<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Company [X]
Filed by a Party other than the Company [_]
Check the appropriate box:
[_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
[_] Preliminary Proxy Statement RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
KOO KOO ROO, INC.
(NAME OF COMPANY AS SPECIFIED IN ITS CHARTER)
N/A
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN COMPANY)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $.01 per share, of Koo Koo Roo, Inc. ("Common
Stock")
(2) Aggregate number of securities to which transaction applies:
55,000,000 (54,480,966 outstanding shares of Common Stock)
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
$1.703125 (average of high and low prices on June 29, 1998)
(4) Proposed maximum aggregate value of transaction:
$93,671,875
(5) Total fee paid:
Fee offset pursuant to Rule 14a-6(j) (see below)
[_] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.: Form S-4 (File No. 333-
58281)
(3) Filing Party: Family Restaurants, Inc.
(4) Date Filed: July 1, 1998
As filed with the Securities and Exchange Commission on July 7, 1998
<PAGE>
[LOGO OF KOO KOO ROO, INC.(R)]
MERGER PROPOSED
YOUR VOTE IS VERY IMPORTANT
September 14, 1998
To our Stockholders:
You are cordially invited to attend the special meeting of stockholders of
Koo Koo Roo, Inc. to be held on October 30, 1998 at the Hyatt Regency Irvine,
17900 Jamboree Road, Irvine, California at 9:00 a.m. 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. You are
being offered shares of common stock of Family Restaurants, Inc., which will
be renamed Koo Koo Roo Enterprises, Inc. upon consummation of the merger.
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: KKRE). Prior
to the consummation of the merger, there has been no established trading
market for such common stock. 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 11 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.
/s/ Lee A. Iacocca
Lee A. Iacocca
Acting Chairman of the Board
/s/ A. William Allen, III
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 September 14, 1998 and first mailed to
stockholders on September 17, 1998.
<PAGE>
[LOGO OF KOO KOO ROO, INC.(R)]
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 30, 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 October 30, 1998 at the Hyatt Regency Irvine, 17900
Jamboree Road, Irvine, California at 9:00 a.m. local time (the "Special
Meeting"), for the following purposes:
1. To consider and vote upon a proposal (the "Merger 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,
(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,
resulting in the former stockholders of KKR owning approximately 31% of the
outstanding common stock of FRI immediately following the Merger, and (iii)
FRI will be renamed Koo Koo Roo Enterprises, Inc.
2. To approve any proposal to adjourn the Special Meeting in the event
that the Chairman of the Special Meeting determines, in his sole
discretion, that such adjournment is necessary or appropriate (the
"Adjournment Proposal").
3. 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
September 10, 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.
The Merger Proposal requires the affirmative vote of the holders of a
majority of the KKR common stock outstanding and entitled to vote thereon. The
Adjournment Proposal requires the affirmative vote of the holders of a
majority of the KKR common stock entitled to vote and present in person or
represented by proxy at 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,
/s/ RONALD D. GARBER
RONALD D. GARBER
Corporate Secretary
September 14, 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......................................... 3
SUMMARY.................................................................... 4
The Companies............................................................ 4
Recommendations to Stockholders.......................................... 4
Record Date; Voting Power................................................ 4
The Merger............................................................... 5
No Appraisal Rights...................................................... 5
Current Relationships and Transactions; Interests of Certain Persons..... 5
Recommendation of the Board of Directors of Koo Koo Roo.................. 5
Opinion of Sutro & Co. Incorporated...................................... 5
Conditions to the Merger................................................. 6
Termination of the Merger Agreement...................................... 6
Payment of Fees upon Termination......................................... 6
Amending or Waiving Terms of the Merger Agreement........................ 6
Regulatory Approvals..................................................... 6
Certain Federal Income Tax Consequences.................................. 7
Unaudited Pro Forma Combined Condensed Financial Information............. 7
Koo Koo Roo Common Stock Information..................................... 7
Listing of Koo Koo Roo Enterprises Common Stock.......................... 7
Koo Koo Roo Enterprises Common Stock Ownership........................... 7
Dividends After the Merger............................................... 7
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL INFORMATION........... 8
INTRODUCTION............................................................... 10
RISK FACTORS............................................................... 11
THE COMPANIES.............................................................. 16
THE COMBINED COMPANY....................................................... 17
THE MERGER................................................................. 19
Background of the Merger................................................. 19
Recommendation of the KKR Board; Reasons for the Merger.................. 22
Certain Projected Financial Information.................................. 24
Accounting Treatment..................................................... 26
Certain United States Federal Income Tax Consequences.................... 26
Regulatory and Third-Party Approvals..................................... 27
No Appraisal Rights...................................................... 28
Interests of Certain Persons in the Merger............................... 28
Restrictions on Resales by Affiliates.................................... 29
Litigation............................................................... 29
Cautionary Statement Concerning Forward-Looking Statements............... 29
OPINION OF SUTRO & CO. INCORPORATED........................................ 31
PRICE RANGE OF KKR COMMON STOCK............................................ 34
DIVIDEND POLICY............................................................ 34
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION............... 35
THE MERGER AGREEMENT....................................................... 41
The Merger............................................................... 41
Consideration to be Received in the Merger............................... 41
Exchange of Stock Certificates........................................... 42
</TABLE>
i
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Representations and Warranties.......................................... 42
Covenants of FRI........................................................ 43
Covenants of KKR........................................................ 45
Mutual Covenants........................................................ 47
Conditions.............................................................. 49
Termination............................................................. 50
Amendment and Waiver.................................................... 50
RELATED AGREEMENTS AND OTHER MATTERS...................................... 51
Bridge Loan Agreement................................................... 51
Hamlet Stock Purchase Agreement......................................... 51
New Indebtedness........................................................ 52
1998 Stock Incentive Plan............................................... 53
Shares to be Outstanding at Closing; FRI Stock Dividend................. 53
Apollo Warrant.......................................................... 53
THE SPECIAL MEETING....................................................... 54
Times and Places; Purposes.............................................. 54
Voting Rights; Votes Required for Approval.............................. 54
Accountants............................................................. 55
Proxies................................................................. 55
DIRECTORS AND MANAGEMENT OF THE COMPANY FOLLOWING THE MERGER.............. 56
Directors............................................................... 56
Committees of the Board of Directors.................................... 56
Compensation of Directors............................................... 56
Termination of VCU Plan................................................. 56
COMPARISON OF STOCKHOLDERS' RIGHTS........................................ 57
Authorized Capital...................................................... 57
Board of Directors...................................................... 57
Committees of the Board of Directors.................................... 58
Newly Created Directorships and Vacancies............................... 58
Removal of Directors.................................................... 58
Officers................................................................ 58
Special Meetings of Stockholders........................................ 58
Quorum at Stockholder Meetings.......................................... 59
Stockholder Action by Written Consent................................... 59
Advance Notice of Stockholder-Proposed Business or Director Nominations
at Annual Meetings..................................................... 59
Amendment of Governing Documents........................................ 61
DESCRIPTION OF COMPANY CAPITAL STOCK FOLLOWING THE MERGER................. 62
Authorized Capital Stock................................................ 62
Common Stock............................................................ 62
Preferred Stock......................................................... 62
Preemptive Rights....................................................... 63
Delaware Antitakeover Statute........................................... 63
Transfer Agent and Registrar............................................ 63
Nasdaq National Market Listing; Delisting and Deregistration of KKR
Common Stock........................................................... 63
EXPERTS................................................................... 64
LEGAL MATTERS............................................................. 64
SUBMISSION OF FUTURE STOCKHOLDER PROPOSALS................................ 64
WHERE YOU CAN FIND MORE INFORMATION....................................... 64
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
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<S> <C>
DELIVERY OF FRI REPORTS WITH PROXY STATEMENT/PROSPECTUS................... 66
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. June 28, 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: KKRE) for each
share of Koo Koo Roo common stock you own. Immediately following the merger,
former stockholders of Koo Koo Roo will own approximately 31% of the
outstanding common stock of Koo Koo Roo Enterprises.
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 on or
about October 30, 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 October
30, 1998 at the Hyatt Regency Irvine, 17900 Jamboree Road, Irvine,
California at 9:00 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 September
10, 1998, the
1
<PAGE>
record date relating to the stockholder meeting, may vote on the merger at
the stockholder meeting.
