15,500,000
- ----------------------------------------
12/31/98 $15,500,000
- ----------------------------------------
03/31/99 $16,500,000
- ----------------------------------------
06/30/99 $17,500,000
- ----------------------------------------
09/30/99 $19,000,000
- ----------------------------------------
12/31/99 $21,000,000
- ----------------------------------------
quarterly thereafter $21,500,000
========================================
</TABLE>
h. The following is added as a new subsection (f) to Section
7.20 of the Agreement:
(f) EBITDA - KKR. In the case of KKR, fail to maintain
EBITDA for the Relevant Measuring Period of not less than the relevant
amount set forth in the following table, measured on a fiscal quarter-end
basis:
13
<PAGE>
<TABLE>
<CAPTION>
===========================================================
Period Ending Minimum EBITDA
- -----------------------------------------------------------
<S> <C>
06/30/99 $1,000,000
- -----------------------------------------------------------
09/30/99 $2,000,000
- -----------------------------------------------------------
12/31/99 $3,000,000
- -----------------------------------------------------------
quarterly thereafter $3,000,000
===========================================================
</TABLE>
i. Section 7.21 of the Agreement hereby is amended and restated
------------
in its entirety to read as follows:
7.21 CAPITAL EXPENDITURES. With the exception of Permitted KKR
Capital Expenditures, make capital expenditures in connection with new
restaurants in any consecutive 12 month period in excess of the sum of (a)
the amount of equity capital contributions made by FRI to Borrower for the
sole purpose of permitting Borrower to make capital expenditures in
connection with new restaurants, plus (b) the greater of (i) $5,000,000, or
(ii) 25% of the combined EBITDA of the Debtors during the applicable 12
month period (as reflected in the financial statements delivered to
Foothill pursuant hereto). For purposes of this Section 7.21, a restaurant
shall be deemed to be a "new restaurant" if, as of any date of
determination, it was opened for the first time not more CAPITAL
EXPENDITURES. With the exception of Permitted KKR than 12 months prior to
such date.
5. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF SECTION 2 OF THIS
--------------------------------------------------------------
AMENDMENT.
---------
The effectiveness of the provisions of Section 2 of this Amendment is
---------
subject to the fulfillment, to the satisfaction of Foothill and its counsel, of
each of the following conditions:
a. Foothill shall have received and have completed a
satisfactory review of the Senior Secured Discount Note Agreement and such other
agreements or documents related to the Senior Secured Discount Notes as are
requested by Foothill in its reasonable discretion;
b. Foothill shall have received each of the following
documents, in form and substance satisfactory to Foothill and its counsel, duly
executed, and each such document shall be in full force and effect:
(1) this Amendment;
(2) the Reaffirmation and Consent (as hereinafter defined);
and
(3) a copy of the Senior Secured Discount Note Agreement,
certified by the Secretary of FRI-MRD as being true,
correct, and complete.
14
<PAGE>
c. Foothill shall have received a line increase fee of
$500,000, which fee is earned in full by Foothill upon the Effective Date, but
shall be due and payable by Borrower to Foothill $150,000 concurrently with the
execution and delivery of this Amendment by Borrower and the balance of $350,000
due and payable by Borrower to Foothill on the HGI Closing Date, and, in each
case, non-refundable when paid;
d. The representations and warranties in Section 13 of this
Amendment, the Agreement as amended by Section 2 of this Amendment, and the
other Loan Documents shall be true and correct in all respects on and as of the
date hereof, as though made on such date (except to the extent that such
representations and warranties relate solely to an earlier date);
e. After giving effect hereto, no Event of Default or event
which with the giving of notice or passage of time would constitute an Event of
Default shall have occurred and be continuing on the date hereof, nor shall
result from the consummation of the transactions contemplated herein;
f. No injunction, writ, restraining order, or other order of
any nature prohibiting, directly or indirectly, the consummation of the
transactions contemplated herein shall have been issued and remain in force by
any governmental authority against Borrower, FRI-MRD, any Guarantor, Foothill,
or any of their Affiliates;
g. No material adverse change shall have occurred in the
financial condition of Borrower, FRI-MRD, any Guarantor, or in the value of the
Collateral; and
h. All other documents and legal matters in connection with the
transactions contemplated by this Amendment shall have been delivered or
executed or recorded and shall be in form and substance reasonably satisfactory
to Foothill and its counsel.
6. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF SECTION 3 OF THIS
--------------------------------------------------------------
AMENDMENT.
---------
The effectiveness of the provisions of Section 3 of this Amendment is
---------
subject to the fulfillment, to the satisfaction of Foothill and its counsel, of
each of the following conditions:
a. Foothill shall have received a consent fee of $100,000,
which fee is earned in full by Foothill, due and payable by Borrower to Foothill
on the KKR Closing Date, and non-refundable when paid;
b. Foothill shall have received evidence, satisfactory to
Foothill, of the consummation of the HGI Acquisition;
c. Foothill shall have received each of the following
documents, in form and substance satisfactory to Foothill and its counsel, duly
executed, and each such document shall be in full force and effect:
15
<PAGE>
(1) this Amendment;
(2) the Reaffirmation and Consent (as hereinafter defined);
(3) the Joinder Agreement (as hereinafter defined) executed
by HGI;
(4) a copy of the Senior Secured Discount Note Agreement,
certified by the Secretary of FRI-MRD as being true,
correct, and complete;
(5) a guaranty (in the form of Exhibit C attached hereto)
---------
executed by HGI;
(6) Amendment Number One to General Continuing Guaranty and
Security Agreement (in the form of Exhibit D attached
---------
hereto);
(7) Amendment Number One to Security Agreement (in the form
of Exhibit E attached hereto); and
---------
(8) Amendment Number One to Stock Pledge Agreement (in the
form of Exhibit F attached hereto).
---------
d. Foothill shall have received evidence satisfactory to it
that, contemporaneously with the HGI Closing Date, FRI-MRD shall receive the
proceeds pursuant to each issuance of the Senior Secured Discount Notes.
e. Foothill shall have received a certificate of status with
respect to HGI, dated within 20 days of the HGI Closing Date, such certificate
to be issued by the appropriate officer of the jurisdiction of organization of
HGI, which certificate shall indicate that HGI is in good standing in such
jurisdiction;
f. Foothill shall have received a certificate from the
Secretary of HGI attesting to the resolutions of HGI's Board of Directors
authorizing its execution, delivery, and performance of its guaranty and
authorizing specific officers of HGI to execute the same, and authorizing its
performance of the Agreement as modified by this Amendment.
g. Foothill shall have received certificates of status with
respect to HGI, dated within 20 days of the HGI Closing Date, such certificates
to be issued by the appropriate officer of the jurisdictions in which HGI's
failure to be duly qualified or licensed would result in a Material Adverse
Change, which certificates shall indicate that HGI is in good standing in such
jurisdictions;
h. Foothill shall have received, in form and substance
satisfactory to Foothill, an opinion of Borrower's and Guarantors' counsel with
respect to the authorization,
16
<PAGE>
execution and delivery of the HGI Acquisition Agreements by FRI or FRI-MRD, as
applicable, and such other related matters as Foothill may reasonably request;
i. Foothill shall have received such amended and restated, or
new Schedules to the Agreement as are necessary to reflect the addition of HGI
as a Subsidiary of FRI-MRD and as a Guarantor under the Agreement, and such
Schedules are reasonably satisfactory to Foothill;
j. No injunction, writ, restraining order, or other order of
any nature prohibiting, directly or indirectly, the consummation of the
transactions contemplated by Section 3 hereof herein shall have been issued and
remain in force by any governmental authority against Borrower, FRI-MRD, HGI,
any Guarantor, Foothill, or any of their Affiliates;
k. Foothill shall have received evidence, satisfactory to
Foothill, that all of the KKR Senior Notes have been, or will be upon the
consummation of the HGI Acquisition, redeemed.
l. All other documents and legal matters in connection with the
transactions contemplated by this Amendment shall have been delivered or
executed or recorded and shall be in form and substance reasonably satisfactory
to Foothill and its counsel.
7. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF SECTION 4 OF THIS
--------------------------------------------------------------
AMENDMENT.
---------
The effectiveness of the provisions of Section 4 of this Amendment is
---------
subject to the fulfillment, to the satisfaction of Foothill and its counsel, of
each of the following conditions:
a. Foothill shall have received evidence, reasonably
satisfactory to Foothill, of the consummation of the KKR Merger;
b. Foothill shall have received executed but unfiled financing
statements and fixture filings relative to the assets of KKR;
c. Foothill shall have received each of the following
documents, duly executed, and each such document shall be in full force and
effect:
(1) this Amendment;
(2) the Reaffirmation and Consent (as hereinafter defined);
(3) the Joinder Agreement (as hereinafter defined) executed
by KKR;
(4) a guaranty (in the form of Exhibit G attached hereto)
---------
executed by KKR;
17
<PAGE>
(5) a certificate from an appropriate officer of KKR
regarding the depositaries at which KKR maintains
deposit accounts and account numbers of each of such
deposit accounts, together with notification letters to
such depositaries pursuant to Section 9302(g) of the
Code;
(6) the Guarantor Security Agreement (in the form of
Exhibit H attached hereto) executed by KKR; and
---------
(7) Amendment Number One to Stock Pledge Agreement (in the
form of Exhibit F attached hereto).
---------
d. Foothill shall have received a certificate from the
Secretary of KKR attesting to the resolutions of KKR's Board of Directors
authorizing its execution, delivery, and performance of its guaranty, the
Guarantor Security Agreement, and authorizing specific officers of such Obligor
to execute the same, and authorizing its performance of the Agreement as amended
by this Amendment;
e. Foothill shall have received a certificate of status with
respect to KKR, dated within 20 days of the KKR Closing Date, such certificate
to be issued by the appropriate officer of the jurisdiction of organization of
KKR, which certificate shall indicate that KKR is in good standing in such
jurisdiction;
f. Foothill shall have received certificates of status with
respect to KKR, dated within 20 days of the KKR Closing Date, such certificates
to be issued by the appropriate officer of the jurisdictions in which KKR's
failure to be duly qualified or licensed would result in a Material Adverse
Change, which certificates shall indicate that KKR is in good standing in such
jurisdictions;
g. Foothill shall have received, in form and substance
satisfactory to Foothill, an opinion of Borrower's and Guarantors' counsel with
respect to the effectiveness of the KKR Merger as of the KKR Closing Date, the
security interests and liens of Foothill with respect to the assets of KKR and
such other matters as Foothill may reasonably request;
h. Foothill shall have received, in form and substance
satisfactory to Foothill, evidence that the certificates of merger with respect
to the KKR Merger have been filed with the Secretary of State of the State of
Delaware and the KKR Merger is valid and effective in accordance with the terms
and provisions of the KKR Merger Agreements and the applicable corporation
statute of the State of Delaware.
i. With respect to KKR, Foothill shall have received a
certificate of insurance, together with the endorsements thereto, as is required
by Section 6.8 of the Agreement, the form and substance of which shall be
-----------
reasonably satisfactory to Foothill and its counsel;
18
<PAGE>
j. Foothill shall have received such amended and restated, or
new Schedules to the Agreement as are necessary to reflect the addition of KKR
as a Subsidiary of FRI-MRD and as a Guarantor under the Agreement, and such
Schedules are reasonably satisfactory to Foothill;
k. No injunction, writ, restraining order, or other order of
any nature prohibiting, directly or indirectly, the consummation of the KKR
Merger shall have been issued and remain in force by any governmental authority
against Borrower, FRI-MRD, any Guarantor, Foothill, or any of their Affiliates;
l. All other documents and legal matters in connection with the
transactions contemplated by this Amendment shall have been delivered or
executed or recorded and shall be in form and substance reasonably satisfactory
to Foothill and its counsel.
8. CONDITIONS SUBSEQUENT. As a condition subsequent to the
---------------------
effectiveness of the increase in the Maximum Amount and the other amendments
related thereto set forth in Section 2 hereof, each of FRI-MRD and Borrower
---------
shall perform or cause to be performed the following (the failure by FRI-MRD or
Borrower to so perform or cause to be performed constituting an Event of Default
under the Agreement):
a. within 30 days of the Effective Date, Foothill shall have
received an opinion of counsel of Borrower, FRI-MRD, and the other Guarantors,
regarding the authorization, execution, delivery and enforceability of the
Amendment, in form and substance reasonably satisfactory to Foothill; provided,
--------
however, that until Foothill shall have received such opinion, the Line Increase
- -------
Blockage Amount shall be $20,000,000 notwithstanding any reductions in the Line
Increase Blockage Amount pursuant to the terms of the Agreement, as amended
hereby;
b. within 30 days of the Effective Date, Foothill shall have
received a certificate from the Secretary of each Obligor attesting to the
resolutions of such Obligor's Board of Directors authorizing its execution,
delivery, and performance of this Amendment and authorizing specific officers of
such Obligor to execute the same; and
c. within 30 days of the Effective Date, Foothill shall have
received a duly executed collateral assignment of rights with respect to the
rights of FRI or any of its Subsidiaries under the KKR Credit Facility, and
shall have received any notes or other instruments evidencing KKR's Indebtedness
under the KKR Credit Facility.
9. CONSENT TO KKR CREDIT FACILITY. Notwithstanding anything herein
------------------------------
or in the Agreement to the contrary but without affecting future compliance with
the provisions of the Agreement including Section 3.2 thereof, upon the
-----------
satisfaction of the conditions set forth in Section 5 hereof, and pursuant to
---------
the terms and conditions of the Agreement and this Amendment, Foothill hereby
(a) consents to the financial arrangement pursuant to which FRI-MRD or one of
its Subsidiaries has agreed to make loans or other advances to KKR, in an amount
not to exceed $3,000,000, in the aggregate, outstanding at any one time, and (b)
agrees
19
<PAGE>
that such financial arrangements shall constitute Permitted Investments pursuant
to the Agreement as amended by this Amendment.
10. CONSENT TO SENIOR SECURED DISCOUNT NOTES. Notwithstanding
----------------------------------------
anything herein or in the Agreement to the contrary but without affecting future
compliance with the provisions of the Agreement including Section 3.2 thereof,
-----------
upon the satisfaction of the conditions set forth in Section 6 hereof, and
---------
pursuant to the terms and conditions of the Agreement and this Amendment,
Foothill hereby (a) consents to the incurrence by FRI-MRD of up to $24,000,000
in aggregate principal amount of Indebtedness on the terms set forth in the
Senior Secured Discount Notes and the Senior Secured Discount Note Agreement,
and (b) agrees that such Indebtedness shall constitute permitted Indebtedness
pursuant to Section 7.1(b) of the Agreement as amended by this Amendment.
--------------
11. CONSENT TO HGI ACQUISITION. Notwithstanding anything herein or
--------------------------
in the Agreement to the contrary but without affecting future compliance with
the provisions of the Agreement including Section 3.2 thereof, upon the
-----------
satisfaction of the conditions set forth in Section 6 hereof, and pursuant to
---------
the terms and conditions of the Agreement and this Amendment, Foothill hereby
consents to the acquisition by FRI-MRD from KKR of all of the issued and
outstanding shares of Stock of HGI.
12. CONSENT TO KKR MERGER. Notwithstanding anything herein or in the
---------------------
Agreement to the contrary but without affecting future compliance with the
provisions of the Agreement including Section 3.2 thereof, upon the satisfaction
-----------
of the conditions set forth in Section 7 hereof, and pursuant to the terms and
---------
conditions of the Agreement and this Amendment, Foothill hereby consents to the
KKR Merger.
13. REPRESENTATIONS AND WARRANTIES. Each Borrower party hereto and
------------------------------
FRI-MRD hereby represents and warrants to Foothill that: (a) the execution,
delivery, and performance of this Amendment and of the Agreement, as amended by
this Amendment, are within its corporate powers, have been duly authorized by
all necessary corporate action, and are not in contravention of any law, rule,
or regulation, or any order, judgment, decree, writ, injunction, or award of any
arbitrator, court, or governmental authority, or of the terms of its charter or
bylaws, or of any contract or undertaking to which it is a party or by which any
of its properties may be bound or affected; and (b) this Amendment and the
Agreement, as amended by this Amendment, constitute each Borrower party hereto
and FRI-MRD's legal, valid, and binding obligation, enforceable against each
Borrower party hereto and FRI-MRD in accordance with their terms.
14. REAFFIRMATION AND CONSENT. Concurrently herewith, FRI-MRD and
-------------------------
Borrower shall cause each current Guarantor to execute and deliver to Foothill
the Reaffirmation and Consent attached hereto as Exhibit A (the "Reaffirmation
---------
and Consent").
15. JOINDER AGREEMENT. Concurrently with the consummation of the HGI
-----------------
Acquisition and the KKR Merger, Borrower shall cause HGI or KKR, as the case may
be, to execute and deliver to Foothill the Joinder Agreement in the form of
Exhibit B (the "Joinder Agreement").
- ---------
20
<PAGE>
16. EFFECT ON AGREEMENT. The Agreement, as amended hereby, shall be
-------------------
and remain in full force and effect in accordance with its respective terms and
hereby is ratified and confirmed in all respects. The execution, delivery, and
performance of this Amendment shall not operate as a waiver of or, except as
expressly set forth herein, as an amendment, of any right, power, or remedy of
Foothill under the Agreement, as in effect prior to the date hereof.
17. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. Section 13 of the
------------------------------------------
Loan Agreement is incorporated herein by this reference as though fully set
forth herein.
18. MISCELLANEOUS.
-------------
a. Upon the effectiveness of this Amendment, each reference in
the Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of
like import referring to the Agreement shall mean and refer to the Agreement as
amended by this Amendment.
b. Upon the effectiveness of this Amendment, each reference in
the Loan Documents to the "Agreement", "thereunder", "therein", "thereof" or
words of like import referring to the Agreement shall mean and refer to the
Agreement as amended by this Amendment.
c. Upon the effectiveness of Section 3 of this Amendment, HGI
---------
shall be deemed a Guarantor under the Loan Agreement and each reference in the
Loan Documents to "Guarantors" or words of like import shall include HGI.
d. Upon the effectiveness of Section 4 of this Amendment, KKR
shall be deemed a Guarantor under the Loan Agreement and each reference in the
Loan Documents to "Guarantors" or words of like import shall include KKR.
e. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Amendment by signing
any such counterpart. Delivery of an executed counterpart of this Amendment by
telefacsimile shall be equally as effective as delivery of a manually executed
counterpart of this Amendment. Any party delivering an executed counterpart of
this Amendment by telefacsimile also shall deliver a manually executed
counterpart of this Amendment but the failure to deliver a manually executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Amendment.
[remainder of page intentionally left blank]
21
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first written above.
FRI-MRD CORPORATION,
a Delaware corporation
By /s/ Robert Trebing, Jr.
------------------------------
Title: President
--------------------------
EL TORITO RESTAURANTS, INC.,
a Delaware corporation
By /s/ Robert Gonda
------------------------------
Title: Treasurer
--------------------------
CHI-CHI'S INC.,
a Delaware corporation
By /s/ Robert Gonda
------------------------------
Title: Treasurer
--------------------------
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/
------------------------------
Title:
--------------------------
-S-1-
<PAGE>
EXHIBIT A
----------
Reaffirmation and Consent
All capitalized terms used herein but not otherwise defined herein
shall have the meanings ascribed to them in that certain Amendment Number Four
to Loan and Security Agreement, dated as of June 9, 1998 (the "Amendment").