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 RISKS ARE ASSOCIATED WITH THE MERGER?
A: In addition to the other information in this Proxy Statement/Prospectus,
the following risk factors (and the other risk factors identified under the
caption "Risk Factors") should be considered carefully in evaluating the
merger proposal:
. the leveraged capital structure of the resulting company;
. the history of operating losses of Koo Koo Roo and Family Restaurants;
. potential difficulties in combining the operations of Koo Koo Roo and
Family Restaurants;
. the geographic concentration of the combined company's restaurants;
. potential increases in competition;
. difficulties in achieving future growth;
. contingent liability for costs related to divested restaurant leases;
. control by a principal stockholder; and
. the combined company's reliance on key personnel.
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.
2
<PAGE>
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:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, New York 10010
Phone Number: (800) 322-2885
3
<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 64.
THE COMPANIES
(SEE PAGES 16 THROUGH 18)
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 22 THROUGH 24)
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 PAGE 54)
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 54,622,765 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.
4
<PAGE>
THE MERGER
(SEE PAGES 19 THROUGH 30)
The merger agreement is described on pages 41 through 50 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 28)
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 PAGES 28 AND 29)
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 $1.1 million, assuming such officers'
employment with Koo Koo Roo is terminated in the event of the merger. Of such
amount, $930,000 will be payable as follows: Mr. Allen, Koo Koo Roo's Chief
Executive Officer, would receive approximately $320,000, John S. Kaufman, Koo
Koo Roo's President, would receive approximately $220,000, William M. McKay,
Koo Koo Roo's Chief Financial Officer, would
receive approximately $190,000, and Ronald D. Garber, Koo Koo Roo's Corporate
Secretary and General Counsel, would receive approximately $200,000. In
addition, Messrs. Allen, Kaufman, McKay and Garber would be entitled to
immediate vesting of options to purchase 519,200, 112,850, 261,200 and 111,200
shares of common stock, respectively, or 1,004,450 shares in the aggregate, at
an exercise price of $1.56 per share. Mr. Allen will also receive forgiveness
of a $50,000 loan payable to Koo Koo Roo, with Koo Koo Roo agreeing to pay
Mr. Allen's federal and state income tax liability attributable to the loan
forgiveness.
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 (of which 1,274,450 were unvested). 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 22 THROUGH 24)
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 PAGES 31 THROUGH 34)
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.
5
<PAGE>
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 49 AND 50)
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;
. 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 50)
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 48)
Koo Koo Roo must pay Family Restaurants a fee of $6 million if the merger
agreement is terminated as a result of the withdrawal or adverse modification
of the recommendation of the merger by the Koo Koo Roo Board or under certain
other circumstances in which another party combines with or acquires Koo Koo
Roo. Under certain other circumstances, Koo Koo Roo must pay Family
Restaurants' expenses (not to exceed $2 million) if the merger agreement is
terminated and another party combines with or acquires Koo Koo Roo.
AMENDING OR WAIVING TERMS OF THE MERGER AGREEMENT
(SEE PAGE 50)
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 PAGES 27 AND 28)
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
6
<PAGE>
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
15 and July 20, 1998, Koo Koo Roo and Family Restaurants, respectively, made
the required filings with the Department of Justice and the Federal Trade
Commission. Notice of early termination of all applicable Hart-Scott-Rodino Act
waiting periods has been received.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
(SEE PAGES 26 AND 27)
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 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.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(SEE PAGES 35 THROUGH 40)
See "Unaudited Pro Forma Combined Condensed Financial Information" to obtain
the relative contribution of Koo Koo Roo and Family Restaurants to the pro
forma stockholders' equity, sales and net loss from continuing operations of
the combined company.
KOO KOO ROO COMMON STOCK INFORMATION
(SEE PAGE 34)
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 September 10, 1998, Koo Koo Roo
common stock closed at $0.97 per share.
LISTING OF KOO KOO ROO ENTERPRISES COMMON STOCK
(SEE PAGE 44)
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: KKRE. Although the common stock of Koo Koo Roo
Enterprises is not expected to meet the National Market's initial or continued
listing requirements with respect to the $5.00 per share minimum bid price, Koo
Koo Roo Enterprises has been granted a waiver of such requirements by Nasdaq
that is subject to review on an annual basis. In addition Koo Koo Roo
Enterprises will be required to maintain compliance with the $1.00 per share
minimum bid price requirement. Family Restaurants common stock is not currently
listed or traded on any public exchange.
KOO KOO ROO ENTERPRISES COMMON STOCK OWNERSHIP
(SEE PAGE 13)
After the merger, Apollo FRI Partners, L.P. will beneficially own
approximately 56% of the outstanding common stock of Koo Koo Roo Enterprises
and consequently will be able to control the election of Directors of Koo Koo
Roo Enterprises and the results of virtually all other matters submitted to a
vote of stockholders.
DIVIDENDS AFTER THE MERGER
(SEE PAGE 34)
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.
7
<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 SIX MONTHS ENDED
--------------------------------------------------- --------------------------------
HISTORICAL HISTORICAL
-------------------------------------- PRO FORMA(1) ------------------ PRO FORMA(1)
DECEMBER 31, DECEMBER 29, DECEMBER 28, DECEMBER 28, JUNE 29, JUNE 28, JUNE 28,
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 $238,081 $233,401 $278,467
Operating loss(2)....... (57,224) (22,779) (11,608) (32,035) (4,987) (894) (15,842)
Interest expense, net... (65,277) (36,725) (19,476) (22,093) (8,962) (11,826) (13,422)
Net income (loss)(2)(3). (123,709) 137,040 (31,593) (55,198) (14,301) (12,974) (29,261)
Pro forma basic and
diluted income (loss)
per common
share(2)(3)(4)......... $ (1.03) $ 1.14 $ (0.26) $ (0.32) $ (0.12) $ (0.11) $ (0.17)
Pro forma weighted
average number of
common shares
outstanding(4)......... 120,068 120,068 120,068 174,612 120,068 120,068 174,612
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------- -----------------
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 $27,173 $ 45,066
Operating loss(5)............. (7,696) (10,094) (19,272) (5,198) (14,370)
Interest income (expense),
net.......................... 126 1,145 197 428 (728)
Net loss before dividends on
preferred stock(5)(6)........ (6,911) (9,285) (29,422) (6,392) (16,118)
Net loss applicable to common
stockholders(5)(6)........... (6,911) (12,333) (32,806) (8,488) (16,150)
Basic and diluted loss per
common share(5)(6)........... $ (0.57) $ (0.83) $ (1.55) $ (0.48) $ (0.36)
Weighted average number of
common shares outstanding.... 12,094 14,878 21,210 17,601 44,429
</TABLE>
<TABLE>
<CAPTION>
FRI
JUNE 28, KKR JUNE JUNE 28,
1998 30, 1998 1998
HISTORICAL HISTORICAL PRO FORMA(7)
---------- ---------- ------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET INFORMATION:
Total assets................................ $285,169 $57,665 $389,664
Total long-term debt and capital lease
obligations................................ 217,087 16,057 239,762
Stockholders' equity (deficit).............. (39,168) 28,288 26,832
</TABLE>
(footnotes on following page)
8
<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, and $2,640 in the six months ended June 29, 1997. 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 six months ended June 29, 1997 and
June 28, 1998 give effect to the FRI Stock Dividend (defined below) and the
exchange of the Apollo Warrant (defined below) for shares of FRI Common
Stock. See "Related Agreements and Other Matters" and the following
schedule.
(AMOUNTS IN THOUSANDS, EXCEPT FRI STOCK DIVIDEND RATIO)
<TABLE>
<S> <C>
FRI Common Stock outstanding immediately preceding the exchange of
the
Apollo Warrant...................................................... 988
Exchange of the Apollo Warrant....................................... + 15
---------
FRI Common Stock outstanding immediately preceding the Merger........ 1,003
FRI Stock Dividend ratio............................................. X 119.709
---------
Shares of pro forma Company Common Stock held by FRI Common
Stockholders immediately preceding the Merger....................... 120,068
Shares of pro forma Company Common Stock held by KKR Common
Stockholders immediately preceding the Merger....................... + 54,544
---------
Pro forma Company Common Stock outstanding immediately following the
Merger.............................................................. 174,612
=========
</TABLE>
(5) Includes restructuring and other charges, including store closings, of
$11,757 in the six months ended June 30, 1998. See Note 5 of Notes to KKR's
Condensed Consolidated Financial Statements as of, and for the six months
ended, June 30, 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."
9
<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 October 30, 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") and a proposal to adjourn the
Special Meeting in the event that the Chairman of the Special Meeting
determines, in his sole discretion, that such adjournment is necessary or
appropriate (the "Adjournment 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.
10
<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 June 28, 1998, on a combined pro forma basis, the Company's total
indebtedness would have been approximately $239.8 million (net of discount),
its total equity would have been approximately $26.8 million and its total
capitalization would have been approximately $266.6 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
because of the amount of indebtedness expected to be outstanding upon
consummation of the Merger 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."
HISTORICAL OPERATING LOSSES AND NET LOSSES OF FRI AND FOR THE COMPANY ON A PRO
FORMA BASIS
For the fiscal years ended December 28, 1997 and December 29, 1996, FRI
recorded a net loss of $31.6 million and net loss before extraordinary item
and gain on sale of division of $60.4 million, respectively. For the same
periods, FRI recorded net operating losses of $11.6 million and $22.8 million,
respectively. On a combined pro forma basis the Company would have had
operating losses of approximately $15.8 and $32.0 million for the six months
ended June 28, 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
11
<PAGE>
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.
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.
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
12
<PAGE>
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.
CONTROL BY PRINCIPAL STOCKHOLDER
Upon consummation of the Merger, Apollo FRI Partners, L.P. ("Apollo") will
own approximately 56% of the outstanding Company Common Stock and have the
ability to control the election of directors and the results of virtually all
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.
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, 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, 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.
13
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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.
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 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.
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
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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."
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. In addition, the Company Common
Stock is not expected to meet the Nasdaq National Market's initial or
continued listing requirements with respect to the $5.00 per share minimum bid
price. Even though the Company has received a waiver of this requirement,
Nasdaq has indicated that such waiver is subject to review on an annual basis.
In addition, the Company will be required to maintain compliance with the
$1.00 per share minimum bid price requirement. 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 AND FINANCIAL PROJECTIONS
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. Forward-looking
statements and financial projections are not guarantees of performance and are
subject to a number of risks and uncertainties, many of which are beyond the
ability of the Company to control or predict, 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 or projections.
None of FRI, KKR or the Company undertake any obligation to update these
forward looking statements or projections. See "The Merger--Certain Projected
Financial Information" and "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 and
Color Me Mine operations, management of the Company intends to continue
focusing on the Company's core restaurant operations.
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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
acquisition transactions involving additional restaurant concepts or other
complimentary retail ventures that would permit KKR to leverage its real
estate and operational infrastructure. The only significant transactions
completed were the March 1996 acquisition of 90% of the common stock of Color
Me Mine, which was acquired in a pooling transaction for 377,000 shares of
KKR's common stock (valued at $900,000 for financial reporting purposes), and
the May 1997 acquisition of the Hamburger Hamlet restaurants, which were
acquired in a purchase transaction for $11.7 million (consisting of $9.7
million in cash and 150,000 shares of KKR's common stock (subject to
adjustment), plus the assumption of certain debt and capital leases related to
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, including transactions
involving the sale of only certain restaurant locations, the sale of certain
or all of the restaurant locations together with certain other selected
assets, the sale of KKR's real property assets and leasehold interests, the
sale of additional KKR convertible preferred stock and the contribution of
selected assets in joint venture transactions. Because none of these
alternatives provided opportunities in which KKR could significantly leverage
its operating structure or expand its operations, none were considered by KKR
to be superior to a strategic acquisition transaction involving the entire
company. None of the discussions with such parties resulted in offers for
strategic transactions with, or for, KKR.
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
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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 from a price per share of $4.9688 on October 1, 1997, with
approximately 23,736,000 shares outstanding as of such date, to a price per
share of $1.5625 on March 26, 1998, with approximately 47,359,000 shares
outstanding as of such date (such per share prices representing the last
reported sales price on the Nasdaq Stock Market's National Market System (the
"Nasdaq National Market") on each such date).
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"). Apollo Advisors is an affiliate of Apollo, which
currently beneficially owns approximately 83% of the common stock of FRI. 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. Throughout the month of April, the
parties' advisors discussed structuring issues, principally related to tax and
accounting issues, compliance with contractual restrictions contained in
certain of FRI's debt agreements, and the internal organization of the
operating entities to be owned by the surviving corporation. On April 27,
1998, representatives of FRI and Libra made a presentation to the KKR Board.
The presentation involved a revised
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<PAGE>
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. Additionally, in order to comply with restrictions under FRI's
existing debt instruments, the transaction would be structured to include a
separate acquisition of The Hamlet Group, Inc., a wholly owned subsidiary of
KKR ("Hamlet"), which would be financed by the issuance of new 14% Senior
Secured Discount Notes (the "New MRD Notes") by a subsidiary of FRI. 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. 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, including
the requisite percentage of the shares of KKR common stock necessary to
approve the Merger, the timing, nature and type of material adverse change to
the operations of KKR that would permit the other party to terminate the
Merger Agreement, the commitment of FRI to publicly list the shares of FRI
common stock to be issued in the Merger, the terms under which KKR could
terminate the Merger Agreement without liability to pursue an alternative
strategic transaction, the ability of KKR to enter into confidentiality
agreements in connection with alternative strategic transactions subsequent to
the execution of the Merger Agreement but prior to the consummation of the
Merger, the terms and conditions of a proposed termination fee payable to FRI,
and the maturity and terms of the bridge loan in the event of a termination of
the Merger Agreement.
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. During such
calls many of the remaining issues were resolved including, on June 7, 1998,
an agreement regarding the amount of the termination fee payable to FRI upon
the occurrence of certain events.
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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 $3
million bridge loan (earning interest at the prime rate as set by the Bank of
America National Trust and Savings Association) 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.
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
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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. The KKR Board also noted that any financing by KKR on
a stand-alone basis would be dilutive to existing stockholders yet would be
unlikely to address several important long-term issues, including future
access to capital and infrastructure utilization. In contrast, the KKR
Board viewed the transaction with FRI as addressing those important long-
term issues.
(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
costs), new store development and construction, information system
development and maintenance, physical plant, accounting and payroll;
(b) the belief that the combined company would have greater access to
working capital resources than KKR through its operating cash flows and
borrowings under its credit facility; and
(c) the belief that the combined company's relationship with Apollo
would provide visibility to a broader group of institutional investors
and greater access to debt and equity financing on favorable terms,
providing the combined company the opportunity to finance the expansion
of the Koo Koo Roo California Kitchen concept at a growth 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, including the exchange ratio
and the representations, warranties, covenants and conditions, and the
provisions that permit KKR to terminate the Merger Agreement under certain
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circumstances and upon the payment to FRI of a $6.0 million termination
fee. Based on the closing price of the KKR Common Stock on June 9, 1998,
the date the Merger Agreement was executed, this termination fee
represented approximately 3.5% of the fully diluted market capitalization
of KKR (assuming 60 million shares outstanding). The KKR Board considered
such termination fee to be reasonable in light of the range of fees payable
in comparable transactions. 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. In addition, the KKR
Board considered that the FRI common stock did not have an established
trading market, and the covenant of FRI to use its commercially reasonable
efforts to cause the Company Common Stock to be designated by the NASD as a
national market system security no later than the effective date of the
Merger (the "Effective Date") and to maintain the Company Common Stock on
the Nasdaq National Market or list the Company Common Stock on the New York
Stock Exchange or the American Stock Exchange for a period of five years
from the Effective Date. The KKR Board also considered that upon
consummation of the Merger, the Company would be controlled by Apollo, and
the overall positive impact the KKR Board believed such ownership would
have on the Company, based on its perception of Apollo's favorable
reputation in the capital markets and among institutional investors,
notwithstanding other possible effects of such ownership on the Company's
stockholders, including whether such ownership may discourage offers for
shares of the Company Common Stock at a premium.
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.
Although there has been a decrease in the price of KKR Common Stock since
the date the Merger Agreement was executed, due in part to the decline in the
general market and the decrease in the stock price of small capitalization
issues in particular, the KKR Board continues to recommend the Merger as of
the date of this Proxy Statement/Prospectus based on the factors described
above.
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.