Each of the undersigned hereby (a) represents and warrants to Foothill that the
execution, delivery, and performance of this Reaffirmation and Consent are
within its corporate powers, have been duly authorized by all necessary
corporate action, and are not in contravention of any law, rule, or regulation,
or any order, judgment, decree, writ, injunction, or award of any arbitrator,
court, or governmental authority, or of the terms of its charter or bylaws, or
of any contract or undertaking to which it is a party or by which any of its
properties may be bound or affected; (b) consents to the amendment of the
Agreement by the Amendment; (c) acknowledges and reaffirms its obligations owing
to Foothill under the Guaranty and any other Loan Documents to which it is
party; and (d) agrees that each of the Guaranty and any other Loan Documents to
which it is a party is and shall remain in full force and effect. Although each
of the undersigned has been informed of the matters set forth herein and has
acknowledged and agreed to same, it understands that Foothill has no obligation
to inform it of such matters in the future or to seek its acknowledgement or
agreement to future amendments, and nothing herein shall create such a duty.
This Reaffirmation and Consent may be executed in any number of counterparts and
by different parties on separate counterparts, each of which, when executed and
delivered, shall be deemed to be an original, and all of which, when taken
together, shall constitute but one and the same Reaffirmation and Consent.
Delivery of an executed counterpart of this Reaffirmation and Consent by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Reaffirmation and Consent. Any party delivering an executed
counterpart of this Reaffirmation and Consent by telefacsimile also shall
deliver an original executed counterpart of this Reaffirmation and Consent but
the failure to deliver an original executed counterpart shall not affect the
validity, enforceability, and binding effect of this Reaffirmation and Consent.
This Reaffirmation and Consent shall be governed by internal laws of the State
of California as more fully set forth in Section 13 of the Loan Agreement.
FAMILY RESTAURANTS, INC.,
a Delaware corporation
FRI-MRD CORPORATION,
a Delaware corporation
FRI-ADMIN CORPORATION,
a Delaware corporation
EL TORITO FRANCHISING COMPANY,
a Delaware corporation
CCMR OF TIMONIUM, INC.,
a Delaware corporation
CCMR OF MARYLAND, INC.,
a Delaware corporation
CHI-CHI'S OF KANSAS, INC.,
a Kansas corporation
<PAGE>
CHI-CHI'S OF GREENBELT, INC.,
a Kentucky corporation
CHI-CHI'S FRANCHISE OPERATIONS CORPORATION,
a Kentucky corporation
CCMR OF CATONSVILLE, INC.,
a Kentucky corporation
CCMR OF GREENBELT, INC.,
a Kentucky corporation
CCMR OF RITCHIE HIGHWAY, INC.,
a Kentucky corporation
CHI-CHI'S MANAGEMENT CORPORATION,
a Kentucky corporation
CCMR OF HARFORD COUNTY, INC.,
a Kentucky corporation
CHI-CHI'S OF SOUTH CAROLINA, INC.,
a Kentucky corporation
MAINTENANCE SUPPORT GROUP, INC.,
a Kentucky corporation
CCMR OF FREDERICK, INC.,
a Kentucky corporation
CCMR OF INNER HARBOR, INC.,
a Kentucky corporation
CHI-CHI'S OF WEST VIRGINIA, INC.,
a Kentucky corporation
CCMR ADVERTISING AGENCY, INC.,
a Kentucky corporation
CCMR OF GOLDEN RING, INC.,
a Kentucky corporation
By _____________________________
Title: _________________________
CCMR OF CUMBERLAND, INC.,
a Kentucky corporation
By _____________________________
Title: Authorized Signatory
<PAGE>
EXHIBIT B
----------
FORM OF
JOINDER AGREEMENT
____________, 1998
Foothill Capital Corporation
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attention: Business Finance Division Manager
Re: Family Restaurants, Inc. Joinder Agreement
------------------------------------------
Ladies and Gentlemen:
Reference hereby is made to that certain Loan and Security Agreement,
dated as of January 10, 1997 (as amended, restated, supplemented, or modified
from time to time, the "Loan Agreement"), by and between Foothill Capital
Corporation, a California corporation ("Lender"), on the one hand, and Family
Restaurants, Inc., a Delaware corporation, FRI-MRD Corporation, a Delaware
corporation, El Torito Restaurants, Inc., a Delaware corporation, Chi-Chi's,
Inc., a Delaware corporation, and each of their Subsidiaries (individually and
collectively, the "Obligors"), on the other hand. Capitalized terms used herein
and not otherwise defined herein shall have the meanings ascribed to them in the
Loan Agreement.
This Joinder Agreement is executed and delivered by the entity
identified as the New Guarantor on the signature page hereof (the "New
Guarantor") in favor of Lender.
SECTION 1. Joinder. The New Guarantor hereby joins in and agrees to
-------
be bound by Section 15.11 of the Loan Agreement and any other Loan Document to
-------------
which any Guarantor is a party, and, in so doing, hereby becomes a Guarantor.
SECTION 2. Representations and Warranties. The New Guarantor hereby
------------------------------
represents and warrants to Lender that: (a) the execution, delivery, and
performance of this Joinder Agreement and any other Loan Document to which the
New Guarantor is party are within its corporate (or equivalent) powers, have
been duly authorized by all necessary corporate (or equivalent) action, and do
not and will not (i) violate any provision of federal, state, or local law or
regulation, the Governing Documents of the New Guarantor, or any order,
judgment, or decree of any court or other governmental authority binding on the
New Guarantor, (ii) conflict with, result in a breach of, or constitute (with
due notice or lapse of time or both) a default under any material contractual
obligation or material lease of the New Guarantor, (iii) result in or require
the creation or imposition of any Lien of
<PAGE>
any material nature whatsoever upon any material properties or assets of any
Obligor, other than Permitted Liens, or (iv) require any approval of
Stockholders (or equivalent) or any approval or consent of any Person under any
material contractual obligation of the New Guarantor, other than those already
obtained prior to the effective date hereof; (b) this Joinder Agreement and any
and all other Loan Documents to which the New Guarantor is party constitute its
legal, valid, and binding obligations, enforceable against the New Guarantor in
accordance with their respective terms; (c) the chief executive office of the
New Guarantor is located at 18831 Von Karman Avenue, Irvine, California 92612;
(d) the FEIN of the New Guarantor is set forth following the name of the New
Guarantor on the signature page hereof; and (e) each other representation and
warranty applicable to the New Guarantor as a Guarantor under the Loan Documents
is and will be true and correct as of the date hereof.
SECTION 3. Binding Effect. This Joinder Agreement is binding upon
--------------
and enforceable against the New Guarantor and its successors and assigns. It
shall inure to the benefit of and may be enforced by Lender and its successors
and assigns.
SECTION 4. Notices. Notices to the New Guarantor shall be given in
-------
the manner set forth in Section 12 of the Loan Agreement.
----------
SECTION 5. Loan Document. This Joinder Agreement is a Loan Document.
-------------
SECTION 6. Loan Document References. (a) Each reference in the Loan
------------------------
Agreement and the other Loan Documents to "Guarantor", or words of like import
referring to the Guarantors shall include and refer to the undersigned New
Guarantor; and (b) each reference in the Loan Documents to this "Agreement",
"hereunder", "herein", "hereof", "thereunder", "therein", "thereof", or words of
like import referring to the Loan Agreement, or other Loan Document to which New
Guarantor is a party shall mean and refer to such Loan Document as supplemented
by this Joinder Agreement.
SECTION 7. Further Assurances. The New Guarantor and the other
------------------
Obligors shall execute and deliver to Lender all [financing statements,
continuation financing statements, fixture filings, security agreements, chattel
mortgages, pledges, mortgages, deeds of trust, assignments, supplements in
respect of any of the foregoing, endorsements of certificates of title,
applications for title, schedules of accounts] affidavits, reports, notices,
letters of authority, and all other documents that Lender may reasonably
request, in form satisfactory to Lender, [to perfect and continue perfected
Lender's security interests in the Collateral and] in order to fully consummate
all of the transactions contemplated under this Joinder Agreement and the Loan
Documents.
(The text contained between the square brackets in Section 7 is only
applicable to the Joinder Agreement to be executed by KKR).
SECTION 8. Counterparts. This Joinder Agreement may be executed in
------------
any number of counterparts, all of which taken together shall constitute one and
the same instrument and any of the parties hereto may execute this Joinder
Agreement by signing
<PAGE>
any such counterpart. Delivery of an executed counterpart of this Joinder
Agreement by telefacsimile shall be equally as effective as delivery of an
original executed counterpart of this Joinder Agreement. Any party delivering
an executed counterpart of this Joinder Agreement by telefacsimile also shall
deliver an original executed counterpart of this Joinder Agreement but the
failure to deliver an original executed counterpart shall not affect the
validity, enforceability, and binding effect of this Joinder Agreement.
[Signature page to follow.]
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has caused this Joinder
Agreement to be duly executed and delivered as of the date first above written.
NEW GUARANTOR:
_______________________________,
a _________ corporation
By:__________________________
Title:
FEIN: _______________________
Acknowledged and Agreed:
FRI-MRD CORPORATION
EL TORITO RESTAURANTS, INC.
CHI-CHI'S, INC.
By___________________________
Title:_______________________
FOOTHILL CAPITAL CORPORATION
By___________________________
Title:_______________________
<PAGE>
Second Amended and Restated Schedule 7.1
----------------------------------------
INDEBTEDNESS
[TO BE PREPARED BY BORROWER ON THE BASIS OF EXISTING AMENDED AND RESTATED
SCHEDULE 7.1 TO THE AGREEMENT, REFLECTING THE CURRENT BALANCES FOR ALL EXISTING
SCHEDULED DEBT AS OF ___________, 1998 AND INCORPORATING THE ADDITIONAL SENIOR
DISCOUNT NOTES IN THE AMOUNT OF $24,000,000.]
<PAGE>
Exhibit 10.31
FORM OF
GENERAL CONTINUING GUARANTY
---------------------------
THE HAMLET GROUP, INC.
THIS GENERAL CONTINUING GUARANTY ("Guaranty"), dated as of __________,
1998, is executed and delivered by THE HAMLET GROUP, INC., a California
corporation ("Guarantor"), in favor of Foothill Capital Corporation, a
California corporation ("Guarantied Party"), in light of the following:
WHEREAS, Debtor, Guarantied Party, and the other parties thereto have
heretofore entered into the Loan Agreement; and
WHEREAS, in order to induce Guarantied Party to continue to extend
financial accommodations to Debtor pursuant to the Loan Agreement, and in
consideration thereof, and in consideration of any loans or other financial
accommodations at any time extended by Guarantied Party to Debtor pursuant to
the Loan Agreement, Guarantor has agreed to guaranty the Guarantied Obligations.
NOW, THEREFORE, in consideration of the foregoing, Guarantor hereby
agrees, in favor of Guarantied Party, as follows:
1. Definitions and Construction.
----------------------------
(a) Definitions. Capitalized terms used herein and not otherwise
-----------
defined herein shall have the meanings ascribed to them in the Loan Agreement.
The following terms, as used in this Guaranty, shall have the following
meanings:
"Debtor" shall mean any one or more of Chi-Chi's, Inc., a
------
Delaware corporation, and El Torito Restaurants, Inc., a Delaware corporation,
individually and collectively, jointly and severally.
"Guarantied Obligations" shall mean the due and punctual
----------------------
payment of the principal of, and interest (including, any and all interest
which, but for the application of the provisions of the Bankruptcy Code, would
have accrued on such amounts) on, and premium, if any, on the Indebtedness owed
by Debtor to Guarantied Party pursuant to the terms of the Loan Documents.
"Guarantied Party" shall have the meaning set forth in the
----------------
preamble to this Guaranty.
-1-
<PAGE>
"Guarantor" shall have the meaning set forth in the preamble
---------
to this Guaranty.
"Guaranty" shall have the meaning set forth in the preamble
--------
to this Guaranty.
"Indebtedness" shall mean any and all Obligations, whether
------------
recovery is or hereafter becomes barred by any statute of limitations or
otherwise becomes unenforceable for any reason whatsoever, including any act or
failure to act by Guarantied Party.
"Loan Agreement" shall mean that certain Loan and Security
--------------
Agreement, dated as of January 10, 1997 (as heretofore amended, supplemented, or
otherwise modified), entered into between Debtor, Guarantied Party, and the
other parties thereto.
(b) Construction. Unless the context of this Guaranty clearly
------------
requires otherwise, references to the plural include the singular, references to
the singular include the plural, the part includes the whole, the terms
"include" and "including" are not limiting, and the term "or" has the inclusive
meaning represented by the phrase "and/or." The words "hereof," "herein,"
"hereby," "hereunder," and other similar terms refer to this Guaranty as a whole
and not to any particular provision of this Guaranty. Any reference in this
Guaranty to any of the following documents includes any and all alterations,
amendments, restatements, extensions, modifications, renewals, or supplements
thereto or thereof, as applicable: the Loan Agreement; this Guaranty; and the
other Loan Documents. This Guaranty has been reviewed by Guarantor, Guarantied
Party, and their respective counsel, and shall be construed and interpreted
according to the ordinary meaning of the words used so as to fairly accomplish
the purposes and intentions of Guarantied Party and Guarantor.
2. Guarantied Obligations. Guarantor hereby irrevocably and
----------------------
unconditionally guaranties to Guarantied Party, as and for its own debt, until
final and indefeasible payment thereof has been made, (a) the payment of the
Guarantied Obligations, in each case when and as the same shall become due and
payable, whether at maturity, pursuant to a mandatory prepayment requirement, by
acceleration, or otherwise; it being the intent of Guarantor that the guaranty
set forth herein shall be a guaranty of payment and not a guaranty of
collection; and (b) the punctual and faithful performance, keeping, observance,
and fulfillment by Debtor of all of the agreements, conditions, covenants, and
Obligations of Debtor contained in the Loan Agreement, and under each of the
other Loan Documents.
-2-
<PAGE>
3. Continuing Guaranty. This Guaranty includes Guarantied
-------------------
Obligations arising under successive transactions continuing, compromising,
extending, increasing, modifying, releasing, or renewing the Guarantied
Obligations, changing the interest rate, payment terms, or other terms and
conditions thereof, or creating new or additional Guarantied Obligations after
prior Guarantied Obligations have been satisfied in whole or in part. To the
maximum extent permitted by law, Guarantor hereby waives any right to revoke
this Guaranty as to future Indebtedness. If such a revocation is effective
notwithstanding the foregoing waiver, Guarantor acknowledges and agrees that (a)
no such revocation shall be effective until written notice thereof has been
received by Guarantied Party, (b) no such revocation shall apply to any
Guarantied Obligations in existence on such date (including any subsequent
continuation, extension, or renewal thereof, or change in the interest rate,
payment terms, or other terms and conditions thereof), (c) no such revocation
shall apply to any Guarantied Obligations made or created after such date to the
extent made or created pursuant to a legally binding commitment of Guarantied
Party in existence on the date of such revocation, and (d) any payment by Debtor
or from any source other than Guarantor subsequent to the date of such
revocation shall first be applied to that portion of the Guarantied Obligations
as to which the revocation is effective and which are not, therefore, guarantied
hereunder, and to the extent so applied shall not reduce the maximum obligation
of Guarantor hereunder. The foregoing notwithstanding, this Guaranty will
terminate at such time as FRI-MRD Corporation, a Delaware corporation, no longer
owns any Stock of Guarantor.
4. Performance Under this Guaranty. In the event that Debtor fails
-------------------------------
to make any payment of any Guarantied Obligations, on or before the due date
thereof, or if Debtor shall fail to perform, keep, observe, or fulfill any other
obligation referred to in clause (b) of Section 2 hereof in the manner provided
-----------------------
in the Loan Agreement or the other Loan Documents, as applicable, Guarantor
immediately shall cause such payment to be made or each of such obligations to
be performed, kept, observed, or fulfilled.
5. Primary Obligations. This Guaranty is a primary and original
-------------------
obligation of Guarantor, is not merely the creation of a surety relationship,
and is an absolute, unconditional, and continuing guaranty of payment and
performance which shall remain in full force and effect without respect to
future changes in conditions until full and final payment in cash (or other
consideration acceptable to Foothill in its sole discretion and agreed to by
Foothill) of the Guarantied Obligations and the termination of all commitments
of Foothill to extend Credit to Debtor or Guarantor. Guarantor agrees that it
is directly, jointly and severally with any other guarantor of the Guarantied
Obligations, liable to Guarantied Party, that the obligations of Guarantor
hereunder are independent of the obligations of Debtor or any other guarantor,
and that a separate action may be brought against Guarantor, whether such action
is brought against Debtor or any other guarantor or whether Debtor or any other
guarantor is joined in such action. Guarantor agrees that
-3-
<PAGE>
its liability hereunder shall be immediate and shall not be contingent upon the
exercise or enforcement by Guarantied Party of whatever remedies it may have
against Debtor or any other guarantor, or the enforcement of any lien or
realization upon any security Guarantied Party may at any time possess.
Guarantor agrees that any release which may be given by Guarantied Party to
Debtor or any other guarantor shall not release Guarantor. Guarantor consents
and agrees that Guarantied Party shall be under no obligation to marshal any
property or assets of Debtor or any other guarantor in favor of Guarantor, or
against or in payment of any or all of the Guarantied Obligations.
6. Waivers.
-------
(a) To the fullest extent permitted by applicable law, Guarantor
hereby waives: (i) notice of acceptance hereof; (ii) notice of any loans or
other financial accommodations made or extended under the Loan Agreement, or the
creation or existence of any Guarantied Obligations; (iii) notice of the amount
of the Guarantied Obligations, subject, however, to Guarantor's right to make
inquiry of Guarantied Party to ascertain the amount of the Guarantied
Obligations at any reasonable time; (iv) notice of any adverse change in the
financial condition of Debtor or of any other fact that might increase
Guarantor's risk hereunder; (v) notice of presentment for payment, demand,
protest, and notice thereof as to any instrument among the Loan Documents; (vi)
notice of any unmatured Event of Default or Event of Default under the Loan
Agreement; and (vii) all other notices (except if such notice is specifically
required to be given to Guarantor under this Guaranty or any other Loan
Documents to which Guarantor is a party) and demands to which Guarantor might
otherwise be entitled.
(b) To the fullest extent permitted by applicable law, Guarantor
hereby waives the right by statute or otherwise to require Guarantied Party to
institute suit against Debtor or to exhaust any rights and remedies which
Guarantied Party has or may have against Debtor. In this regard, Guarantor
agrees that it is bound to the payment of each and all Guarantied Obligations,
whether now existing or hereafter arising, as fully as if such Guarantied
Obligations were directly owing to Guarantied Party by Guarantor. Guarantor
further waives any defense arising by reason of any disability or other defense
(other than the defense that the Guarantied Obligations shall have been fully
and finally performed and indefeasibly paid) of Debtor or by reason of the
cessation from any cause whatsoever of the liability of Debtor in respect
thereof.
(c) To the fullest extent permitted by applicable law, Guarantor
hereby waives: (i) any rights to assert against Guarantied Party any defense
(legal or equitable), set-off, counterclaim, or claim which Guarantor may now or
at any time hereafter have against Debtor or any other party liable to
Guarantied Party on account of or with respect to the Guarantied Obligations;
(ii) any defense, set-off, counterclaim, or
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<PAGE>
claim, of any kind or nature, arising directly or indirectly from the present or
future lack of perfection, sufficiency, validity, or enforceability of the
Guarantied Obligations or any security therefor; (iii) any defense arising by
reason of any claim or defense based upon an election of remedies by Guarantied
Party including any defense based upon an election of remedies by Guarantied
Party under the provisions of (S)(S) 580d and 726 of the California Code of
Civil Procedure, or any similar law of California or any other jurisdiction;
(iv) the benefit of any statute of limitations affecting Guarantor's liability
hereunder or the enforcement thereof, and any act which shall defer or delay the
operation of any statute of limitations applicable to the Guarantied Obligations
shall similarly operate to defer or delay the operation of such statute of
limitations applicable to Guarantor's liability hereunder.