CERTAIN PROJECTED FINANCIAL INFORMATION
KKR and FRI do not, as a matter of course, make public forecasts or
projections as to future sales, earnings or other income statement data, cash
flows or balance sheet and financial position information. However, in
connection with the evaluation of KKR by FRI to determine its interest in
pursuing a potential transaction and Sutro's review of fairness, from a
financial point of view, of the Merger, FRI's management prepared certain
projections (the "Projections"), which were provided to KKR, the KKR Board and
Sutro for their consideration and, therefore, a summary of the Projections is
included herein.
The Projections were not prepared with a view toward public disclosure or
compliance with published guidelines of the SEC or the American Institute of
Certified Public Accountants regarding forward-looking information or
generally accepted accounting principles. Neither KKR's nor FRI's independent
auditors, nor any other independent accountants, have compiled, examined, or
performed any procedures with respect to the prospective financial information
contained herein, nor have they expressed any opinion or given any form of
24
<PAGE>
assurance on such information or its achievability, and assume no
responsibility for, and disclaim any association with, the prospective
financial information. Furthermore, the Projections, which were prepared in
March 1998, necessarily made numerous assumptions, some (but not all) of which
are set forth below and many of which are beyond the control of KKR and FRI
and/or are no longer, or may prove not to have been, accurate. Additionally,
this information does not reflect revised prospects for KKR's and FRI's
businesses, changes in general business and economic conditions, or any other
transaction or event that has occurred or that may occur and that was not
anticipated at the time such information was prepared. Accordingly, such
information is not necessarily indicative of current or future performance,
which may be significantly less favorable than as set forth below, and should
not be regarded as a representation that they will be achieved. None of FRI,
KKR or the Company undertake any obligation to update the Projections. See
"The Merger--Cautionary Statement Concerning Forward-Looking Statements."
The Projections have been prepared by FRI based upon estimates of the
potential future growth and development of KKR and FRI's existing restaurant
concepts, Chi-Chi's and El Torito, through 2001, which FRI believed to be
reasonable at the time they were made. The estimates which follow for 1998
were based upon FRI's internal budgeted amounts for the year and a preliminary
1998 KKR budget, which was provided on March 2, 1998. KKR financial results
were included as of an assumed Effective Date at the beginning of fiscal
August 1998 in accordance with purchase accounting guidelines, although
operating margins were lowered somewhat from KKR's budget. In the Projections:
(i) new restaurant growth is assumed to be 13, 18 and 18 units in 1999, 2000
and 2001, respectively, for El Torito (including El Torito Express Grills); 1,
5 and 5 units in 1999, 2000 and 2001, respectively for Chi-Chi's; and 10, 30
and 50 units in 1999, 2000 and 2001, respectively, for Koo Koo Roo; (ii) 43
Chi-Chi's restaurants that were poorly performing or located in non-core
markets are assumed to be divested at the beginning of fiscal 1999; (iii)
comparable restaurant sales are assumed to grow at rates of 2.1%, 1.4% and
1.4% in 1999, 2000 and 2001, respectively, for El Torito; 3.2%, 4.7% and 4.4%
in 1999, 2000 and 2001, respectively, for Chi-Chi's; 2.0% in each of 1999,
2000 and 2001 for Koo Koo Roo; and 0.5% in each of 1999, 2000 and 2001 for the
Hamlet restaurants; (iv) KKR's Color Me Mine business is assumed to be
divested prior to the Effective Date; (v) Restaurant Level Cashflow (as
defined below) as a percent of sales is assumed to be 15.9%, 17.5% and 18.0%
in 1999, 2000 and 2001, respectively, for the existing FRI concepts (due to
the leverage from assumed increasing sales and continuing benefit of various
cost reduction and reengineering strategies); 17.3%, 19.5% and 19.8% in 1999,
2000 and 2001, respectively, for Koo Koo Roo; and 16.5% in each of 1999, 2000
and 2001 for the Hamlet restaurants, with the improvements in Koo Koo Roo and
Hamlet due to purchasing and distribution leverage, the implementation of new
management practices and various economies of scale; and (vi) general and
administrative expenses are assumed to decline as a percent of sales to 6.1%,
5.5% and 4.9%, respectively, in 1999, 2000 and 2001 (due to the leverage from
assumed increasing sales and elimination of redundant administrative
functions).
THE PROJECTIONS ARE NOT GUARANTEES OF PERFORMANCE. THE PROJECTIONS ARE
FORWARD LOOKING STATEMENTS THAT ARE SUBJECT TO A NUMBER OF RISKS,
UNCERTAINTIES AND ASSUMPTIONS, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE PROJECTED, INCLUDING THE RISKS DESCRIBED UNDER THE
CAPTION "RISK FACTORS" AND THE RISKS DESCRIBED IN THE DOCUMENTS INCORPORATED
HEREIN BY REFERENCE. IN ADDITION, SEVERAL OF THE ASSUMPTIONS THAT KKR AND FRI
BELIEVED TO BE REASONABLE AT THE TIME THE PROJECTIONS WERE CREATED ARE NO
LONGER ACCURATE, INCLUDING, WITHOUT LIMITATION: (I) THE EFFECTIVE DATE WILL BE
LATER THAN THE BEGINNING OF FISCAL AUGUST 1998; (II) FRI IS RECONSIDERING THE
EXTENT OF ITS CHI-CHI'S DIVESTMENT PROGRAM WHICH COULD BE EXPANDED TO
APPROXIMATELY 56 RESTAURANTS, A MAJORITY OF WHICH WILL STILL BE IN OPERATION
AT THE END OF FISCAL 1998 AND (III) ALTHOUGH RESTAURANT LEVEL CASHFLOW FOR
BOTH FRI AND KKR FOR THE FIRST EIGHT MONTHS OF FISCAL 1998 EXCEEDED THAT
GENERATED DURING THE SAME PERIOD IN FISCAL 1997, SUCH CASH FLOW IS BELOW 1998
BUDGETS. DUE TO THE ABOVE FACTORS IT IS LIKELY THAT THE COMPANY'S 1999
INTERNAL BUDGET, WHICH HAS YET TO BE FINALIZED, WILL BE BELOW THE 1999
PROJECTION AND THE COMPANY'S FUTURE RESULTS WILL DIFFER FROM THOSE EXPRESSED
IN THE PROJECTIONS, IN EACH CASE PERHAPS MATERIALLY. MANY OF THE FACTORS THAT
WILL DETERMINE THESE RESULTS ARE BEYOND KKR'S AND FRI'S ABILITY TO CONTROL OR
PREDICT. KKR STOCKHOLDERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
PROJECTIONS. KKR AND FRI DO NOT INTEND TO UPDATE OR REVISE THE PROJECTIONS.
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<PAGE>
FINANCIAL PROJECTIONS
STATEMENT OF OPERATIONS
($ IN MILLIONS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDING DECEMBER
-----------------------------------
1998E(A) 1999P 2000P(B) 2001P
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Restaurants Open at End of Period
El Torito............................... 102 115 133 151
Chi-Chi's............................... 178 136 141 146
Koo Koo Roo............................. 45 55 85 135
Hamlet.................................. 14 14 14 14
------ ------ ------ ------
Total................................... 339 320 373 446
====== ====== ====== ======
Sales..................................... $536.9 $600.7 $694.9 $803.1
Growth.................................. N.A. 11.9 % 15.7 % 15.6 %
Restaurant Level Cashflow(c).............. $ 65.1 $ 96.7 $123.1 $146.6
Percent of Sales........................ 12.1 % 16.1 % 17.7 % 18.3 %
Growth.................................. N.A. 48.5 % 27.3 % 19.0 %
General and Administrative Expenses....... 36.5 36.9 38.5 39.3
Percent of Sales........................ 6.8 % 6.1 % 5.5 % 4.9 %
Other(d).................................. (1.2) (0.5) (0.4) (0.3)
------ ------ ------ ------
EBITDA(e)................................. $ 27.4 $ 59.3 $ 84.2 $107.0
====== ====== ====== ======
Percent of Sales........................ 5.1 % 9.9 % 12.1 % 13.3 %
====== ====== ====== ======
Growth.................................. N.A. 116.1 % 42.0 % 27.0 %
====== ====== ====== ======
</TABLE>
- --------
(a) Includes five months of operations of KKR, based on the assumed Effective
Date at the beginning of fiscal August 1998.
(b) 2000P represents a 53-week year.
(c) Restaurant Level Cashflow represents EBITDA (as defined below) before
general and administrative expenses and any net franchise profit (loss) or
miscellaneous income (expense).
(d) Includes net franchise profit (loss) and miscellaneous income (expense).
(e) 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. KKR and FRI have included information concerning EBITDA
herein because they understand that such information is used by certain
investors as one measure of an ability to service debt, pay taxes and
provide for working capital and capital expenditure requirements. 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.
Furthermore, other companies may compute EBITDA differently and,
therefore, EBITDA amounts among companies may not be comparable.
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
Subject to the qualifications set forth below, the following discussion
summarizes the material United States federal income tax consequences of the
Merger to holders of KKR Common Stock who hold KKR stock as a
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<PAGE>
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 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
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<PAGE>
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, KKR and FRI filed Forms on July 15 and July 20,
1998, respectively, with the Antitrust Division and the FTC with respect to
the Merger. Notice of early termination of all applicable HSR Act waiting
periods has been received. 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. KKR is
required to obtain consent to the Merger from landlords under certain of its
real estate leases. Additionally, FRI and certain of its subsidiaries are
required to obtain consents from Green Equity Investors, L.P. regarding the
amendment of FRI's certificate of incorporation and bylaws, certain consents
regarding the transfer of liquor licenses from KKR to FRI and from lenders
under certain debt instruments. See "Related Agreements and Other Matters--New
Indebtedness."
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. The exercise price of
each such option is $1.56 per share, an amount in excess of the closing price
of the KKR Common Stock on September 8, 1998 ($1.00 per share). 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. Assuming consummation of the Merger,
28
<PAGE>
aggregate payments to such executive officers under the employment agreements
would be approximately $930,000, of which Mr. Allen would receive
approximately $320,000, Mr. Kaufman would receive approximately $220,000, Mr.
McKay would receive approximately $190,000, and Mr. Garber would receive
approximately $200,000. 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. Assuming consummation of the
Merger, Messrs. Allen, Kaufman, McKay and Garber would be entitled to
immediate vesting in respect of options to purchase 519,200, 112,850, 261,200
and 111,200 shares of common stock, respectively, or 1,004,450 shares of
common stock in the aggregate, at an exercise price of $1.56 per share.
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.
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.
29
<PAGE>
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.
30
<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.
Sutro has confirmed its written opinion dated June 9, 1998 by delivery of a
written opinion to KKR dated the date of this Proxy Statement/Prospectus.
A COPY OF THE WRITTEN OPINION OF SUTRO DATED SEPTEMBER 14, 1998 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 June 30, 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 June 28, 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.
31
<PAGE>
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.
In connection with rendering its opinion, Sutro performed a variety of
financial analyses presented to the Board of Directors of KKR on June 9, 1998,
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 "KKR Comparable
Companies").
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
32
<PAGE>
impact of synergies of the Merger. The projected cash flows through 2002 were
discounted to present value using a range of discount rates; the range of
discount rates for KKR was based on an analysis of KKR's weighted average cost
of capital. A weighted average cost of capital for KKR was calculated by Sutro
using the historical interest cost of KKR's outstanding indebtedness and an
estimated cost of equity based primarily on the cost of equity for the KKR
Comparable Companies and the volatility of KKR's common stock. The terminal
value was determined by applying an 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%. With
respect to the contributions to revenue, Sutro determined the KKR contribution
for the fiscal year ended December 1997, and for the projections for the years
1998 through 2000, to be 12.8%, 16.8%, 19.7% and 20.4%, respectively. With
respect to EBITDA, Sutro determined the KKR contribution for the fiscal year
ended December 1997 to be not material, and for the projections for the years
1998 through 2000 to be 13.5%, 13.8%, and 15.4%, respectively. With respect to
EBIT, Sutro determined the KKR contribution for the fiscal year ended December
1997 and for the projection for the year 1998 to be not material, and for the
projections for the years 1999 and 2000 to be 1.9% and 8.5%, respectively.
With respect to net income, Sutro determined the KKR contribution for the
fiscal year ended December 1997 and for the projections for the years 1998 and
1999 to be not material, and for the projection for the year 2000 to be 13.6%.
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 in KKR's revenues, EBITDA,
EBIT and net income per fully diluted share 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. The preparation of a fairness
opinion is a complex process which is not necessarily susceptible to partial
analyses or summary description. In arriving at its opinion, Sutro did not
form a conclusion as to whether any individual analysis, considered in
isolation, supported or failed to support an opinion as to fairness from a
financial point of view and did not place particular reliance or weight on any
individual analysis. Rather, in reaching its conclusion, Sutro made
qualitative judgments as to the significance and relevance of each analysis
and factor. Accordingly, Sutro believes that its analyses must be considered
as a whole and that selecting portions of its analyses and the factors
considered by it, without considering all analyses and factors, could create
an incomplete or misleading view of the process underlying its opinion. 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.
33
<PAGE>
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.
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
National Market.
Prior to the Merger, there has not been a public market for the Company
Common Stock. The shares of Company Common Stock will be listed on the Nasdaq
National Market, subject to official notice of issuance. Although the Company
Common Stock is not expected to meet the National Market's initial or
continued listing requirements with respect to the $5.00 per share minimum bid
price, the Company has been granted a waiver of such requirements by Nasdaq
that is subject to review on an annual basis. In addition, the Company will be
required to maintain compliance with the $1.00 per share minimum bid price
requirement.
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 September 10, 1998).................. 1.688 0.969
</TABLE>
On September 10, 1998, there were 1,321 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."
34
<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 Hamlet from
KKR (the "Hamlet Acquisition") immediately prior to the consummation of the
Merger, (ii) the issuance of the New MRD Notes 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 June 28, 1998
was prepared based upon the unaudited condensed consolidated balance sheet of
FRI as of June 28, 1998 and the unaudited condensed consolidated balance sheet
of KKR as of June 30, 1998 and gives effect to the Transactions as if they had
been completed on June 28, 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 six months ended June 28, 1998 was prepared based upon the
unaudited condensed consolidated statement of operations of FRI for the six
months ended June 28, 1998 and the unaudited condensed consolidated statement
of operations of KKR for the six months ended June 30, 1998. The unaudited pro
forma combined condensed statements of operations for the fiscal year ended
December 28, 1997 and for the six months ended June 28, 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 $6.3 to $8.3 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 $3.3 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 $66 million, based on the
average closing price of KKR Common Stock for the 10 trading days ending on
September 4, 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.
35
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF JUNE 28, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------
FRI KKR PRO
JUNE 28, JUNE 30, PRO FORMA FORMA
1998 1998 NOTES ADJUSTMENTS COMBINED
-------- -------- ----- ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash, cash equivalents and
marketable securities......... $ 26,820 $ 7,515 A $ 3,121 $ 37,456
Other current assets........... 15,886 2,270 B (3,003) 15,153
-------- ------- ------- --------
Total current assets......... 42,706 9,785 118 52,609
Property and equipment, net...... 182,828 37,943 220,771
Reorganization value in excess of
amount allocable to identifiable
assets, net..................... 35,829 -- 35,829
Costs in excess of net assets of
business acquired, net.......... -- -- C 46,199 46,199
Other assets..................... 23,806 9,937 D,E 513 34,256
-------- ------- ------- --------
$285,169 $57,665 $46,830 $389,664
======== ======= ======= ========
LIABILITIES & STOCKHOLDERS'
EQUITY (DEFICIT)
---------------------------
Current Liabilities:
Current portion of long-term
debt and capital lease
obligations................... $ 2,572 $ 2,764 F $(2,500) $ 2,836
Accounts payable............... 13,625 3,345 16,970
Self-insurance reserves........ 28,603 -- 28,603
Other accrued liabilities...... 56,729 9,560 G 2,500 68,789
Income taxes payable........... 3,775 -- 3,775
-------- ------- ------- --------
Total current liabilities.... 105,304 15,669 -- 120,973
Other long-term liabilities...... 4,518 415 4,933
Long-term debt and capital lease
obligations, less current
portion......................... 214,515 13,293 B,F,H 9,118 236,926
Stockholders' equity (deficit)... (39,168) 28,288 H,I 37,712 26,832
-------- ------- ------- --------
$285,169 $57,665 $46,830 $389,664
======== ======= ======= ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Information.