(d) Until such time as all of the Guarantied Obligations have
been fully, finally, and indefeasibly paid in full in cash (or other
consideration acceptable to Foothill in its sole discretion and agreed to by
Foothill): (i) Guarantor hereby waives and postpones any right of subrogation
Guarantor has or may have as against Debtor with respect to the Guarantied
Obligations; (ii) in addition, Guarantor hereby waives and postpones any right
to proceed against Debtor or any other Obligor with respect to any portion of
the Obligations, now or hereafter, for contribution, indemnity, reimbursement,
or any other suretyship rights and claims (irrespective of whether direct or
indirect, liquidated or contingent), with respect to the Guarantied Obligations;
and (iii) in addition, Guarantor also hereby waives and postpones any right to
proceed or to seek recourse against or with respect to any property or asset of
Debtor.
(e) If any of the Guarantied Obligations at any time are secured
by a mortgage or deed of trust upon real property, Guarantied Party may elect,
in its sole discretion, upon a default with respect to the Guarantied
Obligations, to foreclose such mortgage or deed of trust judicially or
nonjudicially in any manner permitted by law, before or after enforcing this
Guaranty, without diminishing or affecting the liability of Guarantor hereunder.
Guarantor understands that (a) by virtue of the operation of California's
antideficiency law applicable to nonjudicial foreclosures, an election by
Guarantied Party nonjudicially to foreclose such a mortgage or deed of trust
probably would have the effect of impairing or destroying rights of subrogation,
reimbursement, contribution, or indemnity of Guarantor against Debtor or other
guarantors or sureties, and (b) absent the waiver given by Guarantor herein,
such an election would estop Guarantied Party from enforcing this Guaranty
against Guarantor. Understanding the foregoing, and understanding that Guarantor
is hereby relinquishing a defense to the enforceability of this Guaranty,
Guarantor hereby waives any right to assert against Guarantied Party any defense
to the enforcement of this Guaranty, whether denominated "estoppel" or
otherwise, based on or arising from an election by Guarantied Party
nonjudicially to foreclose any such mortgage or deed of trust securing the
Guarantied Obligations. Guarantor understands that the effect of the foregoing
waiver may be that Guarantor may have liability hereunder for
-5-
<PAGE>
amounts with respect to which Guarantor may be left without rights of
subrogation, reimbursement, contribution, or indemnity against Debtor or other
guarantors or sureties. Guarantor also agrees that the "fair market value"
provisions of Section 580a of the California Code of Civil Procedure shall have
no applicability with respect to the determination of Guarantor's liability
under this Guaranty.
(f) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER
PROVISION SET FORTH IN THIS GUARANTY, GUARANTOR HEREBY WAIVES, TO THE MAXIMUM
EXTENT SUCH WAIVER IS PERMITTED BY LAW, ANY AND ALL BENEFITS OR DEFENSES ARISING
DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE OF CALIFORNIA CIVIL CODE (S)(S)
2799, 2808, 2809, 2810, 2815, 2819, 2820, 2821, 2822, 2838, 2839, 2845, 2847,
2848, 2849, AND 2850, CALIFORNIA CODE OF CIVIL PROCEDURE (S)(S) 580A, 580B,
580C, 580D, AND 726, AND CHAPTER 2 OF TITLE 14 OF THE CALIFORNIA CIVIL CODE.
(g) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER
PROVISION SET FORTH IN THIS GUARANTY, GUARANTOR WAIVES ALL RIGHTS AND DEFENSES
ARISING OUT OF AN ELECTION OF REMEDIES BY THE GUARANTIED PARTY, EVEN THOUGH THAT
ELECTION OF REMEDIES, SUCH AS A NONJUDICIAL FORECLOSURE WITH RESPECT TO SECURITY
FOR A GUARANTEED OBLIGATION, HAS DESTROYED THE GUARANTOR'S RIGHTS OF SUBROGATION
AND REIMBURSEMENT AGAINST THE DEBTOR BY THE OPERATION OF SECTION 580D OF THE
CALIFORNIA CODE OF CIVIL PROCEDURE OR OTHERWISE.
7. Releases. Guarantor consents and agrees that, without notice to
--------
or by Guarantor and without affecting or impairing the obligations of Guarantor
hereunder, Guarantied Party may, by action or inaction, compromise or settle,
extend the period of duration or the time for the payment, or discharge the
performance of, or may refuse to, or otherwise not enforce, or may, by action or
inaction, release all or any one or more parties to, any one or more of the
terms and provisions of the Loan Agreement or any of the other Loan Documents or
may grant other indulgences to Debtor in respect thereof, or may amend or modify
at any time (or from time to time) any one or more of the Loan Agreement or any
of the other Loan Documents in any manner permitted thereunder, or may, by
action or inaction, release or substitute any other guarantor, if any, of the
Guarantied Obligations, or may enforce, exchange, release, or waive, by action
or inaction, any security for the Guarantied Obligations or any other guaranty
of the Guarantied Obligations, or any portion thereof.
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<PAGE>
8. No Election. Guarantied Party shall have the right to seek
-----------
recourse against Guarantor to the fullest extent provided for herein and no
election by Guarantied Party to proceed in one form of action or proceeding, or
against any party, or on any obligation, shall constitute a waiver of Guarantied
Party's right to proceed in any other form of action or proceeding or against
other parties unless Guarantied Party has expressly waived such right in
writing. Specifically, but without limiting the generality of the foregoing, no
action or proceeding by Guarantied Party under any document or instrument
evidencing the Guarantied Obligations shall serve to diminish the liability of
Guarantor under this Guaranty except to the extent that Guarantied Party finally
and unconditionally shall have realized indefeasible payment by such action or
proceeding.
9. Indefeasible Payment. The Guarantied Obligations shall not be
--------------------
considered indefeasibly paid for purposes of this Guaranty unless and until all
payments to Guarantied Party are no longer subject to any right on the part of
any person whomsoever, including Debtor, Debtor as a debtor in possession, or
any trustee (whether appointed under the Bankruptcy Code or otherwise) of
Debtor's assets to invalidate or set aside such payments or to seek to recoup
the amount of such payments or any portion thereof, or to declare same to be
fraudulent or preferential. In the event that, for any reason, all or any
portion of such payments to Guarantied Party is set aside or restored, whether
voluntarily or involuntarily, after the making thereof, the obligation or part
thereof intended to be satisfied thereby shall be revived and continued in full
force and effect as if said payment or payments had not been made and Guarantor
shall be liable for the full amount Guarantied Party is required to repay plus
any and all costs and expenses (including attorneys fees) paid by Guarantied
Party in connection therewith.
10. Financial Condition of Debtor. Guarantor represents and warrants
-----------------------------
to Guarantied Party that it is currently informed of the financial condition of
Debtor and of all other circumstances which a diligent inquiry would reveal and
which bear upon the risk of nonpayment of the Guarantied Obligations. Guarantor
further represents and warrants to Guarantied Party that it has read and
understands the terms and conditions of the Loan Agreement and the other Loan
Documents. Guarantor hereby covenants that it will continue to keep itself
informed of Debtor's financial condition, the financial condition of other
guarantors, if any, and of all other circumstances which bear upon the risk of
nonpayment or nonperformance of the Guarantied Obligations.
11. [Intentionally Omitted.]
12. Payments; Application. All payments to be made hereunder by
---------------------
Guarantor shall be made in lawful money of the United States of America at the
time of payment, shall be made in immediately available funds, and shall be made
without deduction (whether for taxes or otherwise) or offset. All payments made
by Guarantor
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<PAGE>
hereunder shall be applied as follows: first, to all reasonable out-of-pocket
costs and expenses (including reasonable attorneys fees) actually incurred by
Guarantied Party in enforcing this Guaranty or in collecting the Guarantied
Obligations; second, to all accrued and unpaid interest, premium, if any, and
fees owing to Guarantied Party constituting Guarantied Obligations; and third,
to the balance of the Guarantied Obligations.
13. Attorneys Fees and Costs. Guarantor agrees to pay promptly all
------------------------
reasonable attorneys fees and all other reasonable costs and expenses which may
be incurred by Guarantied Party in the enforcement of this Guaranty or in any
way arising out of, or consequential to the protection, assertion, or
enforcement of the Guarantied Obligations (or any security therefor),
irrespective of whether suit is brought.
14. Notices. Unless otherwise specifically provided in this
-------
Guaranty, any notice or other communication relating to this Guaranty or any
other agreement entered into in connection therewith shall be in writing and
shall be personally delivered or sent by registered or certified mail, postage
prepaid, return receipt requested, or by prepaid telex, TWX, telefacsimile, or
telegram (with messenger delivery specified) to Guarantor or to Guarantied
Party, as the case may be, at its addresses set forth below:
If to Guarantor: THE HAMLET GROUP, INC.
18831 Von Karman Avenue
Irvine, California 92713
Attn: Mr. Robert D. Gonda
Telecopy No.: (714) 757-7984
with a copy to: SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
300 S. Grand Avenue
Los Angeles, California 90071
Attn: Michael A. Woronoff, Esq.
Telecopy No.: (213) 687-5600
If to Guarantied Party: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard, Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Telecopy No.: (310) 575-3435
-8-
<PAGE>
with a copy to: BROBECK, PHLEGER & HARRISON LLP
550 South Hope Street
Los Angeles, California 90071
Attn: John Francis Hilson, Esq.
Telecopy No.: (213) 745-3345
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other. All notices or demands sent in accordance with this Section 14, other
----------
than notices by Guarantied Party in connection with Sections 9504 or 9505 of the
Code, shall be deemed received on the earlier of the date of actual receipt or
three (3) calendar days after the deposit thereof in the mail. Guarantor
acknowledges and agrees that notices sent by Guarantied Party in connection with
Sections 9504 or 9505 of the Code shall be deemed sent when deposited in the
mail or transmitted by telefacsimile or other similar method set forth above.
15. Cumulative Remedies. No remedy under this Guaranty, under the
-------------------
Loan Agreement, or any other Loan Document is intended to be exclusive of any
other remedy, but each and every remedy shall be cumulative and in addition to
any and every other remedy given under this Guaranty, under the Loan Agreement,
or any other Loan Document, and those provided by law. No delay or omission by
Guarantied Party to exercise any right under this Guaranty shall impair any such
right nor be construed to be a waiver thereof. No failure on the part of
Guarantied Party to exercise, and no delay in exercising, any right under this
Guaranty shall operate as a waiver thereof; nor shall any single or partial
exercise of any right under this Guaranty preclude any other or further exercise
thereof or the exercise of any other right.
16. Severability of Provisions. Any provision of this Guaranty which
--------------------------
is prohibited or unenforceable under applicable law shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
17. Entire Agreement; Amendments. This Guaranty constitutes the
----------------------------
entire agreement between Guarantor and Guarantied Party pertaining to the
subject matter contained herein. This Guaranty may not be altered, amended, or
modified, nor may any provision hereof be waived or noncompliance therewith
consented to, except by means of a writing executed by both Guarantor and
Guarantied Party. Any such alteration, amendment, modification, waiver, or
consent shall be effective only to the extent specified therein and for the
specific purpose for which given. No course of dealing and no delay or waiver
of any right or default under this Guaranty shall be deemed a waiver of any
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<PAGE>
other, similar or dissimilar, right or default or otherwise prejudice the rights
and remedies hereunder.
18. Successors and Assigns. This Guaranty shall be binding upon
----------------------
Guarantor and its successors and assigns and shall inure to the benefit of the
successors and assigns of Guarantied Party permitted under the Loan Agreement
and the Other Loan Documents; provided, however, Guarantor shall not assign this
-------- -------
Guaranty or delegate any of its duties hereunder without Guarantied Party's
prior written consent and any unconsented to assignment shall be absolutely
void. In the event of any assignment or other transfer of rights by Guarantied
Party in accordance with the Loan Agreement, the rights and benefits herein
conferred upon Guarantied Party shall automatically extend to and be vested in
such assignee or other transferee.
19. No Third Party Beneficiary. This Guaranty is solely for the
--------------------------
benefit of Guarantied Party and its successors and permitted assigns and may not
be relied on by any other Person.
20. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
------------------------------------------
THE VALIDITY OF THIS GUARANTY, ITS CONSTRUCTION, INTERPRETATION, AND
ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO WITH RESPECT TO ALL MATTERS
ARISING HEREUNDER OR RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN
CONNECTION WITH THIS GUARANTY SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND
FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA,
PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST COLLATERAL OR OTHER
PROPERTY MAY BE BROUGHT, AT FOOTHILL'S OPTION, IN THE COURTS OF ANY JURISDICTION
WHERE FOOTHILL ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER
PROPERTY MAY BE FOUND. EACH OF GUARANTOR AND GUARANTIED PARTY WAIVES, TO THE
EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE
DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY
PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 20.
----------
-10-
<PAGE>
GUARANTOR AND GUARANTIED PARTY HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO
A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
GUARANTY OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. GUARANTOR AND GUARANTIED PARTY REPRESENT THAT EACH HAS
REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL
RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A
COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE
COURT.
- remainder of page intentionally left blank -
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<PAGE>
IN WITNESS WHEREOF, the undersigned has executed and delivered this
Guaranty as of the date first written above.
THE HAMLET GROUP, INC.,
a California corporation
By _____________________________
Title: __________________________
S-1
<PAGE>
EXHIBIT 10.32
FORM OF
AMENDMENT NUMBER ONE TO
GENERAL CONTINUING GUARANTY AND
SECURITY AGREEMENT
This AMENDMENT NUMBER ONE TO GENERAL CONTINUING GUARANTY AND SECURITY
AGREEMENT (this "Amendment") is entered into as of June 9, 1998, by and between
Foothill Capital Corporation, a California corporation ("Foothill"), and Family
Restaurants, Inc., a Delaware corporation ("FRI") with reference to the
following facts:
A. Foothill, on the one hand, and El Torito Restaurant's, Inc. ("El
Torito"), a Delaware corporation, Chi-Chi's, Inc., a Delaware
Corporation (collectively with El Torito, "Borrower"), FRI-MRD
Corporation, a Delaware corporation ("FRI-MRD"), and certain of their
Affiliates, on the other hand, heretofore have entered into that
certain Loan and Security Agreement, dated as of January 10, 1997, as
amended by that certain Amendment Number One to Loan and Security
Agreement, dated as of May 23, 1997, as amended by that certain
Amendment Number Two to Loan and Security Agreement, dated as of
August 12, 1997, as amended by that certain Amendment Number Three to
Loan and Security Agreement, dated as of April __, 1998, and as
amended by that certain Amendment Number Four to Loan and Security
Agreement, dated as of the date hereof (the "Fourth Amendment"),
(collectively, the "Loan Agreement");
B. Foothill and FRI have heretofore entered into that certain General
Continuing Guaranty, dated as of January 10, 1997 (the "Guaranty"),
pursuant to which FRI has guaranteed the obligations of Borrower to
Foothill under the Loan Agreement, and that certain Security
Agreement, dated as of January 10, 1997 (the "Security Agreement"),
pursuant to which FRI has collateralized its obligations under the
Guaranty;
C. Concurrently herewith, Borrower, FRI-MRD, and Foothill are entering
into the Fourth Amendment to permit, inter alia, FRI-MRD's issuance of
----------
new Senior Secured Discount Notes in the original principal amount of
up to $24,000,000 (yielding gross proceeds of approximately
$21,000,000) to be secured by a pledge of the Pledged HGI Collateral;
D. FRI has requested Foothill to amend the Guaranty and the Security
Agreement to permit the foregoing transactions; and
E. Foothill is willing to so modify the Guaranty and the Security
Agreement, each in accordance with the terms and conditions hereof;
<PAGE>
NOW, THEREFORE, in consideration of the above recitals and the mutual
premises contained herein, Foothill and FRI hereby agree as follows:
1. DEFINITIONS FOR THIS AMENDMENT.
------------------------------
Any and all initially capitalized terms used herein shall have the
meanings ascribed thereto in the Security Agreement, as amended hereby. For
purposes of this Amendment only, the following initially capitalized terms shall
have the following meanings:
"Effective Date" means the date on which Foothill acknowledges, in
--------------
writing, that each of the conditions contained in Section 4 have been fulfilled
---------
or waived.
2. AMENDMENTS TO THE GUARANTY.
--------------------------
a. Section 21(c) of the Guaranty hereby is amended and restated
-------------
in its entirety to read as follows:
(c) Except as otherwise provided below, (i) if, after the Closing
Date, Guarantor acquires any real or personal property or assets, Guarantor
shall grant to Guarantied Party first priority (except for Permitted Liens)
security interests in any or all of such real or personal property or
assets, and (ii) if, after the Closing Date, Guarantor forms or acquires
any additional Subsidiary, Guarantor shall (A) grant or cause to be granted
to Guarantied Party a first priority security interest in all Stock of such
Subsidiary (not including the Stock of HGI) owned by Guarantor or any
Subsidiary of Guarantor, (B) cause such Subsidiary, if it is a Restricted
Subsidiary, to guarantee payment and performance of the Obligations
pursuant to a written guaranty similar in form and substance to the
Guaranty (including similar representations, warranties, and covenants,
except for any provisions that are unique to Guarantor and therefore
inapplicable to such Restricted Subsidiary), and (C) except for HGI, cause
such Subsidiary, if it is a Restricted Subsidiary, to grant to Guarantied
Party first priority (except for Permitted Liens) security interests in any
or all of the real or personal property or assets of such Subsidiary
pursuant to a written security agreement similar in form and substance to
the Guarantor Security Agreement (including similar representations,
warranties, and covenants, except for any provisions that are unique to
Guarantor and therefore inapplicable to such Restricted Subsidiary).
3. AMENDMENTS TO THE SECURITY AGREEMENT.
------------------------------------
a. Section 1.1 of the Agreement hereby is amended by modifying
-----------
the following definition:
"Collateral" means each of the following: the Accounts;
----------
Guarantor's Books; the Equipment; the General Intangibles; the Inventory;
the Negotiable Collateral; any money, or other assets of Guarantor which
now or hereafter come into the possession, custody, or control of Foothill;
and the proceeds and products, whether tangible or intangible, of any of
the foregoing, including proceeds of insurance covering
2
<PAGE>
any or all of the Collateral, and any and all Accounts, Guarantor's Books,
Equipment, General Intangibles, Inventory, Negotiable Collateral, money,
deposit accounts, or other tangible or intangible property resulting from
the sale, exchange, collection, or other disposition of any of the
foregoing, or any portion thereof or interest therein, and the proceeds
thereof; provided, however, that the Pledged HGI Collateral and the
-------- -------
proceeds or products thereof shall not constitute Collateral.
"Negotiable Collateral" means all of Guarantor's present and
---------------------
future letters of credit, notes, drafts, instruments, Investment Property
(including the shares of stock of Subsidiaries of Guarantor, other than
HGI), documents, personal property leases (wherein Guarantor is the
lessor), chattel paper, and Guarantor's Books relating to any of the
foregoing.
b. Section 5.1 of the Security Agreement hereby is amended and
-----------
restated in its entirety to read as follows:
5.1 LIENS. Create, incur, assume, or permit to exist, directly
or indirectly, any Lien on or with respect to any of its property or
assets, of any kind, whether now owned or hereafter acquired, or any income
or profits therefrom, except for Permitted Liens and the pledge of the
Pledged HGI Collateral pursuant to the Senior Secured Discount Note
Agreement.
4. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS AMENDMENT.
-----------------------------------------------------------
The effectiveness of the provisions of this Amendment is subject to
the fulfillment, to the satisfaction of Foothill and its counsel, of each of the
following conditions:
a. Foothill shall have received each of the following
documents, in form and substance satisfactory to Foothill and its counsel, duly
executed, and each such document shall be in full force and effect:
(1) this Amendment; and
(2) the Fourth Amendment.
b. All conditions to the effectiveness of Section 3 of the
---------
Fourth Amendment shall have been fulfilled or waived, and the same shall be in
full force and effect.
c. Foothill shall have received a certificate from the
Secretary of FRI attesting to the resolutions of FRI's Board of Directors
authorizing its execution, delivery, and performance of this Amendment and
authorizing specific officers of FRI to execute the same;
d. No injunction, writ, restraining order, or other order of
any nature prohibiting, directly or indirectly, the consummation of the
transactions contemplated herein shall have been issued and remain in force by
any governmental authority against Borrower, FRI-MRD, FRI, any other Guarantor,
Foothill, or any of their Affiliates; and
3
<PAGE>
e. All other documents and legal matters in connection with the
transactions contemplated by this Amendment shall have been delivered or
executed or recorded and shall be in form and substance reasonably satisfactory
to Foothill and its counsel.
5. REPRESENTATIONS AND WARRANTIES. FRI hereby represents and
------------------------------
warrants to Foothill that: (a) the execution, delivery, and performance of this
Amendment, of the Guaranty as amended by this Amendment, and of the Security
Agreement as amended by this Amendment, are within its corporate powers, have
been duly authorized by all necessary corporate action, and are not in
contravention of any law, rule, or regulation, or any order, judgment, decree,
writ, injunction, or award of any arbitrator, court, or governmental authority,
or of the terms of its charter or bylaws, or of any contract or undertaking to
which it is a party or by which any of its properties may be bound or affected;
(b) this Amendment, the Guaranty as amended by this Amendment, and the Security
Agreement as amended by this Amendment, constitute FRI's legal, valid, and
binding obligation, enforceable against FRI in accordance with their terms.
6. EFFECT ON GUARANTY. The Guaranty, as amended by this Amendment,
------------------
shall be and remain in full force and effect in accordance with its respective
terms and hereby is ratified and confirmed in all respects. The execution,
delivery, and performance of this Amendment shall not operate as a waiver of or,
except as expressly set forth herein, as an amendment, of any right, power, or
remedy of Foothill under the Guaranty, as in effect prior to the date hereof.
7. EFFECT ON SECURITY AGREEMENT. The Security Agreement, as amended
----------------------------
by this Amendment, shall be and remain in full force and effect in accordance
with its respective terms and hereby are ratified and confirmed in all respects.
The execution, delivery, and performance of this Amendment shall not operate as
a waiver of or, except as expressly set forth herein, as an amendment, of any
right, power, or remedy of Foothill under the Security Agreement, as in effect
prior to the date hereof.
8. MISCELLANEOUS.
-------------
a. Upon the effectiveness of this Amendment, each reference in
the Guaranty to "this Guaranty", "hereunder", "herein", "hereof" or words of
like import referring to the Guaranty shall mean and refer to the Guaranty as
amended by this Amendment.
b. Upon the effectiveness of this Amendment, each reference in the
Loan Documents to the "Guaranty", "thereunder", "therein", "thereof" or words of
like import referring to the Guaranty shall mean and refer to the Guaranty as
amended by this Amendment.
c. Upon the effectiveness of this Amendment, each reference in
the Security Agreement to "this Agreement", "hereunder", "herein", "hereof" or
words of like import referring to the Security Agreement shall mean and refer to
the Security Agreement as amended by this Amendment.
4
<PAGE>
d. Upon the effectiveness of this Amendment, each reference in
the Loan Documents to the "Security Agreement", "thereunder", "therein",
"thereof" or words of like import referring to the Security Agreement shall mean
and refer to the Security Agreement as amended by this Amendment.
e. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Amendment by signing
any such counterpart. Delivery of an executed counterpart of this Amendment by
telefacsimile shall be equally as effective as delivery of a manually executed
counterpart of this Amendment. Any party delivering an executed counterpart of
this Amendment by telefacsimile also shall deliver a manually executed
counterpart of this Amendment but the failure to deliver a manually executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Amendment.
[Signature page to follow.]
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first written above.
FAMILY RESTAURANTS, INC.,
a Delaware corporation
By
--------------------------------
Title:
----------------------------
FOOTHILL CAPITAL CORPORATION,
a California corporation
By
--------------------------------
Title:
----------------------------
-S-1
<PAGE>
EXHIBIT 10.33
FORM OF
AMENDMENT NUMBER ONE TO
SECURITY AGREEMENT
This AMENDMENT NUMBER ONE TO SECURITY AGREEMENT (this "Amendment") is
entered into as of June 9, 1998, by and between Foothill Capital Corporation, a
California corporation ("Foothill"), and FRI-MRD Corporation, a Delaware
corporation ("FRI-MRD") with reference to the following facts:
A. Foothill, on the one hand, and El Torito Restaurant's, Inc. ("El
Torito"), a Delaware corporation, Chi-Chi's, Inc., a Delaware
Corporation (collectively with El Torito, "Borrower"), FRI-MRD, and
certain of their Affiliates, on the other hand, heretofore have
entered into that certain Loan and Security Agreement, dated as of
January 10, 1997, as amended by that certain Amendment Number One to
Loan and Security Agreement, dated as of May 23, 1997, as amended by
that certain Amendment Number Two to Loan and Security Agreement,
dated as of August 12, 1997, as amended by that certain Amendment
Number Three to Loan and Security Agreement, dated as of April __,
1998, and as amended by that certain Amendment Number Four to Loan and
Security Agreement, dated as of the date hereof (the "Fourth
Amendment"), (collectively, the "Loan Agreement");
B. Foothill and FRI-MRD have heretofore entered into that certain General
Continuing Guaranty, dated as of January 10, 1997 (the "Guaranty"),
pursuant to which FRI-MRD has guaranteed the obligations of Borrower
to Foothill under the Loan Agreement, and that certain Security
Agreement, dated as of January 10, 1997 (the "Security Agreement"),
pursuant to which FRI-MRD has collateralized its obligations under the
Guaranty;
C. Borrower and FRI-MRD have requested Foothill to consent to, inter
-----
alia, FRI-MRD's issuance of new Senior Secured Discount Notes in the
original principal amount of up to $24,000,000 (yielding gross
proceeds of approximately $21,000,000) to be secured by a pledge of
the Pledged HGI Collateral;
D. Borrower and FRI-MRD have requested Foothill to amend the Loan
Agreement and the Security Agreement to permit the foregoing
transactions;
E. Concurrently herewith, Borrower, FRI-MRD, and Foothill are entering
into the Fourth Amendment to so modify the Loan Agreement; and
F. Foothill is willing to so modify the Security Agreement in accordance
with the terms and conditions hereof;
<PAGE>
NOW, THEREFORE, in consideration of the above recitals and the mutual
premises contained herein, Foothill and FRI-MRD hereby agree as follows:
1. DEFINITIONS FOR THIS AMENDMENT.
------------------------------
Any and all initially capitalized terms used herein shall have the
meanings ascribed thereto in the Security Agreement, as amended hereby. For
purposes of this Amendment only, the following initially capitalized terms shall
have the following meanings:
"Effective Date" means the date on which Foothill acknowledges, in
--------------
writing, that each of the conditions contained in Section 3 have been fulfilled
---------
or waived.
2. AMENDMENTS TO THE SECURITY AGREEMENT.
------------------------------------
a. Section 1.1 of the Agreement hereby is amended by modifying
-----------
the following definition:
"Collateral" means each of the following: the Accounts;
----------
Guarantor's Books; the Equipment; the General Intangibles; the Inventory;
the Negotiable Collateral; any money, or other assets of Guarantor which
now or hereafter come into the possession, custody, or control of Foothill;
and the proceeds and products, whether tangible or intangible, of any of
the foregoing, including proceeds of insurance covering any or all of the
Collateral, and any and all Accounts, Guarantor's Books, Equipment, General
Intangibles, Inventory, Negotiable Collateral, money, deposit accounts, or
other tangible or intangible property resulting from the sale, exchange,
collection, or other disposition of any of the foregoing, or any portion
thereof or interest therein, and the proceeds thereof; provided, however,
-------- -------
that the Pledged HGI Collateral and the proceeds or products thereof shall
not constitute Collateral.
b. Section 5.1 of the Security Agreement hereby is amended and
-----------
restated in its entirety to read as follows:
5.1 LIENS. Create, incur, assume, or permit to exist, directly
or indirectly, any Lien on or with respect to any of its property or
assets, of any kind, whether now owned or hereafter acquired, or any income
or profits therefrom, except for Permitted Liens and the pledge of the
Pledged HGI Collateral pursuant to the Senior Secured Discount Note
Agreement.
3. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS AMENDMENT.
-----------------------------------------------------------
The effectiveness of the provisions of this Amendment is subject to
the fulfillment, to the satisfaction of Foothill and its counsel, of each of the
following conditions:
2
<PAGE>
a. Foothill shall have received each of the following documents, in
form and substance satisfactory to Foothill and its counsel, duly executed, and
each such document shall be in full force and effect:
(1) this Amendment; and
(2) the Fourth Amendment.
b. All conditions to the effectiveness of Section 3 of the
---------
Fourth Amendment shall have been fulfilled or waived, and the same shall be in
full force and effect.
c. Foothill shall have received a certificate from the
Secretary of FRI-MRD attesting to the resolutions of FRI-MRD's Board of
Directors authorizing its execution, delivery, and performance of this Amendment
and authorizing specific officers of such FRI-MRD to execute the same;
d. No injunction, writ, restraining order, or other order of
any nature prohibiting, directly or indirectly, the consummation of the
transactions contemplated herein shall have been issued and remain in force by
any governmental authority against Borrower, FRI-MRD, any Guarantor, Foothill,
or any of their Affiliates; and
e. All other documents and legal matters in connection with the
transactions contemplated by this Amendment shall have been delivered or
executed or recorded and shall be in form and substance reasonably satisfactory
to Foothill and its counsel.
4. REPRESENTATIONS AND WARRANTIES. FRI-MRD hereby represents and
------------------------------
warrants to Foothill that: (a) the execution, delivery, and performance of this
Amendment and of the Security Agreement, as amended by this Amendment, are
within its corporate powers, have been duly authorized by all necessary
corporate action, and are not in contravention of any law, rule, or regulation,
or any order, judgment, decree, writ, injunction, or award of any arbitrator,
court, or governmental authority, or of the terms of its charter or bylaws, or
of any contract or undertaking to which it is a party or by which any of its
properties may be bound or affected; (b) this Amendment and the Security
Agreement, as amended by this Amendment, constitute FRI-MRD's legal, valid, and
binding obligation, enforceable against FRI-MRD in accordance with its terms.
5. EFFECT ON SECURITY AGREEMENT. The Security Agreement, as amended
----------------------------
by this Amendment, shall be and remain in full force and effect in accordance
with its respective terms and hereby is ratified and confirmed in all respects.
The execution, delivery, and performance of this Amendment shall not operate as
a waiver of or, except as expressly set forth herein, as an amendment, of any
right, power, or remedy of Foothill under the Security Agreement, as in effect
prior to the date hereof.
3
<PAGE>
6. MISCELLANEOUS.
-------------
a. Upon the effectiveness of this Amendment, each reference in
the Security Agreement to "this Agreement", "hereunder", "herein", "hereof" or
words of like import referring to the Security Agreement shall mean and refer to
the Security Agreement as amended by this Amendment.
b. Upon the effectiveness of this Amendment, each reference in
the Loan Documents to the "Security Agreement", "thereunder", "therein",
"thereof" or words of like import referring to the Security Agreement shall mean
and refer to the Security Agreement as amended by this Amendment.
c. This Amendment may be executed in any number of counterparts, all
of which taken together shall constitute one and the same instrument and any of
the parties hereto may execute this Amendment by signing any such counterpart.
Delivery of an executed counterpart of this Amendment by telefacsimile shall be
equally as effective as delivery of a manually executed counterpart of this
Amendment. Any party delivering an executed counterpart of this Amendment by
telefacsimile also shall deliver a manually executed counterpart of this
Amendment but the failure to deliver a manually executed counterpart shall not
affect the validity, enforceability, and binding effect of this Amendment.
[Signature page to follow.]
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first written above.
FRI-MRD CORPORATION,
a Delaware corporation
By
-----------------------------
Title:
-------------------------
FOOTHILL CAPITAL CORPORATION,
a California corporation
By
-----------------------------
Title:
-------------------------
-S-1-
<PAGE>
EXHIBIT 10.34
FORM OF
AMENDMENT NUMBER ONE TO
STOCK PLEDGE AGREEMENT
This AMENDMENT NUMBER ONE TO STOCK PLEDGE AGREEMENT (this "Amendment")
is entered into as of June 9, 1998, by and between Foothill Capital Corporation,
a California corporation ("Foothill"), and FRI-MRD CORPORATION, a Delaware
corporation ("FRI-MRD") with reference to the following facts:
A. Foothill, on the one hand, and El Torito Restaurant's, Inc. ("El
Torito"), a Delaware corporation, Chi-Chi's, Inc., a Delaware
Corporation (collectively with El Torito, "Borrower"), FRI-MRD, and
certain of their Affiliates, on the other hand, heretofore have
entered into that certain Loan and Security Agreement, dated as of
January 10, 1997, as amended by that certain Amendment Number One to
Loan and Security Agreement, dated as of May 23, 1997, as amended by
that certain Amendment Number Two to Loan and Security Agreement,
dated as of August 12, 1997, as amended by that certain Amendment
Number Three to Loan and Security Agreement, dated as of April __,
1998, and as amended by that certain Amendment Number Four to Loan and
Security Agreement, dated as of the date hereof (the "Fourth
Amendment"), (collectively, the "Loan Agreement");
B. Foothill and FRI-MRD have heretofore entered into that certain Stock
Pledge Agreement, dated as of January 10, 1997 (the "Stock Pledge
Agreement"), pursuant to which FRI-MRD pledged, granted, transferred,
and assigned to Foothill a security interest in the Collateral (as
therein defined) to secure the Secured Obligations (as therein
defined), as provided therein;
C. Concurrently herewith, Borrower, FRI-MRD, and Foothill are entering
into the Fourth Amendment to permit, inter alia, (a) FRI-MRD's
----------
issuance of new Senior Secured Discount Notes in the original
principal amount of up to $24,000,000 (yielding gross proceeds of
approximately $21,000,000) to be secured by a pledge of the Pledged
HGI Collateral, and (b) the merger of FRI-Sub, Inc., a Delaware
corporation ("FRI-Sub"), into Koo Koo Roo, Inc., a Delaware
corporation ("KKR"), with KKR as the survivor.
D. Borrower and FRI-MRD have requested Foothill to amend the Stock Pledge
Agreement to permit the foregoing transactions; and
E. Foothill is willing to so modify the Stock Pledge Agreement in
accordance with the terms and conditions hereof;
<PAGE>
NOW, THEREFORE, in consideration of the above recitals and the mutual
premises contained herein, Foothill and FRI-MRD hereby agree as follows:
1. DEFINITIONS FOR THIS AMENDMENT.
------------------------------
Any and all initially capitalized terms used herein shall have the
meanings ascribed thereto in the Stock Pledge Agreement, as amended hereby. For
purposes of this Amendment only, the following initially capitalized terms shall
have the following meanings:
"Effective Date" means the date on which Foothill acknowledges, in
--------------
writing, that each of the conditions contained in Section 3 have been fulfilled
---------
or waived.
"HGI Closing Date" shall have the meaning ascribed thereto in the
----------------
Fourth Amendment.
"KKR Closing Date" shall have the meaning ascribed thereto in the
----------------
Fourth Amendment.
2. AMENDMENTS TO THE STOCK PLEDGE AGREEMENT TO FACILITATE THE HGI
--------------------------------------------------------------
ACQUISITION.
-----------
a. Section 1(a) of the Stock Pledge Agreement hereby is amended
------------
by modifying the following definition:
"Future Rights" shall mean: (a) to the extent of Pledgor's
-------------
interest therein, all shares of stock (other than Pledged Shares) of the
Issuers, and all securities convertible or exchangeable into, and all
warrants, options, or other rights to purchase, shares of stock of the
Issuers; (b) to the extent of Pledgor's interest therein, all shares of,
all securities convertible or exchangeable into, and all warrants, options,
or other rights to purchase shares of stock of any Person, not including
HGI, in which Pledgor, after the date of this Agreement, acquires a direct
equity interest, irrespective of whether such Person is or becomes a
Subsidiary of Pledgor; and (c) the certificates or instruments representing
such additional shares, convertible or exchangeable securities, warrants,
and other rights and all dividends, cash, options, warrants, rights,
instruments, and other property or proceeds from time to time received,
receivable, or otherwise distributed in respect of or in exchange for any
or all of such shares.
3. AMENDMENTS TO THE STOCK PLEDGE AGREEMENT TO FACILITATE THE KKR
--------------------------------------------------------------
MERGER.
------
a. Schedule A of the Stock Pledge Agreement is hereby amended,
----------
restated, and replaced in its entirety by the Schedule A attached hereto.
----------
4. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF SECTION 2 TO THIS
--------------------------------------------------------------
AMENDMENT.
---------
2
<PAGE>
The effectiveness of the provisions of Section 2 of this Amendment is
---------
subject to the fulfillment, to the satisfaction of Foothill and its counsel, of
each of the following conditions:
a. Foothill shall have received each of the following
documents, in form and substance satisfactory to Foothill and its counsel, duly
executed, and each such document shall be in full force and effect:
(1) this Amendment; and
(2) the Fourth Amendment;
b. Foothill shall have received a certificate from the
Secretary of FRI-MRD attesting to the resolutions of FRI-MRD's Board of
Directors authorizing its execution, delivery, and performance of this Amendment
and authorizing specific officers of FRI-MRD to execute the same;
c. All conditions to the effectiveness of Section 3 of the
---------
Fourth Amendment shall have been fulfilled or waived, and the same shall be in
full force and effect.
d. As of the HGI Closing Date, no injunction, writ, restraining
order, or other order of any nature prohibiting, directly or indirectly, the
consummation of the transactions contemplated herein shall have been issued and
remain in force by any governmental authority against Borrower, FRI-MRD, any
Guarantor, Foothill, or any of their Affiliates; and
e. All other documents and legal matters in connection with the
transactions contemplated by this Amendment shall have been delivered or
executed or recorded and shall be in form and substance reasonably satisfactory
to Foothill and its counsel.
5. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF SECTION 3 TO THIS
--------------------------------------------------------------
AMENDMENT.
---------
The effectiveness of the provisions of Section 3 of this Amendment is
---------
subject to the fulfillment, to the satisfaction of Foothill and its counsel, of
each of the following conditions:
a. Foothill shall have received each of the following
documents, in form and substance satisfactory to Foothill and its counsel, duly
executed, and each such document shall be in full force and effect:
(1) this Amendment; and
(2) the Fourth Amendment.
b. All conditions to the effectiveness of Section 4 of the
---------
Fourth Amendment shall have been fulfilled or waived, and the same shall be in
full force and effect.
3
<PAGE>
c. Foothill shall have received a certificate from the
Secretary of FRI-MRD attesting to the resolutions of FRI-MRD's Board of
Directors authorizing its execution, delivery, and performance of this Amendment
and authorizing specific officers of FRI-MRD to execute the same;
d. As of the KKR Closing Date, no injunction, writ, restraining
order, or other order of any nature prohibiting, directly or indirectly, the
consummation of the transactions contemplated herein shall have been issued and
remain in force by any governmental authority against Borrower, FRI-MRD, any
Guarantor, Foothill, or any of their Affiliates; and
e. All other documents and legal matters in connection with the
transactions contemplated by this Amendment shall have been delivered or
executed or recorded and shall be in form and substance reasonably satisfactory
to Foothill and its counsel.