36
<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 C 1,155 30,403
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 1,155 564,097
-------- -------- ------- --------
Operating loss.......... (11,608) (19,272) (1,155) (32,035)
Other expense (income)
Interest, net......... 19,476 (197) D,E,F,J 2,814 22,093
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 before
income tax provision... (31,084) (19,636) (3,969) (54,689)
Income tax provision.... 509 -- 509
-------- -------- ------- --------
Net loss from continuing
operations............. $(31,593) $(19,636) $(3,969) $(55,198)
======== ======== ======= ========
(K)(L)
Pro forma basic and
diluted loss per common
share.................. $ (0.26) $ (0.32)
======== ========
Pro forma weighted
average number of
common shares
outstanding............ 120,068 174,612
======== ========
(M)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Information.
37
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 28, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL SIX
MONTHS ENDED
------------------
FRI PRO
JUNE 28, KKR JUNE PRO FORMA FORMA
1998 30, 1998 NOTES ADJUSTMENTS COMBINED
-------- -------- ------- ----------- --------
<S> <C> <C> <C> <C> <C>
Sales........................ $233,401 $ 45,066 $ $278,467
-------- -------- ------- --------
Food, labor and related
costs....................... 144,714 30,562 175,276
Occupancy and other operating
expenses.................... 62,179 9,852 72,031
Depreciation and
amortization................ 10,622 2,448 C 578 13,648
General and administrative
expenses.................... 14,116 4,347 18,463
Opening costs................ 1,258 470 1,728
Loss on disposition of
properties, net............. 1,406 -- 1,406
Restructuring and other
charges, including store
closings.................... -- 11,757 11,757
-------- -------- ------- --------
Total costs and expenses. 234,295 59,436 578 294,309
-------- -------- ------- --------
Operating loss............... (894) (14,370) (578) (15,842)
Other expense (income):
Interest, net.............. 11,826 728 D,E,F,J 868 13,422
Minority interest in net
loss of joint venture..... -- (235) (235)
Other...................... -- (22) (22)
-------- -------- ------- --------
Loss from continuing
operations before income tax
provision................... (12,720) (14,841) (1,446) (29,007)
Income tax provision......... 254 -- 254
-------- -------- ------- --------
Net loss from continuing
operations.................. $(12,974) $(14,841) $(1,446) $(29,261)
======== ======== ======= ========
(K)(N)
Pro forma basic and diluted
loss per common share....... $ (0.11) $ (0.17)
======== ========
Pro forma weighted average
number of common shares
outstanding................. 120,068 174,612
======== ========
(M)
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Information.
38
<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*............................... $ 21,621
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..................................................... $ 3,121
========
</TABLE>
* Assumes completion of the Transactions on October 31, 1998.
B. To eliminate the $3,000 Loan (defined below) and related accrued interest
of $3. See "Related Agreements and Other Matters--Bridge Loan Agreement."
C. To record (i) $46,199 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 $1,155 and $578 for the fiscal year ended December 28,
1997 and the six months ended June 28, 1998, respectively.
D. 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 six months ended June 28,
1998 of $329 and $164, respectively.
E. To eliminate unamortized debt issuance costs of $557 and related
amortization of debt issuance costs associated with the retirement of the
KKR Notes of $84 and $126 for the fiscal year ended December 31, 1997 and
the six months ended June 30, 1998, respectively.
F. 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 $850 for the fiscal year ended December 31, 1997 and the six months
ended June 30, 1998, respectively.
G. To record estimated KKR severance liability of $2,500.
H. To give effect to (i) the completion of the Merger for estimated
consideration of $66,000, based on the average closing price of KKR Common
Stock for the 10 trading days ending on September 4, 1998 and (ii) the
completion of the Hamlet Acquisition pursuant to which KKR will receive
proceeds of $21,621 from FRI, which amount will be financed by the issuance
of the New MRD Notes.
I. To eliminate the stockholders' equity of KKR of $28,288.
J. To record interest expense of $3,219 and $1,680 on the New MRD Notes for
the fiscal year ended December 28, 1997 and the six months ended June 28,
1998, respectively.
K. For the fiscal year ended December 31, 1997 and the six months ended June
30, 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.
L. 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.
M. The pro forma FRI weighted average number of common shares outstanding for
the historical fiscal year ended December 28, 1997 and the historical six
months ended June 28, 1998 give effect to the FRI Stock Dividend and the
exchange of the Apollo Warrant for shares of FRI Common Stock. See "Summary
Historical and Unaudited Pro Forma Financial Information" and "Related
Agreements and Other Matters."
N. For the six months ended June 30, 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.
39
<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 (H) $66,000 plus
estimated FRI merger costs of (C) $2,430 less net
assets of KKR acquired of (I) ($22,231), which
includes estimated KKR severance liability of (G)
$2,500, estimated KKR merger costs of (A) $3,000 and
the elimination of unamortized debt issuances of (E)
$557 = $46,199
(2) Other Assets: (D) $1,070; (E) ($557) = $513
(3) Long-term debt and capital lease obligations, less current portion:
(B) ($3,003); (F) ($9,500); (H) $21,621 = $9,118
(4) Stockholders' equity (deficit) (H) $66,000; (I) ($28,288) = $37,712
STATEMENT OF OPERATIONS (fiscal year ended December 28, 1997):
(1) Interest, net: (D) $329; (E) ($84); (F) ($650); (J) $3,219 = $2,814
STATEMENT OF OPERATIONS (six months ended June 28, 1998):
(1) Interest, net: (D) $164; (E) ($126); (F) ($850); (J) $1,680 = $868
40
<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, an individual to be determined as President, 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. It is expected that the individual elected
as President of KKR will be Gayle A. DeBrosse.
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
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<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
42
<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
43
<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.
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<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;
45
<PAGE>
(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
September 9, 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 loan of $3,000,000 (the
"Loan") to Hamlet, a wholly owned subsidiary of KKR, secured by substantially
all of the assets of Hamlet.
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 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. Neither FRI nor
KKR intend to consummate the Hamlet Acquisition if the Merger is not
completed. The Hamlet Purchase Agreement was approved by the KKR Board as an
integral element of its approval of the Merger Agreement. See "The Merger--
Recommendation of the KKR Board; Reasons for the Merger." Stockholders of KKR
are not required or entitled to vote on the Hamlet Acquisition.
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 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.
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1998 STOCK INCENTIVE PLAN
Immediately prior to the Effective Time the FRI Board of Directors is
expected to adopt, and the FRI stockholders are expected to approve, the Koo
Koo Roo Enterprises, Inc. 1998 Stock Incentive Plan (the "1998 Stock Incentive
Plan"). The 1998 Stock 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 number of shares of common
stock equal to 10% of the fully diluted Company Common Stock outstanding
immediately following the Effective Time will be 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 121.0 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 October 30,
1998, at the Hyatt Regency Irvine, 17900 Jamboree Road, Irvine, California at
9:00 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, (ii) the Adjournment Proposal and
(iii) 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 September 10, 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, 54,622,765 shares of KKR Common
Stock were issued and outstanding and were held by approximately 1,321 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. The Adjournment Proposal requires the
affirmative vote of the holders of a majority of the KKR Common Stock entitled
to vote and present in person or represented by proxy at the Special Meeting,
even if less than a quorum.
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, 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.
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 MacKenzie Partners, Inc. ("MacKenzie") to
assist KKR in the solicitation of proxies from common stockholders in
connection with the Special Meeting. MacKenzie will receive a base fee of
$6,500 as compensation for its services as well as reimbursement of its
reasonable out-of-pocket expenses in connection therewith. KKR has agreed to
indemnify MacKenzie 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 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 200,000 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 $6.3 to $8.3 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 $3.3 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 54,622,765 shares of KKR Common Stock outstanding, no shares of
Series A Convertible Preferred Stock outstanding and 700 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
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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 988,285 shares of FRI Common Stock outstanding, 84,375 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
62
<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 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. The shares of Company Common Stock will be listed on the Nasdaq
National Market subject to official notice of issuance. Although the Company
Common Stock is not expected to meet the National Market's initial or
continued listing requirements with respect to the $5.00 per share minimum bid
price, the Company has been granted a waiver of such requirements by Nasdaq
that is subject to review on an annual basis. In addition, the Company will be
required to maintain compliance with the $1.00 per share minimum bid price
requirement. 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.