6. REPRESENTATIONS AND WARRANTIES. FRI-MRD hereby represents and
------------------------------
warrants to Foothill that: (a) the execution, delivery, and performance of this
Amendment and of the Stock Pledge Agreement, as amended by this Amendment, are
within its corporate powers, have been duly authorized by all necessary
corporate action, and are not in contravention of any law, rule, or regulation,
or any order, judgment, decree, writ, injunction, or award of any arbitrator,
court, or governmental authority, or of the terms of its charter or bylaws, or
of any contract or undertaking to which it is a party or by which any of its
properties may be bound or affected; (b) this Amendment and the Stock Pledge
Agreement, as amended by this Amendment, constitute FRI-MRD's legal, valid, and
binding obligation, enforceable against FRI-MRD in accordance with its terms.
7. EFFECT ON STOCK PLEDGE AGREEMENT. The Stock Pledge Agreement, as
--------------------------------
amended by this Amendment, shall be and remain in full force and effect in
accordance with its respective terms and hereby is ratified and confirmed in all
respects. The execution, delivery, and performance of this Amendment shall not
operate as a waiver of or, except as expressly set forth herein, as an
amendment, of any right, power, or remedy of Foothill under the Stock Pledge
Agreement, as in effect prior to the date hereof.
8. MISCELLANEOUS.
-------------
a. Upon the effectiveness of this Amendment, each reference in
the Stock Pledge Agreement to "this Agreement", "hereunder", "herein", "hereof"
or words of like import referring to the Stock Pledge Agreement shall mean and
refer to the Stock Pledge Agreement as amended by this Amendment.
b. Upon the effectiveness of this Amendment, each reference in
the Loan Documents to the "Stock Pledge Agreement", "thereunder", "therein",
"thereof" or words of like import referring to the Stock Pledge Agreement shall
mean and refer to the Stock Pledge Agreement as amended by this Amendment.
c. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties
4
<PAGE>
hereto may execute this Amendment by signing any such counterpart. Delivery of
an executed counterpart of this Amendment by telefacsimile shall be equally as
effective as delivery of a manually executed counterpart of this Amendment. Any
party delivering an executed counterpart of this Amendment by telefacsimile also
shall deliver a manually executed counterpart of this Amendment but the failure
to deliver a manually executed counterpart shall not affect the validity,
enforceability, and binding effect of this Amendment.
[Signature page to follow.]
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first written above.
FRI-MRD CORPORATION,
a Delaware corporation
By___________________________
Title:_______________________
FOOTHILL CAPITAL CORPORATION,
a California corporation
By___________________________
Title:_______________________
-S-1-
<PAGE>
SCHEDULE A
----------
TO
STOCK PLEDGE AGREEMENT
----------------------
Pledgor: FRI-MRD CORPORATION
Pledged Shares
--------------
<TABLE>
<CAPTION>
Former Name, if Pledgor's
Number of Certificate any, in which Percentage Jurisdiction of
Issuer Shares Class Numbers Certificate Issued Ownership Incorporation
------ ------ ----- ------- ------------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
EL TORITO RESTAURANTS, INC. 100 common 3 100% Delaware
CHI-CHI'S INC. 1000 common 5 100% Delaware
FRI-ADMIN CORPORATION 100 common 3 100% Delaware
EL TORITO FRANCHISING COMPANY 100 common 1 100% Delaware
KOO KOO ROO, INC. _____ common _______ 100% Delaware
</TABLE>
<PAGE>
EXHIBIT 10.35
FORM OF
GENERAL CONTINUING GUARANTY
---------------------------
KOO KOO ROO, INC.
THIS GENERAL CONTINUING GUARANTY ("Guaranty"), dated as of
____________, 1998, is executed and delivered by KOO KOO ROO, INC., a Delaware
corporation ("Guarantor"), in favor of Foothill Capital Corporation, a
California corporation ("Guarantied Party"), in light of the following:
WHEREAS, Debtor, Guarantied Party, and the other parties thereto have
heretofore entered into the Loan Agreement; and
WHEREAS, in order to induce Guarantied Party to continue to extend
financial accommodations to Debtor pursuant to the Loan Agreement, and in
consideration thereof, and in consideration of any loans or other financial
accommodations at any time extended by Guarantied Party to Debtor pursuant to
the Loan Agreement, Guarantor has agreed to guaranty the Guarantied Obligations.
NOW, THEREFORE, in consideration of the foregoing, Guarantor hereby
agrees, in favor of Guarantied Party, as follows:
1. Definitions and Construction.
----------------------------
(a) Definitions. Capitalized terms used herein and not otherwise
-----------
defined herein shall have the meanings ascribed to them in the Loan Agreement.
The following terms, as used in this Guaranty, shall have the following
meanings:
"Debtor" shall mean any one or more of Chi-Chi's, Inc., a
------
Delaware corporation, and El Torito Restaurants, Inc., a Delaware corporation,
individually and collectively, jointly and severally.
"Guarantied Obligations" shall mean the due and punctual
----------------------
payment of the principal of, and interest (including, any and all interest
which, but for the application of the provisions of the Bankruptcy Code, would
have accrued on such amounts) on, and premium, if any, on the Indebtedness owed
by Debtor to Guarantied Party pursuant to the terms of the Loan Documents.
"Guarantied Party" shall have the meaning set forth in the
----------------
preamble to this Guaranty.
-1-
<PAGE>
"Guarantor" shall have the meaning set forth in the preamble
---------
to this Guaranty.
"Guaranty" shall have the meaning set forth in the preamble
--------
to this Guaranty.
"Indebtedness" shall mean any and all Obligations, whether
------------
recovery is or hereafter becomes barred by any statute of limitations or
otherwise becomes unenforceable for any reason whatsoever, including any act or
failure to act by Guarantied Party.
"Loan Agreement" shall mean that certain Loan and Security
--------------
Agreement, dated as of January 10, 1997 (as heretofore amended, supplemented, or
otherwise modified), entered into between Debtor, Guarantied Party, and the
other parties thereto.
(b) Construction. Unless the context of this Guaranty clearly
------------
requires otherwise, references to the plural include the singular, references to
the singular include the plural, the part includes the whole, the terms
"include" and "including" are not limiting, and the term "or" has the inclusive
meaning represented by the phrase "and/or." The words "hereof," "herein,"
"hereby," "hereunder," and other similar terms refer to this Guaranty as a whole
and not to any particular provision of this Guaranty. Any reference in this
Guaranty to any of the following documents includes any and all alterations,
amendments, restatements, extensions, modifications, renewals, or supplements
thereto or thereof, as applicable: the Loan Agreement; this Guaranty; and the
other Loan Documents. This Guaranty has been reviewed by Guarantor, Guarantied
Party, and their respective counsel, and shall be construed and interpreted
according to the ordinary meaning of the words used so as to fairly accomplish
the purposes and intentions of Guarantied Party and Guarantor.
2. Guarantied Obligations. Guarantor hereby irrevocably and
----------------------
unconditionally guaranties to Guarantied Party, as and for its own debt, until
final and indefeasible payment thereof has been made, (a) the payment of the
Guarantied Obligations, in each case when and as the same shall become due and
payable, whether at maturity, pursuant to a mandatory prepayment requirement, by
acceleration, or otherwise; it being the intent of Guarantor that the guaranty
set forth herein shall be a guaranty of payment and not a guaranty of
collection; and (b) the punctual and faithful performance, keeping, observance,
and fulfillment by Debtor of all of the agreements, conditions, covenants, and
Obligations of Debtor contained in the Loan Agreement, and under each of the
other Loan Documents.
-2-
<PAGE>
3. Continuing Guaranty. This Guaranty includes Guarantied
-------------------
Obligations arising under successive transactions continuing, compromising,
extending, increasing, modifying, releasing, or renewing the Guarantied
Obligations, changing the interest rate, payment terms, or other terms and
conditions thereof, or creating new or additional Guarantied Obligations after
prior Guarantied Obligations have been satisfied in whole or in part. To the
maximum extent permitted by law, Guarantor hereby waives any right to revoke
this Guaranty as to future Indebtedness. If such a revocation is effective
notwithstanding the foregoing waiver, Guarantor acknowledges and agrees that (a)
no such revocation shall be effective until written notice thereof has been
received by Guarantied Party, (b) no such revocation shall apply to any
Guarantied Obligations in existence on such date (including any subsequent
continuation, extension, or renewal thereof, or change in the interest rate,
payment terms, or other terms and conditions thereof), (c) no such revocation
shall apply to any Guarantied Obligations made or created after such date to the
extent made or created pursuant to a legally binding commitment of Guarantied
Party in existence on the date of such revocation, and (d) any payment by Debtor
or from any source other than Guarantor subsequent to the date of such
revocation shall first be applied to that portion of the Guarantied Obligations
as to which the revocation is effective and which are not, therefore, guarantied
hereunder, and to the extent so applied shall not reduce the maximum obligation
of Guarantor hereunder.
4. Performance Under this Guaranty. In the event that Debtor fails
-------------------------------
to make any payment of any Guarantied Obligations, on or before the due date
thereof, or if Debtor shall fail to perform, keep, observe, or fulfill any other
obligation referred to in clause (b) of Section 2 hereof in the manner provided
-----------------------
in the Loan Agreement or the other Loan Documents, as applicable, Guarantor
immediately shall cause such payment to be made or each of such obligations to
be performed, kept, observed, or fulfilled.
5. Primary Obligations. This Guaranty is a primary and original
-------------------
obligation of Guarantor, is not merely the creation of a surety relationship,
and is an absolute, unconditional, and continuing guaranty of payment and
performance which shall remain in full force and effect without respect to
future changes in conditions until full and final payment in cash (or other
consideration acceptable to Foothill in its sole discretion and agreed to by
Foothill) of the Guarantied Obligations and the termination of all commitments
of Foothill to extend Credit to Debtor or Guarantor. Guarantor agrees that it
is directly, jointly and severally with any other guarantor of the Guarantied
Obligations, liable to Guarantied Party, that the obligations of Guarantor
hereunder are independent of the obligations of Debtor or any other guarantor,
and that a separate action may be brought against Guarantor, whether such action
is brought against Debtor or any other guarantor or whether Debtor or any other
guarantor is joined in such action. Guarantor agrees that its liability
hereunder shall be immediate and shall not be contingent upon the exercise or
enforcement by Guarantied Party of whatever remedies it may have against Debtor
or any
-3-
<PAGE>
other guarantor, or the enforcement of any lien or realization upon any security
Guarantied Party may at any time possess. Guarantor agrees that any release
which may be given by Guarantied Party to Debtor or any other guarantor shall
not release Guarantor. Guarantor consents and agrees that Guarantied Party
shall be under no obligation to marshal any property or assets of Debtor or any
other guarantor in favor of Guarantor, or against or in payment of any or all of
the Guarantied Obligations.
6. Waivers.
-------
(a) To the fullest extent permitted by applicable law, Guarantor
hereby waives: (i) notice of acceptance hereof; (ii) notice of any loans or
other financial accommodations made or extended under the Loan Agreement, or the
creation or existence of any Guarantied Obligations; (iii) notice of the amount
of the Guarantied Obligations, subject, however, to Guarantor's right to make
inquiry of Guarantied Party to ascertain the amount of the Guarantied
Obligations at any reasonable time; (iv) notice of any adverse change in the
financial condition of Debtor or of any other fact that might increase
Guarantor's risk hereunder; (v) notice of presentment for payment, demand,
protest, and notice thereof as to any instrument among the Loan Documents; (vi)
notice of any unmatured Event of Default or Event of Default under the Loan
Agreement; and (vii) all other notices (except if such notice is specifically
required to be given to Guarantor under this Guaranty or any other Loan
Documents to which Guarantor is a party) and demands to which Guarantor might
otherwise be entitled.
(b) To the fullest extent permitted by applicable law, Guarantor
hereby waives the right by statute or otherwise to require Guarantied Party to
institute suit against Debtor or to exhaust any rights and remedies which
Guarantied Party has or may have against Debtor. In this regard, Guarantor
agrees that it is bound to the payment of each and all Guarantied Obligations,
whether now existing or hereafter arising, as fully as if such Guarantied
Obligations were directly owing to Guarantied Party by Guarantor. Guarantor
further waives any defense arising by reason of any disability or other defense
(other than the defense that the Guarantied Obligations shall have been fully
and finally performed and indefeasibly paid) of Debtor or by reason of the
cessation from any cause whatsoever of the liability of Debtor in respect
thereof.
(c) To the fullest extent permitted by applicable law, Guarantor
hereby waives: (i) any rights to assert against Guarantied Party any defense
(legal or equitable), set-off, counterclaim, or claim which Guarantor may now or
at any time hereafter have against Debtor or any other party liable to
Guarantied Party on account of or with respect to the Guarantied Obligations;
(ii) any defense, set-off, counterclaim, or claim, of any kind or nature,
arising directly or indirectly from the present or future lack of perfection,
sufficiency, validity, or enforceability of the Guarantied Obligations or any
-4-
<PAGE>
security therefor; (iii) any defense arising by reason of any claim or defense
based upon an election of remedies by Guarantied Party including any defense
based upon an election of remedies by Guarantied Party under the provisions of
(S)(S) 580d and 726 of the California Code of Civil Procedure, or any similar
law of California or any other jurisdiction; (iv) the benefit of any statute of
limitations affecting Guarantor's liability hereunder or the enforcement
thereof, and any act which shall defer or delay the operation of any statute of
limitations applicable to the Guarantied Obligations shall similarly operate to
defer or delay the operation of such statute of limitations applicable to
Guarantor's liability hereunder.
(d) Until such time as all of the Guarantied Obligations have
been fully, finally, and indefeasibly paid in full in cash (or other
consideration acceptable to Foothill in its sole discretion and agreed to by
Foothill): (i) Guarantor hereby waives and postpones any right of subrogation
Guarantor has or may have as against Debtor with respect to the Guarantied
Obligations; (ii) in addition, Guarantor hereby waives and postpones any right
to proceed against Debtor or any other Obligor with respect to any portion of
the Obligations, now or hereafter, for contribution, indemnity, reimbursement,
or any other suretyship rights and claims (irrespective of whether direct or
indirect, liquidated or contingent), with respect to the Guarantied Obligations;
and (iii) in addition, Guarantor also hereby waives and postpones any right to
proceed or to seek recourse against or with respect to any property or asset of
Debtor.
(e) If any of the Guarantied Obligations at any time are secured
by a mortgage or deed of trust upon real property, Guarantied Party may elect,
in its sole discretion, upon a default with respect to the Guarantied
Obligations, to foreclose such mortgage or deed of trust judicially or
nonjudicially in any manner permitted by law, before or after enforcing this
Guaranty, without diminishing or affecting the liability of Guarantor hereunder.
Guarantor understands that (a) by virtue of the operation of California's
antideficiency law applicable to nonjudicial foreclosures, an election by
Guarantied Party nonjudicially to foreclose such a mortgage or deed of trust
probably would have the effect of impairing or destroying rights of subrogation,
reimbursement, contribution, or indemnity of Guarantor against Debtor or other
guarantors or sureties, and (b) absent the waiver given by Guarantor herein,
such an election would estop Guarantied Party from enforcing this Guaranty
against Guarantor. Understanding the foregoing, and understanding that Guarantor
is hereby relinquishing a defense to the enforceability of this Guaranty,
Guarantor hereby waives any right to assert against Guarantied Party any defense
to the enforcement of this Guaranty, whether denominated "estoppel" or
otherwise, based on or arising from an election by Guarantied Party
nonjudicially to foreclose any such mortgage or deed of trust securing the
Guarantied Obligations. Guarantor understands that the effect of the foregoing
waiver may be that Guarantor may have liability hereunder for amounts with
respect to which Guarantor may be left without rights of subrogation,
reimbursement, contribution, or indemnity against Debtor or other guarantors or
sureties.
-5-
<PAGE>
Guarantor also agrees that the "fair market value" provisions of Section 580a of
the California Code of Civil Procedure shall have no applicability with respect
to the determination of Guarantor's liability under this Guaranty.
(f) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER
PROVISION SET FORTH IN THIS GUARANTY, GUARANTOR HEREBY WAIVES, TO THE MAXIMUM
EXTENT SUCH WAIVER IS PERMITTED BY LAW, ANY AND ALL BENEFITS OR DEFENSES ARISING
DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE OF CALIFORNIA CIVIL CODE (S)(S)
2799, 2808, 2809, 2810, 2815, 2819, 2820, 2821, 2822, 2838, 2839, 2845, 2847,
2848, 2849, AND 2850, CALIFORNIA CODE OF CIVIL PROCEDURE (S)(S) 580A, 580B,
580C, 580D, AND 726, AND CHAPTER 2 OF TITLE 14 OF THE CALIFORNIA CIVIL CODE.
(g) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER
PROVISION SET FORTH IN THIS GUARANTY, GUARANTOR WAIVES ALL RIGHTS AND DEFENSES
ARISING OUT OF AN ELECTION OF REMEDIES BY THE GUARANTIED PARTY, EVEN THOUGH THAT
ELECTION OF REMEDIES, SUCH AS A NONJUDICIAL FORECLOSURE WITH RESPECT TO SECURITY
FOR A GUARANTEED OBLIGATION, HAS DESTROYED THE GUARANTOR'S RIGHTS OF SUBROGATION
AND REIMBURSEMENT AGAINST THE DEBTOR BY THE OPERATION OF SECTION 580D OF THE
CALIFORNIA CODE OF CIVIL PROCEDURE OR OTHERWISE.
7. Releases. Guarantor consents and agrees that, without notice to
--------
or by Guarantor and without affecting or impairing the obligations of Guarantor
hereunder, Guarantied Party may, by action or inaction, compromise or settle,
extend the period of duration or the time for the payment, or discharge the
performance of, or may refuse to, or otherwise not enforce, or may, by action or
inaction, release all or any one or more parties to, any one or more of the
terms and provisions of the Loan Agreement or any of the other Loan Documents or
may grant other indulgences to Debtor in respect thereof, or may amend or modify
at any time (or from time to time) any one or more of the Loan Agreement or any
of the other Loan Documents in any manner permitted thereunder, or may, by
action or inaction, release or substitute any other guarantor, if any, of the
Guarantied Obligations, or may enforce, exchange, release, or waive, by action
or inaction, any security for the Guarantied Obligations or any other guaranty
of the Guarantied Obligations, or any portion thereof.
8. No Election. Guarantied Party shall have the right to seek
-----------
recourse against Guarantor to the fullest extent provided for herein and no
election by Guarantied Party to proceed in one form of action or proceeding, or
against any party, or on any
-6-
<PAGE>
obligation, shall constitute a waiver of Guarantied Party's right to proceed in
any other form of action or proceeding or against other parties unless
Guarantied Party has expressly waived such right in writing. Specifically, but
without limiting the generality of the foregoing, no action or proceeding by
Guarantied Party under any document or instrument evidencing the Guarantied
Obligations shall serve to diminish the liability of Guarantor under this
Guaranty except to the extent that Guarantied Party finally and unconditionally
shall have realized indefeasible payment by such action or proceeding.
9. Indefeasible Payment. The Guarantied Obligations shall not be
--------------------
considered indefeasibly paid for purposes of this Guaranty unless and until all
payments to Guarantied Party are no longer subject to any right on the part of
any person whomsoever, including Debtor, Debtor as a debtor in possession, or
any trustee (whether appointed under the Bankruptcy Code or otherwise) of
Debtor's assets to invalidate or set aside such payments or to seek to recoup
the amount of such payments or any portion thereof, or to declare same to be
fraudulent or preferential. In the event that, for any reason, all or any
portion of such payments to Guarantied Party is set aside or restored, whether
voluntarily or involuntarily, after the making thereof, the obligation or part
thereof intended to be satisfied thereby shall be revived and continued in full
force and effect as if said payment or payments had not been made and Guarantor
shall be liable for the full amount Guarantied Party is required to repay plus
any and all costs and expenses (including attorneys fees) paid by Guarantied
Party in connection therewith.
10. Financial Condition of Debtor. Guarantor represents and warrants
-----------------------------
to Guarantied Party that it is currently informed of the financial condition of
Debtor and of all other circumstances which a diligent inquiry would reveal and
which bear upon the risk of nonpayment of the Guarantied Obligations. Guarantor
further represents and warrants to Guarantied Party that it has read and
understands the terms and conditions of the Loan Agreement and the other Loan
Documents. Guarantor hereby covenants that it will continue to keep itself
informed of Debtor's financial condition, the financial condition of other
guarantors, if any, and of all other circumstances which bear upon the risk of
nonpayment or nonperformance of the Guarantied Obligations.
11. [Intentionally Omitted.]
12. Payments; Application. All payments to be made hereunder by
---------------------
Guarantor shall be made in lawful money of the United States of America at the
time of payment, shall be made in immediately available funds, and shall be made
without deduction (whether for taxes or otherwise) or offset. All payments made
by Guarantor hereunder shall be applied as follows: first, to all reasonable
out-of-pocket costs and expenses (including reasonable attorneys fees) actually
incurred by Guarantied Party in enforcing this Guaranty or in collecting the
Guarantied Obligations; second, to all accrued
-7-
<PAGE>
and unpaid interest, premium, if any, and fees owing to Guarantied Party
constituting Guarantied Obligations; and third, to the balance of the Guarantied
Obligations.
13. Attorneys Fees and Costs. Guarantor agrees to pay promptly all
------------------------
reasonable attorneys fees and all other reasonable costs and expenses which may
be incurred by Guarantied Party in the enforcement of this Guaranty or in any
way arising out of, or consequential to the protection, assertion, or
enforcement of the Guarantied Obligations (or any security therefor),
irrespective of whether suit is brought.
14. Notices. Unless otherwise specifically provided in this
--- -------
Guaranty, any notice or other communication relating to this Guaranty or any
other agreement entered into in connection therewith shall be in writing and
shall be personally delivered or sent by registered or certified mail, postage
prepaid, return receipt requested, or by prepaid telex, TWX, telefacsimile, or
telegram (with messenger delivery specified) to Guarantor or to Guarantied
Party, as the case may be, at its addresses set forth below:
If to Guarantor: KOO KOO ROO, INC.
18831 Von Karman Avenue
Irvine, California 92713
Attn: Mr. Robert D. Gonda
Telecopy No.: (714) 757-7984
with a copy to: SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
300 S. Grand Avenue
Los Angeles, California 90071
Attn: Michael A. Woronoff, Esq.
Telecopy No.: (213) 687-5600
If to Guarantied Party: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard, Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Telecopy No.: (310) 575-3435
with a copy to: BROBECK, PHLEGER & HARRISON LLP
550 South Hope Street
Los Angeles, California 90071
Attn: John Francis Hilson, Esq.
Telecopy No.: (213) 745-3345
-8-
<PAGE>
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other. All notices or demands sent in accordance with this Section 14, other
----------
than notices by Guarantied Party in connection with Sections 9504 or 9505 of the
Code, shall be deemed received on the earlier of the date of actual receipt or
three (3) calendar days after the deposit thereof in the mail. Guarantor
acknowledges and agrees that notices sent by Guarantied Party in connection with
Sections 9504 or 9505 of the Code shall be deemed sent when deposited in the
mail or transmitted by telefacsimile or other similar method set forth above.
15. Cumulative Remedies. No remedy under this Guaranty, under the
-------------------
Loan Agreement, or any other Loan Document is intended to be exclusive of any
other remedy, but each and every remedy shall be cumulative and in addition to
any and every other remedy given under this Guaranty, under the Loan Agreement,
or any other Loan Document, and those provided by law. No delay or omission by
Guarantied Party to exercise any right under this Guaranty shall impair any such
right nor be construed to be a waiver thereof. No failure on the part of
Guarantied Party to exercise, and no delay in exercising, any right under this
Guaranty shall operate as a waiver thereof; nor shall any single or partial
exercise of any right under this Guaranty preclude any other or further exercise
thereof or the exercise of any other right.
16. Severability of Provisions. Any provision of this Guaranty which
--------------------------
is prohibited or unenforceable under applicable law shall be ineffective to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof.
17. Entire Agreement; Amendments. This Guaranty constitutes the
----------------------------
entire agreement between Guarantor and Guarantied Party pertaining to the
subject matter contained herein. This Guaranty may not be altered, amended, or
modified, nor may any provision hereof be waived or noncompliance therewith
consented to, except by means of a writing executed by both Guarantor and
Guarantied Party. Any such alteration, amendment, modification, waiver, or
consent shall be effective only to the extent specified therein and for the
specific purpose for which given. No course of dealing and no delay or waiver
of any right or default under this Guaranty shall be deemed a waiver of any
other, similar or dissimilar, right or default or otherwise prejudice the rights
and remedies hereunder.
18. Successors and Assigns. This Guaranty shall be binding upon
----------------------
Guarantor and its successors and assigns and shall inure to the benefit of the
successors and assigns of Guarantied Party permitted under the Loan Agreement
and the Other Loan Documents; provided, however, Guarantor shall not assign this
-------- -------
Guaranty or delegate any of its duties hereunder without Guarantied Party's
prior written consent and any
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<PAGE>
unconsented to assignment shall be absolutely void. In the event of any
assignment or other transfer of rights by Guarantied Party in accordance with
the Loan Agreement, the rights and benefits herein conferred upon Guarantied
Party shall automatically extend to and be vested in such assignee or other
transferee.
19. No Third Party Beneficiary. This Guaranty is solely for the
--------------------------
benefit of Guarantied Party and its successors and permitted assigns and may not
be relied on by any other Person.
20. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
------------------------------------------
THE VALIDITY OF THIS GUARANTY, ITS CONSTRUCTION, INTERPRETATION,
AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO WITH RESPECT TO ALL
MATTERS ARISING HEREUNDER OR RELATED HERETO SHALL BE DETERMINED UNDER, GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN
CONNECTION WITH THIS GUARANTY SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND
FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA,
PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST COLLATERAL OR OTHER
PROPERTY MAY BE BROUGHT, AT FOOTHILL'S OPTION, IN THE COURTS OF ANY JURISDICTION
WHERE FOOTHILL ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER
PROPERTY MAY BE FOUND. EACH OF GUARANTOR AND GUARANTIED PARTY WAIVES, TO THE
EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE
DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY
PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 20.
----------
GUARANTOR AND GUARANTIED PARTY HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF THIS GUARANTY OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING
CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. GUARANTOR AND GUARANTIED PARTY REPRESENT THAT EACH HAS
REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL
RIGHTS
-10-
<PAGE>
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF
THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
- remainder of page intentionally left blank -
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<PAGE>
IN WITNESS WHEREOF, the undersigned has executed and delivered this
Guaranty as of the date first written above.
KOO KOO ROO, INC.,
a Delaware corporation
By _____________________________
Title: __________________________
S-1
<PAGE>
EXHIBIT 10.36
FORM OF
SECURITY AGREEMENT
------------------
(KOO KOO ROO, INC.)
This SECURITY AGREEMENT (this "Agreement"), is entered into as of
__________, 1998 between FOOTHILL CAPITAL CORPORATION, a California corporation
("Foothill"), with a place of business located at 11111 Santa Monica Boulevard,
Suite 1500, Los Angeles, California 90025-3333, and KOO KOO ROO, INC., a
Delaware corporation ("Guarantor"), with its chief executive office located at
18831 Von Karman Avenue, Irvine, California 92713.
WHEREAS, Borrower, Foothill, and the other parties thereto have heretofore
entered into the Loan Agreement;
WHEREAS, Guarantor has executed that certain General Continuing Guaranty,
of even date herewith, in favor of Foothill (the "Guaranty"), respecting certain
obligations of Borrower owing to Foothill under the Loan Agreement;
WHEREAS, Guarantor desires to collateralize its obligations under the
Guaranty by granting to Foothill a security interest in certain of its assets;
and
WHEREAS, Guarantor will benefit by virtue of the loan from Foothill to
Borrower.
NOW THEREFORE, in consideration of the premises set forth above, the terms
and conditions contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and each intending to
be bound hereby, Foothill and Guarantor agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS . All capitalized terms used herein and not otherwise
-----------
defined herein shall have the meanings ascribed to them in the Loan Agreement.
As used in this Agreement, the following terms shall have the following
definitions:
"Accounts" means all currently existing and hereafter arising
--------
accounts, contract rights, and all other forms of obligations owing to Guarantor
arising out of the sale, license, or lease of goods or the rendition of services
by Guarantor, irrespective of whether earned by performance, and any and all
credit insurance, guaranties, or security therefor.
<PAGE>
"Agreement" means this Security Agreement and any extensions,
---------
riders, supplements, notes, amendments, or modifications to or in connection
with this Security Agreement.
"Borrower" means any one or more of Chi-Chi's, Inc., a Delaware
--------
corporation, and El Torito Restaurants, Inc., a Delaware corporation,
individually and collectively, jointly and severally.
"Collateral" means each of the following: the Accounts;
----------
Guarantor's Books; the Equipment; the General Intangibles; the Inventory; the
Negotiable Collateral; any money, or other assets of Guarantor which now or
hereafter come into the possession, custody, or control of Foothill; and the
proceeds and products, whether tangible or intangible, of any of the foregoing,
including proceeds of insurance covering any or all of the Collateral, and any
and all Accounts, Guarantor's Books, Equipment, General Intangibles, Inventory,
Negotiable Collateral, money, deposit accounts, or other tangible or intangible
property resulting from the sale, exchange, collection, or other disposition of
any of the foregoing, or any portion thereof or interest therein, and the
proceeds thereof.
"Equipment" means all of Guarantor's present and hereafter
---------
acquired machinery, machine tools, motors, equipment, furniture, furnishings,
fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods
(other than consumer goods, farm products, or Inventory), wherever located, and
any interest of Guarantor in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located.
"Event of Default" has the meaning ascribed to it in Section 6.
----------------
"Excluded Contract Right" means, with respect to Guarantor, and
-----------------------
with respect to any contract to which Guarantor is a party, a right or privilege
of Guarantor under such contract, or an obligation due to Guarantor under such
contract, that: (a) In the case of a More Important Contract, arises under a
contract described on Schedule E-1 of the Loan Agreement; or (b) In the case of
------------
a Less Important Contract, (i) does not consist of the right of Guarantor to
---
receive a payment, or an obligation due to Guarantor with respect to a payment,
and (ii) is, by the express terms of such contract, subject to a restriction on
assignability that prohibits the pledge, hypothecation, mortgage, encumbrance,
or grant of a Lien on same, if such restriction is enforceable, and if the
breach of such restriction by Guarantor would constitute a material breach of
such contract sufficient to give rise to a right on the part of another party to
such contract to terminate such contract or to impose liability for not
insignificant damages upon Guarantor for breach of such contract; provided that
--------
the proceeds of any disposition of any Excluded Contract
-2-
<PAGE>
Right shall not constitute an Excluded Contract Right, and any such proceeds
---
shall be subject to Foothill's security interest.
- -----
"General Intangibles" means all of Guarantor's present and future
-------------------
general intangibles and other personal property (including contract rights,
rights arising under common law, statutes, or regulations, choses or things in
action, goodwill, patents, trade names, trademarks, servicemarks, copyrights,
blueprints, drawings, purchase orders, customer lists, monies due or recoverable
from pension funds, route lists, rights to payment and other rights under any
royalty or licensing agreements, infringement claims, computer programs,
information contained on computer discs or tapes, literature, reports, catalogs,
deposit accounts, insurance premium rebates, tax refunds, and tax refund
claims), other than goods, Accounts, and Negotiable Collateral; provided that
--------
General Intangibles shall not include any Excluded Contract Right.
"Guarantied Obligations" shall have the meaning ascribed to it in
----------------------
the Guaranty.
"Guarantor's Books" means all of Guarantor's books and records,
-----------------
including: ledgers; records indicating, summarizing, or evidencing Guarantor's
properties or assets (including the Collateral) or liabilities; all information
relating to Guarantor's business operations or financial condition; and all
computer programs, disc or tape files, printouts, runs, or other computer
prepared information in respect of such books and records.
"Guarantor" has the meaning ascribed thereto in the preamble to
---------
this Agreement.
"Guaranty" means the General Continuing Guaranty of Guarantor to
--------
Foothill of even date herewith.
"Inventory" means all present and future inventory in which
---------
Guarantor has any interest, including goods held for sale, license, or lease or
to be furnished under a contract of service and all of Guarantor's present and
future raw materials, work in process, finished goods, and packing and shipping
materials, wherever located, and any documents of title representing any of the
above.
"Investment Property" means "investment property" as that term
-------------------
is defined in Section 9115 of the Code.
"Less Important Contract" means, with respect to Guarantor, a
-----------------------
contract to which Guarantor is a party that is not a More Important Contract.
-3-
<PAGE>
"Loan Agreement" means that certain Loan and Security Agreement,
--------------
dated as of January 10, 1997 (as heretofore amended, supplemented, or otherwise
modified), among Borrower, Foothill, and the other parties thereto.
"More Important Contract" means, with respect to Guarantor, a
-----------------------
contract to which Guarantor is a party: (a) Described on Schedule E-1 to the
------------
Loan Agreement; (b) the material breach of which by Guarantor could give rise to
a claim against Guarantor that is material in relation to Guarantor's financial
condition; or (c) the termination of which could interfere substantially with
the ongoing operations, businesses, or prospects of Guarantor.
"Negotiable Collateral" means all of Guarantor's present and
---------------------
future letters of credit, notes, drafts, instruments, Investment Property
(including the shares of stock of Subsidiaries of Guarantor), documents,
personal property leases (wherein Guarantor is the lessor), chattel paper, and
Guarantor's Books relating to any of the foregoing.
"Permitted Liens" means, with respect to the assets of Guarantor
---------------
or its Subsidiaries: (a) Liens granted to Foothill or any assignee under the
Loan Documents, (b) Liens for unpaid taxes, assessments, and government charges
that either (i) are not yet due and payable or (ii) are the subject of Permitted
Protests, (c) Liens set forth on Schedule P-1 of the Loan Agreement, (d)(i) the
------------
interests of lessors or lessees under operating leases and subleases, or (ii)
the interests of licensees or franchisees under licenses or franchises of
Borrower Intellectual Property to the extent constituting an Ordinary Course
Disposition under clause (e) of the definition of Ordinary Course Disposition,
(e)(i) Liens securing purchase money Indebtedness or capital leases permitted
under Section 7.1(g) of the Loan Agreement, so long as the Lien only attaches to
--------------
the asset purchased or acquired, or (ii) Acquisition Liens, (f) Liens arising by
operation of law, incurred in the ordinary course of business of Guarantor and
its Subsidiaries and not in connection with the borrowing of money, and which
Liens either (i) are for sums not yet due and payable, (ii) are the subject of
Permitted Protests, or (iii) in the aggregate are de minimis in amount, (g)
-- -------
Liens arising from deposits made in connection with obtaining worker's
compensation or other unemployment insurance, (h) Liens or deposits to secure
performance of bids, tenders, contracts or leases (to the extent permitted under
this Agreement), incurred in the ordinary course of business of Guarantor and
its Subsidiaries and not in connection with the borrowing of money, (i) Liens
arising by reason of security for surety or appeal bonds, (j) Liens of or
resulting from any judgment or award that does not constitute an Event of
Default hereunder, (k) Liens with respect to the Real Property Collateral, and
the Anaheim Property, that are exceptions to the commitments for title insurance
issued in connection with the Mortgages, and the Anaheim Mortgage as accepted by
Foothill at the time of such issuance, (l) with respect to any Real Property,
easements,
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<PAGE>
rights of way, zoning and similar covenants and restrictions, and similar
encumbrances that do not materially interfere with or impair the use or
operation thereof by Guarantor or its Subsidiaries, (m) other Liens imposed by
operation of law that do not materially affect Guarantor's or its Subsidiaries
ability to perform their respective obligations under the Loan Documents, (n)
replacement or continued Liens granted to a Person who provides refinancing or
continuation of Indebtedness pursuant to Section 7.1(h) of the Loan Agreement;
--------------
provided, that the replacement or continued Lien is limited to all or part of
- --------
the properties or assets that secured the refinanced or continued Indebtedness.
"Secured Obligations" shall mean all liabilities, obligations,
-------------------
or undertakings owing by Guarantor to Foothill of any kind or description
arising out of or outstanding under, advanced or issued pursuant to, or
evidenced by the Guaranty, any other Loan Document heretofore, herewith, or
hereafter executed by Guarantor, or this Agreement, irrespective of whether for
the payment of money, whether direct or indirect, absolute or contingent, due or
to become due, voluntary or involuntary, whether now existing or hereafter
arising, and including all interest (including interest that accrues after the
filing of a case under the Bankruptcy Code) and any and all reasonable out-of-
pocket costs, fees (including reasonable attorneys fees), and expenses which
Guarantor is required to pay pursuant to any of the foregoing, by law, or
otherwise.
1.2 CODE. Any terms used in this Agreement which are defined in
----
the Code shall be construed and defined as set forth in the Code unless
otherwise defined herein.
1.3 CONSTRUCTION. Unless the context of this Agreement clearly
------------
requires otherwise, references to the plural include the singular, references to
the singular include the plural, the term "including" is not limiting, and the
term "or" has, except where otherwise indicated, the inclusive meaning
represented by the phrase "and/or." The words "hereof," "herein," "hereby,"
"hereunder," and similar terms in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement. Section,
subsection, clause, schedule, and exhibit references are to this Agreement
unless otherwise specified. Any reference in this Agreement or in any of the
other Loan Documents to this Agreement or any of the other Loan Documents shall
include all alterations, amendments, restatements, changes, extensions,
modifications, renewals, replacements, substitutions, and supplements, thereto
and thereof, as applicable. In the event of a direct conflict between the terms
and provisions of this Agreement and the Loan Agreement, it is the intention of
the parties hereto that both such documents shall be read together and
construed, to the fullest extent possible, to be in concert with each other. In
the event of any actual, irreconcilable conflict that cannot be resolved as
aforesaid, the terms and provisions of the Loan Agreement shall control and
govern; provided, however, that the inclusion herein of additional obligations
on the part of Guarantor and supplemental rights and remedies in
-5-
<PAGE>
favor of Foothill, in each case in respect of the Collateral, shall not be
deemed a conflict with the Loan Agreement.
1.4 SCHEDULES AND EXHIBITS. All of the schedules and exhibits
----------------------
attached to this Agreement shall be deemed incorporated herein by reference.
2. CREATION OF SECURITY INTEREST.
2.1 GRANT OF SECURITY INTEREST. Guarantor hereby grants to
--------------------------
Foothill a continuing security interest in all of its currently existing and
hereafter acquired or arising Collateral in order to secure payment and
performance of the Secured Obligations. Foothill's security interests in the
Collateral shall attach to all Collateral without further act on the part of
Foothill or Guarantor. Anything contained in this Agreement or any other Loan
Document to the contrary notwithstanding, Guarantor has no authority, express or
implied, to dispose of any item or portion of the Collateral other than
Permitted Dispositions. Concurrent with the consummation of any Permitted
Disposition, Foothill agrees to release its Liens on the subject property or
asset (but not the proceeds from the Asset Disposition).