63
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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.
64
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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, as
amended Year ended December 28, 1997.
Quarterly Reports on Form 10-Q, as
amended Quarters ended March 29, 1998 and June 28, 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 Reports on Form 10-Q Quarters ended March 31, 1998 and June 30, 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
October 20, 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.
65
<PAGE>
DELIVERY OF FRI REPORTS WITH PROXY STATEMENT/PROSPECTUS
The FRI 1997 Form 10-K and June 28, 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 September 14,
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.
66
<PAGE>
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
<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
----
ARTICLE V
<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
----
<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
SECTION 9.1 Conditions to Each Party's Obligation to Effect the
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.
A-2
<PAGE>
"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.
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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
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ANNEX B
OPINION OF SUTRO & CO. INCORPORATED
September 14, 1998
The Board of Directors
Koo Koo Roo, Inc.
11075 Santa Monica Boulevard
Suite 225
Los Angeles, CA 90025
Members of the Board:
We have delivered our opinion dated June 9, 1998 which we hereby reconfirm
(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 Reports on Form 10-Q for
the periods ended March 31, 1998 and June 30, 1998; and (ii) FRI's Annual
Report on Form 10-K for the fiscal year ended December 28, 1997 and Quarterly
Reports on Form 10-Q for the periods ended March 29, 1998 and June 28, 1998.
We have also reviewed certain internal financial forecasts and projections
prepared in March 1998 and 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 prepared in March 1998 and 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. We have
been advised that the March 1998 projections provided to us have not been
updated. 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
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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 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>
EXHIBIT K
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K/A-1
[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. Furthermore, other companies may
compute EBITDA differently, and therefore, EBITDA amounts among companies
may not be comparable.
(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 reported net cash used in operating activities for the years
ended December 28, 1997 and December 29, 1996. Liquidity requirements were
funded by proceeds from the sale of the Family Restaurant Division,
supplemented if necessary by working capital advances available under the
Foothill Credit Facility. 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.
Statement of Cash Flows. For the year ended December 28, 1997, the Company
reported net cash used in operating activities of $13.1 million compared to
net cash used in operating activities of $21.9 million for the year ended
December 29, 1996. The improvement in net cash used in operating activities of
$8.8 million was due to a $21.6 million reduction in interest paid and no
restructuring costs in 1997 versus $6.5 million of such costs in 1996. These
improvements were partially offset by a reduction in cash received from
customers, franchisees and licensees net of cash paid to suppliers and
employees. For 1997, the Company reported net cash used in investing
activities of $16.6 million compared to net cash provided by investing
activities of $165.0 million in 1996. This difference was primarily due to a
$173.6 million reduction in proceeds from (i) the disposal of property and
equipment; (ii) the sale of the Family Restaurant Division, net; and (iii) the
sale of notes receivable, net. For 1997, the Company reported net cash
provided by financing activities of $28.4 million compared to net cash used in
financing activities of $117.7 million in 1996. During 1997, $33.9 million in
net proceeds from the issuance of notes was received, while in 1996,
repurchases of notes and repayment of working capital borrowings amounted to
$32.5 million and $79.8 million, respectively.
For the year ended December 29, 1996, the Company reported net cash used in
operating activities of $21.9 million compared to net cash provided by
operating activities of $6.1 million for the year ended December 31, 1995. A
reduction in cash received from customers, franchisees and licensees net of
cash paid to suppliers and employees and increased restructuring costs of $2.2
million more than offset an increase in interest received of $3.9 million and
a decrease in interest paid of $6.8 million. For 1996, the Company reported
net cash provided by investing activities of $165.0 million compared to net
cash used in investing activities of $19.6 million in 1995. This difference
was primarily due to proceeds from sale of the Family Restaurant Division, net
of $121.3 million and proceeds from sale of notes receivable, net of $32.1
million, both realized in 1996, combined with a $28.2 million reduction in
capital expenditures from 1995 to 1996. For 1996, the Company reported net
cash used in financing activities of $117.7 million compared to net cash
provided by financing activities of $13.7 million in 1995. During 1996,
repurchase of notes amounted to $32.5 million, while activity in the Company's
working capital line resulted in borrowings of $20.2 million in 1995 and
repayments of $79.8 million in 1996.
EBITDA. 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.
K-11
<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. Furthermore, other companies
may compute EBITDA differently, and therefore, EBITDA amounts among companies
may not be comparable.
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 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.
K-12
<PAGE>
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.
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>
K-13
<PAGE>
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 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
K-14
<PAGE>
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.
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
K-15
<PAGE>
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.
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.
K-16
<PAGE>
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, 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.
K-17
<PAGE>
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.
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.
K-18
<PAGE>
(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 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. Furthermore, other companies may compute EBITDA differently,
and therefore, EBITDA amounts among companies may not be comparable.
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 K-31.
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
K-31. --
(2) Financial Statement Schedule K-49
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.) (Filed as Exhibit 10(bb) to the Company's
Form 10-K filed with the SEC on March 30, 1998.)
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.)
(Filed as Exhibit 10(cc) to the Company's Form 10-K filed with the
SEC on March 30, 1998.)
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. (Filed as Exhibit
10(dd) to the Company's Form 10-K filed with the SEC on March 30,
1998.)
21(a) List of Subsidiaries. (Filed as Exhibit 21(a) to the Company's Form
10-K filed with the SEC on March 30, 1998.)
21(b) Names Under Which Subsidiaries Do Business. (Filed as Exhibit 21(b) to
the Company's Form 10-K filed with the SEC on March 30, 1998.)
23 Consent of KPMG Peat Marwick LLP. (Filed as Exhibit 23 to the
Company's Form 10-K filed with the SEC on March 30, 1998.)
27 Financial Data Schedule. (Filed as Exhibit 27 to the Company's Form
10-K filed with the SEC on March 30, 1998.)