2.2 NEGOTIABLE COLLATERAL. In the event that any Collateral,
---------------------
including proceeds, is evidenced by or consists of Negotiable Collateral (other
than Collection items received by Guarantor in the ordinary course of
Guarantor's business and deposited), Guarantor shall, promptly upon the request
of Foothill, deliver physical possession of such Negotiable Collateral to
Foothill or its bailee to the extent required for Foothill to have a first
priority perfected Lien thereon.
2.3 [Intentionally omitted.]
2.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Guarantor shall
---------------------------------------------
execute, and deliver to Foothill, prior to or concurrently with Guarantor's
execution and delivery of this Agreement and at any time thereafter at the
request of Foothill, all financing statements, continuation financing
statements, fixture filings, security agreements, chattel mortgages, pledges,
mortgages, deeds of trust, assignments, endorsements of certificates of title,
applications for title, affidavits, reports, notices, schedules of accounts,
letters of authority, and all other documents that Foothill may reasonably
request, in form satisfactory to Foothill, to perfect and continue perfected
Foothill's security interests in the Collateral and in order to fully consummate
all of the transactions contemplated under the Loan Documents.
2.5 POWER OF ATTORNEY. Guarantor hereby irrevocably makes,
-----------------
constitutes, and appoints Foothill (and any of Foothill's officers, employees,
or agents
-6-
<PAGE>
designated by Foothill) as Guarantor's true and lawful attorney, with power to:
(a) if Guarantor refuses to, or fails timely to execute and deliver any of the
documents described in Section 2.4, sign the name of Guarantor on any of the
-----------
documents described in Section 2.4; (b) endorse Guarantor's name on any
-----------
Collection item that may come into Foothill's possession; (c) at any time that
an Event of Default has occurred and is continuing, make, settle, and adjust all
claims under Guarantor's policies of insurance and make all determinations and
decisions with respect to such policies of insurance. The appointment of
Foothill as Guarantor's attorney, and each and every one of Foothill's rights
and powers, being coupled with an interest, is irrevocable until all of the
Secured Obligations have been fully and finally repaid and performed and
Foothill's obligation to extend credit under the Loan Agreement is terminated.
2.6 RIGHT TO INSPECT. Prior to the time that an Event of Default
----------------
has occurred and is continuing or Foothill deems itself insecure, Foothill
(through any of its officers, employees, or agents) shall have the right, from
time to time hereafter upon reasonable prior notification to Guarantor and
during normal business hours, to inspect Guarantor's and each of its
Subsidiary's Books and to check, test, and, subject to Section 2.11(d) of the
---------------
Loan Agreement, appraise the Collateral in order to verify Guarantor's financial
condition or the amount, quality, value, condition of, or any other matter
relating to, the Collateral. After the time that an Event of Default has
occurred and is continuing or Foothill deems itself insecure, Foothill (through
any of its officers, employees, or agents) shall have the right, from time to
time thereafter, to inspect Guarantor's and each of its Subsidiaries' Books and
to check, test, and, subject to Section 2.11(d) of the Loan Agreement, appraise
---------------
the Collateral in order to verify Guarantor's financial condition or the amount,
quality, value, condition of, or any other matter relating to, the Collateral.
3. REPRESENTATIONS AND WARRANTIES.
Guarantor represents and warrants as follows:
3.1 NO PRIOR ENCUMBRANCES. Guarantor owns the Collateral, free
---------------------
and clear of Liens, except for Permitted Liens.
3.2 PLACE OF BUSINESS/CHIEF EXECUTIVE OFFICE; FEIN. As of the KKR
----------------------------------------
Closing Date, the chief executive office of Guarantor is at the address
indicated in the first paragraph of this Agreement. Guarantor's FEIN is _______.
3.3 [Intentionally Omitted].
3.4 [Intentionally Omitted].
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<PAGE>
3.5 [Intentionally Omitted].
3.6 DUE ORGANIZATION AND QUALIFICATION. Guarantor is a Delaware
----------------------------------
corporation, and it is and shall at all times hereafter be duly organized and
existing and in good standing under the laws of Delaware and qualified and
licensed to do business in, and in good standing in, any state where the failure
to be so licensed or qualified could reasonably be expected to have a material
adverse effect on the business, operations, condition (financial or otherwise),
finances, or prospects of Guarantor or on the value of the Collateral.
3.7 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
------------------------------
performance of this Agreement, the Guaranty, and any other Loan Document to
which Guarantor is a party are within Guarantor's corporate powers, have been
duly authorized, and are not in conflict with nor, constitute a breach of any
provision contained in Guarantor's Articles or Certificate of Incorporation, or
By-laws, nor will they constitute an event of default under any material
agreement to which Guarantor is now or may hereafter become a party.
3.8 LITIGATION. There are no actions or proceedings pending by
----------
or against Guarantor before any court or administrative agency and Guarantor
does not have knowledge or belief of any pending, threatened, or imminent
litigation, governmental investigations, or claims, complaints, actions, or
prosecutions involving Guarantor, except for: (a) matters disclosed on Schedule
--------
5.9 of the Loan Agreement; and (b) matters arising after the date hereof that,
- ---
if decided adversely to Guarantor, would not materially impair the prospect of
repayment of the Secured Obligations or materially impair the value or priority
of Foothill's security interests in the Collateral.
3.9 NO INTENT TO HINDER CREDITORS. No transfer of property is
-----------------------------
being made by Guarantor and no obligation is being incurred by Guarantor in
connection with the transactions contemplated by this Agreement or the other
Loan Documents with the intent to hinder, delay, or defraud either present or
future creditors of Guarantor.
3.10 RELIANCE BY FOOTHILL; CUMULATIVE. The warranties,
--------------------------------
representations, and agreements set forth herein shall be conclusively presumed
to have been relied upon by Foothill and shall be cumulative and in addition to
any and all other warranties, representations, and agreements which Guarantor
shall now or hereinafter give, or cause to be given, to Foothill.
4. AFFIRMATIVE COVENANTS.
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<PAGE>
Guarantor covenants and agrees that, until payment in full of the Secured
Obligations, and unless Foothill shall otherwise consent in writing, Guarantor
shall do all of the following:
4.1 [Intentionally Omitted.]
4.2 [Intentionally Omitted.]
4.3 [Intentionally Omitted.]
4.4 [Intentionally Omitted.]
4.5 TAXES. Other than taxes of which Guarantor is unaware or that
-----
in the aggregate are de minimis, all assessments and taxes (including
-- -------
withholding taxes), whether real, personal, or otherwise, due or payable by, or
imposed, levied, or assessed against Guarantor or any of its property have been
paid, and shall be paid in full, before delinquency or before the expiration of
any extension period, except to the extent that the validity of such assessment
or tax (other than taxes that are the subject of a United States federal tax
lien) is the subject of a Permitted Protest. Guarantor, upon request, shall
furnish Foothill with proof reasonably satisfactory to Foothill indicating that
Guarantor has made all due and timely payments or deposits of all such federal,
state, and local taxes, assessments, or contributions required of it by law.
4.6 INSURANCE.
(a) At its expense, keep the Collateral insured against loss
or damage by fire, theft, explosion, sprinklers, and other hazards and risks,
and in such amounts, as are ordinarily insured against by other owners in
similar businesses. Guarantor also shall maintain business interruption, public
liability, product liability, and property damage insurance relating to their
ownership and use of the Collateral, as well as insurance against larceny,
embezzlement, and criminal misappropriation, in each case consistent with past
practice; provided, however, that Guarantor and its Subsidiaries only shall be
required to use their reasonable best efforts to maintain earthquake insurance,
in amounts and subject to deductibles consistent with those ordinarily insured
against by other similar companies in the same industry, so long as it is
available at reasonable commercial rates. Foothill agrees that Guarantor and its
Subsidiaries may self-insure for workers compensation insurance, generally
liability insurance, auto liability insurance, and health insurance, in each
case, consistent with past practice and with a limit of up to $500,000 per
occurrence.
-9-
<PAGE>
(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as may be reasonably satisfactory to
Foothill. Insurance policies covering property and assets against loss by fire,
lightening, windstorm, hail, explosion, aircraft, smoke damage, earthquake,
elevator collisions and other risks included under an "extended coverage"
endorsement shall, with respect to hazard insurance and such other insurance as
Foothill shall specify, contain a California Form 438BFU (NS) mortgagee
endorsement, or an equivalent endorsement satisfactory to Foothill, showing
Foothill as a loss payee thereof as its interests may appear, and shall contain
a waiver of warranties. All such insurance (with the exception of workers'
compensation and health insurance policies) shall name Foothill as an additional
insured as its interest may appear. Every policy of insurance referred to in
this Section 4.6 (with the exception of workers' compensation and health
insurance policies) shall contain an agreement by the insurer that it will not
cancel such policy except after 10 days prior written notice to Foothill.
Certified copies or originals of such policies or certificates thereof
satisfactory to Foothill evidencing such insurance shall be delivered to
Foothill prior to the expiration or the cancellation of the existing or
preceding policies. Guarantor shall deliver to Foothill, upon the request of
Foothill, evidence of the payment of all premiums for such policies of
insurance.
4.7 FOOTHILL EXPENSES. Guarantor shall immediately and without
-----------------
demand reimburse Foothill for all sums expended by Foothill which constitute
Foothill Expenses and Guarantor hereby authorizes and approves all advances and
payments by Foothill for items constituting Foothill Expenses.
5. NEGATIVE COVENANTS.
Guarantor covenants and agrees that until payment in full of
the Secured Obligations, it will not do any of the following without Foothill's
prior written consent:
5.1 LIENS. Create, incur, assume, or permit to exist, directly or
-----
indirectly, any lien on or with respect to any of its property or assets, of any
kind, whether now owned or hereafter acquired, or any income or profits
therefrom, except for Permitted Liens.
5.2 [Intentionally omitted.]
5.3 [Intentionally omitted.]
5.4 CHANGE NAME. Except on 30 days prior written notice to
-----------
Foothill, change its name or FEIN.
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<PAGE>
5.5 [Intentionally omitted.]
5.6 [Intentionally omitted.]
5.7 [Intentionally omitted.]
5.8 [Intentionally omitted.]
5.9 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND
-----------------------------------------------------------
EQUIPMENT WITH BAILEES. Without thirty (30) days prior written notification to
- ----------------------
Foothill, relocate its chief executive office to a new location, unless, at the
time of such written notification, it provides any financing statements or
fixture filings necessary to perfect and continue perfected Foothill's security
interests and also provides to Foothill a landlord's waiver in form and
substance satisfactory to Foothill. The Inventory and Equipment shall not at any
time now or hereafter be stored with a bailee, warehouseman, or similar party
without Foothill's prior written consent.
6. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an
event of default (each, an "Event of Default") under this Agreement:
6.1 The occurrence of an Event of Default (as defined in the Loan
Agreement);
6.2 If (a) Guarantor fails or neglects to perform, keep, or
observe, in any material respect, any term, provision, condition, covenant, or
agreement contained in this Agreement or in the Guaranty, or in any other
present or future Loan Document between Guarantor and Foothill and such failure
---
continues for a period of 15 days from the date on which Guarantor first had
knowledge or reasonably should have had knowledge of such failure or neglect, or
--
(b) Guarantor fails or neglects to perform, keep, or observe, in any material
respect, any other term, provision, condition, covenant, or agreement contained
in this Agreement or in the Guaranty, or in any other present or future Loan
Document between Guarantor and Foothill, and Foothill, in its reasonable
discretion, determines such failure or neglect is not capable of cure by
Guarantor within 15 days from the date on which Guarantor first had knowledge or
reasonably should have had knowledge of such failure or neglect;
6.3 If there is a Material Adverse Collateral Change;
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<PAGE>
6.4 (a) If a notice of lien, levy, or assessment is filed of
record with respect to any of Guarantor's properties or assets by the United
States Government, or any department, agency, or instrumentality thereof, or if
any taxes or debts owing at any time hereafter to the United States becomes a
lien, whether choate or otherwise, upon any of Guarantor's properties or assets;
or (b) if a notice of lien, levy, or assessment is filed of record for an amount
in excess of $250,000 with respect to any of Guarantor's properties or assets by
any state, county, municipal, or governmental agency, or if any taxes or debts
owing at any time hereafter to any one or more of such entities becomes a lien
for an amount in excess of $250,000, whether choate or otherwise, upon any of
Guarantor's properties or assets and, in any such case, such taxes or debts are
not the subject of a Permitted Protest, and the lien, levy, or assessment is not
released, discharged, or bonded against before the earlier of 30 days of the
date it first arises or 5 days of the date when such property or asset is
subject to being forfeited;
6.5 If a judgment or other claim becomes a Lien upon any material
portion of Guarantor's properties or assets and the same is not released,
discharged, bonded against, or stayed pending appeal before the earlier of 30
days of the date it first arises or 5 days of the date when such property or
asset is subject to being forfeited;
6.6 If there is a material default in any material agreement
relating to Indebtedness to which Guarantor is a party with one or more third
Persons resulting in a right by such third Persons, irrespective of whether
exercised, to accelerate the maturity of Guarantor's obligations thereunder;
6.7 [Intentionally Omitted;]
6.8 If any misstatement or misrepresentation exists now or
hereafter in any written warranty, representation, statement, or report made
pursuant to any of the Loan Documents to Foothill by Guarantor or any officer,
employee, agent, or director of Guarantor (in the case of employees or agents
who are not officers or directors, to the extent authorized by an officer or
director to communicate or transact business with Foothill or who regularly
communicate or transact business with Foothill), or if any such warranty or
representation is withdrawn.
7. FOOTHILL'S RIGHTS AND REMEDIES.
7.1 RIGHTS AND REMEDIES. Upon the occurrence and during the
-------------------
continuation of an Event of Default, the security hereby constituted shall
become enforceable and, in addition to all other rights and remedies available
to Foothill as provided hereafter, Foothill may, at its election, without notice
of its election and without demand, do any one or more of the following, all of
which are authorized by Guarantor:
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<PAGE>
(a) Proceed directly and at once, without notice, against the
Guarantor to collect and recover the full amount or any portion of the
Guarantied Obligations, without first proceeding against Borrower, or against
any security or collateral for the Guarantied Obligations;
(b) Without notice to the Guarantor and regardless of the
acceptance of any security or collateral for the payment hereof, appropriate and
apply toward the payment of the Guarantied Obligations (i) any indebtedness due
or to become due from Foothill to the Guarantor and (ii) any moneys, credits or
other property belonging to the Guarantor at any time held by or coming into the
possession of Foothill;
(c) May exercise in respect of the Collateral, in addition to
other rights and remedies provided for herein and the Guaranty or otherwise
available to it, all the rights and remedies available to it at law (including
those of a secured party under the Code) or in equity;
(d) [Intentionally omitted;]
(e) [Intentionally omitted;]
(f) Without notice or demand, make such payments and do such
acts as Foothill considers reasonably necessary to protect its security interest
in the Collateral. Guarantor agrees to assemble the Collateral if Foothill so
requires, and to make the Collateral available to Foothill as Foothill may
designate. Guarantor authorizes Foothill to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Foothill's reasonable determination appears to be prior
or superior to its security interest and to pay all reasonable expenses incurred
in connection therewith. With respect to any of Guarantor's owned premises,
Guarantor hereby grants Foothill a license to enter into possession of such
premises and to occupy the same, without charge, for up to one hundred twenty
(120) days in order to exercise any of Foothill's rights or remedies provided
herein, at law, in equity, or otherwise;
(g) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Foothill is hereby granted a license or other right to
use, without charge, Guarantor's labels, patents, copyrights, rights of use of
any name, trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the Collateral,
in completing production of advertising for sale and selling any Collateral, and
Guarantor's rights under all licenses and all franchise agreements shall inure
to Foothill's benefit;
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<PAGE>
(h) Sell all or any part of the Collateral at either a public
or private sale, or both, by way of one or more contracts or transactions, for
cash or on terms, in such manner and at such places (including Guarantor's
premises) as Foothill determines is commercially reasonable. It is not necessary
that the Collateral be present at any such sale. Foothill shall have the right
upon any such public sale or sales, and, to the extent permitted by law, upon
any such private sale or sales, to purchase the whole or any part of the
Collateral so sold, free of any right or equity of redemption in Guarantor,
which right or equity is hereby waived or released to the extent permitted by
law. Anything in the foregoing to the contrary notwithstanding, Foothill
acknowledges and agrees that (i) the Flagstar Bonds contain certain legends,
contain certain restrictions on transfer, and are subject to certain claims of
Flagstar and potential reductions of the principal amount thereof, (ii) any
transfer of the Flagstar Bonds (including, without limitation, upon foreclosure)
shall be subject to any enforceable restrictions contained in the Flagstar
Bonds, and (iii) so long as no Triggering Event has occurred and is continuing
and so long as the proposed sale would not violate any covenant contained in any
Loan Document to which Guarantor is a party or by which Guarantor is bound, in
the event of a proposed sale by Guarantor of any Flagstar Bonds in the
possession of a bailee under a bailee agreement with Foothill, promptly after
Guarantor notifies Foothill of such sale, Foothill shall instruct the bailee to
deliver such Flagstar Bonds to Guarantor, (or otherwise in accordance with
Guarantor's written instructions) within 5 Business Days of Guarantor's notice
to Foothill, it shall deliver duly executed non-recourse endorsements or
assignments (if necessary), provided that Guarantor shall immediately return
--------
such Flagstar Bonds to the bailee, and such endorsements or assignments to
Foothill, in the event that such sale is not consummated within 5 Business Days
of the delivery of such Flagstar Bonds to Guarantor.
(i) Foothill shall give notice of the disposition of the
Personal Property Collateral as follows:
(1) Foothill shall give Guarantor and each holder of a
security interest in the Personal Property Collateral who has filed with
Foothill a written request for notice, a notice in writing of the time and place
of public sale, or, if the sale is a private sale or some other disposition
other than a public sale is to be made of the Personal Property Collateral, then
the time on or after which the private sale or other disposition is to be made;
(2) The notice shall be personally delivered or mailed,
postage prepaid, to Guarantor as provided in Section 10, at least 10 days before
--------
the date fixed for the sale, or at least 10 days before the date on or after
which the private sale or other disposition is to be made; no notice needs to be
given prior to the disposition of any portion of the Personal Property
Collateral that is perishable or threatens to decline speedily in value or that
is of a type customarily sold on a recognized market. Notice to Persons
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<PAGE>
other than Guarantor claiming an interest in the Personal Property Collateral
shall be sent to such addresses as they have furnished to Foothill;
(3) If the sale is to be a public sale, Foothill also shall
give notice of the time and place by publishing a notice one time at least 10
days before the date of the sale in a newspaper of general circulation in the
county in which the sale is to be held;
(j) [Intentionally omitted;]
(k) [Intentionally omitted;]
(l) [Intentionally omitted;]
(m) [Intentionally omitted;]
(n) Any deficiency which exists after disposition of the
Collateral as provided above will be paid immediately by Guarantor up to the
maximum amount, if any, of Guarantor's liability under the Guaranty. Any excess
will be promptly returned to Guarantor, without interest and subject to the
rights of third parties, by Foothill.
Except as required by law, Foothill may take any or all of the foregoing action
without demand, presentment, protest, advertisement or notice of any kind to or
upon Guarantor or any other person. Anything in this Agreement to the contrary
notwithstanding, unless a Triggering Event has occurred and is continuing,
Foothill (a) shall not exercise any of its default remedies with respect to the
Flagstar Bonds, and (b) shall not exercise any of its default remedies with
respect to the Investment Property.
7.2 REMEDIES CUMULATIVE. Foothill's rights and remedies under
-------------------
this Agreement and the other Loan Documents shall be cumulative. Foothill shall
have all other rights and remedies not inconsistent herewith as provided under
the Code, by law, or in equity. No exercise by Foothill of one right or remedy
shall be deemed an election,and no waiver by Foothill of any Event of Default on
Borrower's part shall be deemed a continuing waiver. No delay by Foothill shall
constitute a waiver, election, or acquiescence by it.
8. TAXES AND EXPENSES REGARDING THE COLLATERAL.
If Guarantor fails to pay any monies (whether taxes, rents,
assessments, insurance premiums, or otherwise) due to third persons or entities,
or fails to
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<PAGE>
make any deposits or furnish any required proof of payment or deposit, all as
required under the terms of this Agreement, then, to the extent that Foothill
determines that such failure, by Guarantor reasonably could be expected to have
a material adverse effect on Foothill's interests in the Collateral, in its
discretion and without prior notice to Guarantor, Foothill may do any or all of
the following: (a) make payment of the same or any part thereof; (b) set up such
reserves in Borrower's loan account as Foothill reasonably deems necessary to
protect Foothill from the exposure created by such failure; or (c) obtain and
maintain insurance policies of the type described in Section 4.6 hereof insuring
-----------
Guarantor's ownership and use of the Collateral, and take any action with
respect to such policies as Foothill reasonably deems prudent. Any amounts paid
or deposited by Foothill shall constitute Foothill Expenses, shall immediately
become additional Secured Obligations, shall bear interest at the applicable
rate described in the Loan Document, and shall be secured by the Collateral. Any
payments made by Foothill shall not constitute an agreement by Foothill to make
similar payments in the future or a waiver by Foothill of any Event of Default
under this Agreement. Foothill need not inquire as to, or contest the validity
of, any such expense, tax, security interest, encumbrance, or lien and the
receipt of the usual official notice for the payment thereof shall for the
purposes of this Agreement be conclusive evidence that the same was validly due
and owing. Foothill shall use its best efforts to provide notice to Guarantor of
any action taken by it under this Section 8.
9. WAIVERS; INDEMNIFICATION.
9.1 DEMAND; PROTEST; ETC. To the fullest extent permitted by
--------------------
applicable law, Guarantor waives demand, protest, notice of protest, notice of
default or dishonor, notice of payment and nonpayment, notice of any default,
nonpayment at maturity, release, compromise, settlement, extension, or renewal
of accounts, documents, instruments, chattel paper, and guarantees at any time
held by Foothill on which Guarantor may in any way be liable.
9.2 FOOTHILL'S LIABILITY FOR COLLATERAL. So long as Foothill
-----------------------------------
complies with its obligations, if any, under Section 9207 of the Code, Foothill
shall not in any way or manner be liable or responsible for: (a) the safekeeping
of the Collateral; (b) any loss or damage thereto occurring or arising in any
manner or fashion from any cause; (c) any diminution in the value thereof; or
(d) any act or default of any carrier, warehouseman, bailee, forwarding agency,
or other Person; and (e) risk of loss, damage, or destruction of the Collateral.
9.3 INDEMNIFICATION. Guarantor agrees to defend, indemnify,
---------------
save, and hold Foothill and its officers, employees, and agents harmless
against: (a) all demands, claims, and liabilities claimed or asserted by any
other Person, and (b) all losses (including reasonable attorneys fees and
disbursements) in any way suffered, incurred, or paid by
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<PAGE>
Foothill as a result of or in any way arising out of, or related to transactions
with Borrower or Guarantor, under this Agreement and any other Loan Documents.
Guarantor shall have no obligation under this Section 9.3: (a) with respect to
-----------
indemnification of any liability that a court of competent jurisdiction finally
determines to have resulted from the gross negligence or willful misconduct of
the indemnified person; (b) with respect to any settlement in excess of $250,000
made without Guarantor's consent (which shall not be unreasonably withheld,
conditioned, or delayed and which consent need not be obtained if Guarantor, or
Borrower is in default of its obligations under this Section 9.3); or (c)
-----------
without Guarantor's consent (which shall not be reasonably withheld,
conditioned, or delayed), for the fees and disbursements of more than one
separate firm of attorneys for all indemnified persons relative to a
indemnification of any particular liability. This provision shall survive full
and final payment in cash of the Secured Obligations and the termination of all
commitments of Foothill to extend credit to Borrower or Guarantor for a period
of 2 years.
9.4 WAIVERS. (a) To the fullest extent permitted by applicable
-------
law, Guarantor hereby waives: (i) notice of acceptance hereof; (ii) notice of
any loans or other financial accommodations made or extended under the Loan
Agreement, or the creation or existence of any Obligations; (iii) notice of the
amount of the Obligations, subject, however, to Guarantor's right to make
inquiry of Foothill to ascertain the amount of the Obligations at any reasonable
time; (iv) notice of any adverse change in the financial condition of Borrower
or of any other fact that might increase Guarantor's risk hereunder; (v) notice
of presentment for payment, demand, protest, and notice thereof as to any
instrument among the Loan Documents; (vi) notice of any unmatured Event of
Default or Event of Default under the Loan Agreement; and (vii) all other
notices (except if such notice is specifically required to be given to Guarantor
under this Agreement) and demands to which Guarantor might otherwise be
entitled.
(b) To the fullest extent permitted by applicable law, Guarantor hereby
waives the right by statute or otherwise to require Foothill to institute suit
against Borrower or to exhaust any rights and remedies which Foothill has or may
have against Borrower. Guarantor further waives any defense arising by reason
of any disability or other defense (other than the defense that the Obligations
shall have been fully and finally indefeasibly paid) of Borrower or by reason of
the cessation from any cause (other than that the Obligations shall have been
fully and finally indefeasibly paid) whatsoever of the liability of Borrower in
respect thereof.
(c) To the fullest extent permitted by applicable law, Guarantor hereby
waives: (i) any rights to assert against Foothill any defense (legal or
equitable), set-off, counterclaim, or claim which Guarantor may now or at any
time hereafter have against Borrower or any other party liable to Foothill on
account of or with respect to the
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<PAGE>
Obligations; (ii) any defense, set-off, counterclaim, or claim, of any kind or
nature, arising directly or indirectly from the present or future sufficiency,
validity, or enforceability of the Obligations; (iii) any defense arising by
reason of any claim or defense based upon an election of remedies by Foothill
including, to the extent applicable, the provisions of (S)(S) 580d and 726 of
the California Code of Civil Procedure, or any similar law of California or any
other jurisdiction; (iv) the benefit of any statute of limitations affecting
Guarantor's liability hereunder or the enforcement thereof.
(d) To the fullest extent permitted by applicable law, Guarantor hereby
waives any right of subrogation Guarantor has or may have as against Borrower
with respect to the Obligations. In addition, Guarantor hereby waives any right
to proceed against Borrower, now or hereafter, for contribution, indemnity,
reimbursement, or any other suretyship rights and claims (irrespective of
whether direct or indirect, liquidated or contingent), with respect to the
Obligations. Guarantor also hereby waives any right to proceed or to seek
recourse against or with respect to any property or asset of Borrower.
Guarantor hereby agrees that, in light of the waivers contained in this Section,
Guarantor shall not be deemed to be a "creditor" (as that term is defined in the
Bankruptcy Code or otherwise) of Borrower, whether for purposes of the
application of Sections 547 or 550 of the United States Bankruptcy Code or
otherwise.
(e) If any of the Secured Obligations at any time are secured by a mortgage
or deed of trust upon real property, Foothill may elect, in its sole discretion,
upon a default with respect to the Secured Obligations, to foreclose such
mortgage or deed of trust judicially or nonjudicially in any manner permitted by
law, before or after enforcing this Agreement, without diminishing or affecting
the liability of Guarantor hereunder. Guarantor understands that (a) by virtue
of the operation of California's antideficiency law applicable to nonjudicial
foreclosures, an election by Foothill nonjudicially to foreclose such a mortgage
or deed of trust probably would have the effect of impairing or destroying
rights of subrogation, reimbursement, contribution, or indemnity of Guarantor
against Borrower or guarantors or sureties, and (b) absent the waiver given by
Guarantor herein, such an election might estop Foothill from enforcing this
Agreement against Guarantor. Understanding the foregoing, and understanding
that Guarantor is hereby relinquishing a defense to the enforceability of this
Agreement, Guarantor hereby waives any right to assert against Foothill any
defense to the enforcement of this Agreement, whether denominated "estoppel" or
otherwise, based on or arising from an election by Foothill nonjudicially to
foreclose any such mortgage or deed of trust. Guarantor understands that the
effect of the foregoing waiver may be that Guarantor may have liability
hereunder for amounts with respect to which Guarantor may be left without rights
of subrogation, reimbursement, contribution, or indemnity against Borrower or
guarantors or sureties. Guarantor also agrees that the "fair market value"
provisions of
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<PAGE>
Section 580a of the California Code of Civil Procedure shall have no
applicability with respect to the determination of Guarantor's liability under
this Agreement.
(f) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION
SET FORTH IN THIS AGREEMENT, GUARANTOR HEREBY WAIVES, TO THE MAXIMUM EXTENT SUCH
WAIVER IS PERMITTED BY LAW, ANY AND ALL DEFENSES ARISING DIRECTLY OR INDIRECTLY
UNDER ANY ONE OR MORE OF CALIFORNIA CIVIL CODE (S)(S) 2808, 2809, 2810, 2815,
2819, 2820, 2821, 2838, 2839, 2845, 2848, 2849, AND 2850, TO THE EXTENT
APPLICABLE, CALIFORNIA CODE OF CIVIL PROCEDURE (S)(S) 580A, 580B, 580C, 580D,
AND 726, AND, TO THE EXTENT APPLICABLE, CHAPTER 2 OF TITLE 14 OF THE CALIFORNIA
CIVIL CODE.
(g) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION
SET FORTH IN THIS AGREEMENT, GUARANTOR HEREBY WAIVES ALL RIGHTS AND DEFENSES
ARISING OUT OF AN ELECTION OF REMEDIES BY FOOTHILL, EVEN THOUGH THAT ELECTION OF
REMEDIES, SUCH AS A NONJUDICIAL FORECLOSURE WITH RESPECT TO SECURITY FOR A
SECURED OBLIGATION, HAS DESTROYED GUARANTOR'S RIGHTS OF SUBROGATION AND
REIMBURSEMENT AGAINST THE BORROWER BY THE OPERATION OF SECTION 580D OF THE CODE
OF CIVIL PROCEDURE OR OTHERWISE.
10. NOTICES.
All notices and other communications hereunder to Foothill shall be in
writing and shall be mailed, sent or delivered in accordance with the Loan
Agreement and all notices and other communications hereunder to Guarantor shall
be in writing and shall be mailed, sent or delivered in care of Borrower in
accordance with the Loan Agreement.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND
ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER,
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN
CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE
AND FEDERAL COURTS
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<PAGE>
LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, PROVIDED, HOWEVER,
THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY
BE BROUGHT, AT FOOTHILL'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE
FOOTHILL ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY
MAY BE FOUND. EACH OF GUARANTOR AND FOOTHILL WAIVES, TO THE EXTENT PERMITTED
UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM
NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN
ACCORDANCE WITH THIS SECTION 11.
----------
GUARANTOR AND FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. GUARANTOR AND FOOTHILL REPRESENT THAT EACH HAS REVIEWED THIS
WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
12. DESTRUCTION OF GUARANTOR'S DOCUMENTS.
All documents, schedules, agings, or other papers delivered to
Foothill may be destroyed or otherwise disposed of by Foothill four (4) months
after they are delivered to or received by Foothill, unless Guarantor requests,
in writing, the return of said documents, schedules or other papers and makes
arrangements, at Guarantor's expense, for their return.
13. GENERAL PROVISIONS.
13.1 EFFECTIVENESS. This Agreement shall be binding and deemed
-------------
effective when executed by Guarantor and accepted and executed by Foothill.
13.2 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
----------------------
the benefit of the respective successors and assigns of each of the parties;
provided, however, that Guarantor may not assign this Agreement or any rights or
duties hereunder without Foothill's prior written consent and any prohibited
assignment shall be absolutely
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<PAGE>
void. No consent to an assignment by Foothill shall release Guarantor from its
Secured Obligations. Foothill may assign this Agreement and its rights and
duties hereunder in accordance with the Loan Agreement, and no consent or
approval by Guarantor is required in connection with any such assignment. In
accordance with the Loan Agreement, Foothill reserves the right to sell, assign,
transfer, negotiate, or grant participations in all or any part of, or any
interest in Foothill's rights and benefits hereunder. In accordance with the
Loan Agreement, Foothill may disclose all documents and information which
Foothill now or hereafter may have relating to Guarantor or Guarantor's
business. To the extent that Foothill assigns its rights and obligations to a
third Person in accordance with the Loan Agreement, Foothill thereafter shall be
released from such assigned obligations to Guarantor and such assignment shall
effect a novation between Guarantor and such third Person.
13.3 SECTION HEADINGS. Headings and numbers have been set forth
----------------
herein for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Agreement.
13.4 INTERPRETATION. Neither this Agreement nor any uncertainty or
--------------
ambiguity herein shall be construed or resolved against Foothill or Guarantor,
whether under any rule of construction or otherwise. On the contrary, this
Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.
13.5 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
--------------------------
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
13.6 AMENDMENTS IN WRITING. This Agreement can only be amended by
---------------------
a writing signed by both Foothill and Guarantor.
13.7 COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
Delivery of an executed counterpart of this Agreement by telefacsimile shall be
equally as effective as delivery of an original executed counterpart of this
Agreement. Any party delivering an executed counterpart of this Agreement by
telefacsimile also shall deliver an original executed counterpart of this
Agreement but the failure to deliver an original executed counterpart shall not
affect the validity, enforceability, and binding effect of this Agreement.
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<PAGE>
13.8 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the incurrence
----------------------------------------
or payment of the Secured Obligations by Guarantor or the transfer by Guarantor
to Foothill of any property of Guarantor should for any reason subsequently be
declared to be void or voidable under any state or federal law relating to
creditors' rights, including provisions of the Bankruptcy Code relating to
fraudulent conveyances, preferences, and other voidable or recoverable payments
of money or transfers of property (collectively, a "Voidable Transfer"), and if
Foothill is required to repay or restore, in whole or in part, any such Voidable
Transfer, or elects to do so upon the reasonable advice of its counsel, then, as
to any such Voidable Transfer, or the amount thereof that Foothill is required
or elects to repay or restore, and as to all reasonable costs, expenses, and
attorneys fees of Foothill related thereto, the liability of Guarantor
automatically shall be revived, reinstated, and restored and shall exist as
though such Voidable Transfer had never been made.
13.9 TERMINATION. Upon the full and final payment in cash of the
-----------
Secured Obligations and the termination of all commitments of Foothill to extend
credit to Borrower or Guarantor, Foothill shall promptly terminate and release
its security interests in the Collateral, execute and deliver any necessary
financing statement terminations or releases, and return to Guarantor any
Collateral that was in the possession of Foothill, provided that, with respect
--------
to any loss or damage Foothill may incur as a result of dishonored checks or
other items of payment received by Foothill and applied to the Secured
Obligations, Foothill shall, at its option, (i) have received a written
agreement, executed by Borrower or Guarantor (as required by Foothill in its
sole discretion) and by any Person whose loans or other advances to Borrower or
Guarantor are used in whole or in part to satisfy the Secured Obligations,
indemnifying Foothill from any such loss or damage; or (ii) have retained such
monetary reserves or Liens on the Collateral for such period of time as
Foothill, in its reasonable discretion, may deem necessary to protect Foothill
from any such loss or damage. All reasonable expenses incurred by Foothill in
connection with the termination of the security interests granted to Foothill in
connection with this agreement shall be the sole expense of Guarantor.
- Remainder of page intentionally left blank -
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed at Los Angeles, California.
KOO KOO ROO, INC.,
a Delaware corporation
By
---------------------------------
Its
---------------------------------
FOOTHILL CAPITAL CORPORATION, a
California corporation
By
---------------------------------
Its
---------------------------------
-S-1
<PAGE>
EXHIBIT 23.1
Board of Directors
Family Restaurants, Inc.:
We consent to incorporation by reference in the registration statement (No. 333-
_______) on Form S-4 of Family Restaurants, Inc. as of July 1, 1998, relating to
the consolidated balance sheets of Family Restaurants, Inc. and its subsidiaries
as of December 28, 1997 and December 29, 1996, and the related consolidated
statements of operations, common stockholders' equity (deficit) and cash flows
for the years ended December 28, 1997, December 29, 1996 and December 31, 1995
and the related financial statement schedule, which report appears in the
December 28, 1997 Annual Report on Form 10-K of Family Restaurants, Inc. and to
the reference to our firm under the heading "Experts" in the Proxy
Statement/Prospectus.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Orange County, California
June 30, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Koo Koo Roo, Inc.
We hereby consent to the incorporation by reference in the Proxy
Statement/Prospectus constituting as part of this Registration Statement on
Form S-4 of our report dated March 20, 1998, relating to the consolidated
financial statements of Koo Koo Roo, Inc. appearing in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
We also consent to the reference to us under the caption "Experts" in the
Proxy Statement/Prospectus.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
Los Angeles, California
June 26, 1998
<PAGE>
EXHIBIT 99.1
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KOO KOO ROO, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF KOO KOO ROO, INC. FOR THE SPECIAL MEETING ON SEPTEMBER , 1998
The undersigned hereby constitutes and appoints A. William Allen, III,
William M. McKay and Ronald D. Garber, his true and lawful agent and proxy
with full power of substitution to represent, and to vote the shares of the
undersigned at the Special Meeting of Stockholders of Koo Koo Roo, Inc. to be
held at at a.m. and at any adjournment or postponement
thereof on all matters coming before said meeting.
This proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this proxy
will be voted FOR the stated proposal.
SEE REVERSE SIDE
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FOLD AND DETACH HERE
<PAGE>
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE STATED PROPOSAL
Please mark
your votes
as in this [X]
example.
1. To approve and adopt the Agreement and Plan of Merger (the "Merger
Agreement"), dated as of June 9, 1998, by and among Family Restaurants,
Inc. ("FRI"), FRI-Sub, Inc. ("Merger-Sub") and Koo Koo Roo, Inc. ("KKR"),
pursuant to which Merger-Sub will be merged with and into KKR with KKR
being the surviving corporation in the merger (the "Merger") and becoming
an indirect wholly owned subsidiary of FRI.
FOR AGAINST ABSTAIN
[_] [_] [_]
In their discretion, the proxyholders are authorized to vote upon all matters
incident to the conduct of the Special Meeting and such others matters, if
any, as may properly come before the Special Meeting or any postponement or
adjournment thereof.
THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL MEETING
AND THE PROXY STATEMENT/PROSPECTUS DATED AUGUST , 1998 RELATING TO THE
SPECIAL MEETING.
PLEASE SIGN, DATE, AND MAIL THIS PROXY PROMPTLY IN THE RETURN ENVELOPE whether
or not you expect to attend the Special Meeting. You may nevertheless vote in
person if you do attend.
, 1998
Signature _______________________________ Date ______________________________
Signature if held jointly _______________ Date ______________________________
Note: Please sign this proxy exactly as name appears herein. If shares are
held by joint tenants, both should sign. Attorneys-in-fact, executors,
administrators, trustees, guardians, corporation officers or others signing in
a representative capacity should indicate the capacity in which they are
signing.
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FOLD AND DETACH HERE