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>
(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 September 9, 1998
____________________________________ Chief Executive Officer
Kevin S. Relyea (Principal Executive
Officer)
/s/ Peter P. Copses Director September 9, 1998
____________________________________
Peter P. Copses
/s/ David B. Kaplan Director September 9, 1998
____________________________________
David B. Kaplan
/s/ Antony P. Ressler Director September 9, 1998
____________________________________
Antony P. Ressler
/s/ Robert T. Trebing, Jr. Executive Vice President and September 9, 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>
EXHIBIT Q
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q/A-1
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 28, 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 OF (I.R.S. EMPLOYER
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 August 10, 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>
JUNE 28, DECEMBER 28,
1998 1997
----------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 26,820 $ 32,518
Bridge note receivable--KKR merger.................. 3,003 0
Receivables......................................... 4,292 3,944
Inventories......................................... 4,350 4,569
Other current assets................................ 4,241 4,086
--------- ---------
Total current assets.............................. 42,706 45,117
Property and equipment, net........................... 182,828 183,601
Reorganization value in excess of amount allocable to
identifiable assets, net............................. 35,829 36,529
Other assets.......................................... 23,806 24,521
--------- ---------
$ 285,169 $ 289,768
========= =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities:
Current portion of long-term debt, including capi-
talized lease obligations.......................... $ 2,572 $ 2,694
Accounts payable.................................... 13,625 13,959
Self-insurance reserves............................. 28,603 32,515
Other accrued liabilities........................... 56,729 58,573
Income taxes payable................................ 3,775 3,788
--------- ---------
Total current liabilities......................... 105,304 111,529
Other long-term liabilities........................... 4,518 4,478
Long-term debt, including capitalized lease
obligations, less current portion.................... 214,515 199,955
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................................. (195,112) (182,138)
Less treasury stock, at cost (8,992 shares)......... (1,383) (1,383)
--------- ---------
Total stockholders' deficit....................... (39,168) (26,194)
--------- ---------
$ 285,169 $ 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
------------------
JUNE 28, JUNE 29,
1998 1997
-------- --------
<S> <C> <C>
Sales...................................................... $120,095 $123,103
-------- --------
Product costs.............................................. 32,033 32,766
Payroll and related costs.................................. 41,712 42,503
Occupancy and other operating expenses..................... 31,331 33,674
Depreciation and amortization.............................. 5,283 5,611
General and administrative expenses........................ 6,998 6,964
Opening costs.............................................. 638 3
Loss on disposition of properties, net..................... 738 410
Impairment of long-lived assets............................ 0 2,640
-------- --------
Total costs and expenses................................. 118,733 124,571
-------- --------
Operating income (loss).................................... 1,362 (1,468)
Interest expense, net...................................... 5,999 4,556
-------- --------
Loss before income tax provision........................... (4,637) (6,024)
Income tax provision....................................... 127 176
-------- --------
Net loss................................................... $ (4,764) $ (6,200)
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
Q-3
<PAGE>
FAMILY RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS ENDED
------------------
JUNE 28, JUNE 29,
1998 1997
-------- --------
<S> <C> <C>
Sales...................................................... $233,401 $238,081
-------- --------
Product costs.............................................. 62,796 63,131
Payroll and related costs.................................. 81,918 83,370
Occupancy and other operating expenses..................... 62,179 66,424
Depreciation and amortization.............................. 10,622 11,181
General and administrative expenses........................ 14,116 14,442
Opening costs.............................................. 1,258 3
Loss on disposition of properties, net..................... 1,406 1,877
Impairment of long-lived assets............................ 0 2,640
-------- --------
Total costs and expenses................................. 234,295 243,068
-------- --------
Operating loss............................................. (894) (4,987)
Interest expense, net...................................... 11,826 8,962
-------- --------
Loss before income tax provision........................... (12,720) (13,949)
Income tax provision....................................... 254 352
-------- --------
Net loss................................................... $(12,974) $(14,301)
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
Q-4
<PAGE>
FAMILY RESTAURANTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED
--------------------
JUNE 28, JUNE 29,
1998 1997
--------- ---------
<S> <C> <C> <C>
Increase in Cash and Cash Equivalents
Cash flows from operating activities:
Cash received from customers, franchisees and
licensees......................................... $ 234,475 $ 238,691
Cash paid to suppliers and employees............... (227,995) (238,045)
Interest paid, net................................. (7,365) (6,652)
Opening costs...................................... (914) 0
Income taxes paid.................................. (267) (269)
--------- ---------
Net cash used in operating activities............ (2,066) (6,275)
--------- ---------
Cash flows from investing activities:
Proceeds from disposal of property and equipment... 74 42
Bridge note receivable--KKR merger................. (3,000) 0
Capital expenditures............................... (9,710) (5,403)
Mandatory lease buyback, net....................... 0 (2,828)
Lease termination payments......................... (722) (2,651)
Opening costs...................................... 0 (65)
Other.............................................. (172) (1,817)
--------- ---------
Net cash used in investing activities............ (13,530) (12,722)
--------- ---------
Cash flows from financing activities:
Reductions of long-term debt, including capitalized
lease obligations................................. (1,625) (1,591)
Net proceeds from issuance of notes................ 11,620 0
Payment of debt issuance costs..................... (97) (1,365)
--------- ---------
Net cash provided by (used in) financing
activities...................................... 9,898 (2,956)
--------- ---------
Net decrease in cash and cash equivalents............ (5,698) (21,953)
Cash and cash equivalents at beginning of period..... 32,518 33,820
--------- ---------
Cash and cash equivalents at end of period........... $ 26,820 $ 11,867
========= =========
Reconciliation of net loss to net cash used in
operating activities:
Net loss............................................. $ (12,974) $ (14,301)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 10,622 11,184
Amortization of debt issuance costs................ 597 506
Expense of unamortized opening costs............... 344 0
Loss on disposition of properties.................. 1,406 1,877
Impairment of long-lived assets.................... 0 2,640
Accretion of interest.............................. 3,948 294
(Increase) decrease in receivables, inventories and
other current assets.............................. (628) 809
Decrease in accounts payable, self-insurance re-
serves, other accrued liabilities and income taxes
payable........................................... (5,381) (9,284)
--------- ---------
Net cash used in operating activities................ $ (2,066) $ (6,275)
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
Q-5
<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 June
28, 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 June 28,
1998, the Company was the franchisor and licensor of 21 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 and six months ended June 28, 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 April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5 ("SOP 98-5"), "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 SOP 98-5 is effective for fiscal years beginning after
December 15, 1998, early adoption is allowed, and the Company elected to adopt
the provisions of SOP 98-5 in the quarter ended March 29, 1998.
Accordingly, $344,000 of unamortized opening costs at December 28, 1997
(classified as other current assets) was expensed in the condensed
consolidated statement of operations for the quarter ended March 29, 1998.
Opening costs incurred during the quarter and six months ended June 28,1998
were $638,000 and $914,000, respectively. Amortization of opening costs of
$3,000 in the comparable periods of 1997 has been reclassified.
Q-6
<PAGE>
5. KKR Merger. The Company, FRI-Sub, Inc., a newly organized Delaware
corporation and wholly owned subsidiary of FRI-MRD (the "Merger Sub"), and Koo
Koo Roo, Inc., a Delaware corporation ("KKR"), have entered into an Agreement
and Plan of Merger, dated as of June 9, 1998 (the "Merger Agreement"),
pursuant to which the Merger Sub will merge with and into KKR (the "Merger"),
with KKR as the surviving corporation of the Merger. As a result of the
Merger, KKR will become a wholly owned subsidiary of FRI-MRD. The closing of
the Merger is subject to certain conditions, including but not limited to, the
approval of the common stockholders of KKR and the obtaining of certain
regulatory approvals and third party consents.
As a result of the Merger, each outstanding share of common stock, $.01 par
value, of KKR will be converted into the right to receive one share of common
stock, par value $0.01 per share, of the Company (the "Company Common Stock").
In connection with the signing of the Merger Agreement, FRI-MRD provided a
$3.0 million loan (the "Bridge Loan") to a subsidiary of KKR. Additionally, in
connection with the Merger, FRI-MRD will issue new senior secured discount
notes (the "New MRD Notes") for net proceeds of approximately $21.6 million
and the Company is expanding the Foothill Credit Facility (as defined below)
by an additional $20.0 million. The proceeds from the sale of the New MRD
Notes will be used to acquire all of the outstanding capital stock (the
"Hamlet Shares") of The Hamlet Group, Inc. ("Hamlet") immediately prior to the
consummation of the Merger (the "Hamlet Acquisition"). 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. The Merger and the Hamlet Acquisition will be accounted for as a
purchase.
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 the
Company's restaurants, (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 second quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
A. Liquidity
The Company reported net cash used in operating activities for the six
months ended June 28, 1998 and June 29, 1997. Liquidity requirements were
funded by available cash balances, supplemented if necessary by working
capital advances available under the Foothill Credit Facility (as defined
below). In addition, FRI-MRD
Q-7
<PAGE>
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.
Statement of Cash Flows. For the first six months of 1998, the Company
reported net cash used in operating activities of $2.1 million compared to net
cash used in operating activities of $6.3 million for the same period in 1997.
The difference in cash received from customers, franchisees and licensees as
compared to cash paid to suppliers and employees improved by $5.8 million from
1997 to 1998 which more than offset cash paid for opening costs of $0.9
million and an increase in interest paid, net of $0.7 million. For the first
six months of 1998, the Company reported net cash used in investing activities
of $13.5 million compared to net cash used in investing activities of $12.7
million for the same period in 1997. The increase in net cash used in
investing activities of $0.8 million was due to the $3.0 million bridge loan
related to the KKR Merger and an increase in capital expenditures of $4.3
million which more than offset decreases in mandatory lease buyback of
$2.8 million, lease termination payments of $1.9 million and other amounts of
$1.6 million. For the first six months of 1998, the Company reported net cash
provided by financing activities of $9.9 million compared to net cash used in
financing activities of $3.0 million for the same period in 1997. During 1998,
$11.6 million in net proceeds from the issuance of notes was received, while
payment of debt issuance costs decreased $1.3 million from 1997.
EBITDA. For the first six months 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 $12.4
million, compared to $10.7 million for the same period in 1997. The $1.7
million improvement was primarily due to the continuing impact of El Torito
and Chi-Chi's cost reduction and reengineering strategies, which have improved
operating margins. This improved EBITDA is the continuation of the trend that
began in 1996 when new management was installed at both El Torito and Chi-
Chi's. Since 1995, the divisional EBITDA of the Company's ongoing operations
is set forth in the following table.
<TABLE>
<CAPTION>
DIVISIONAL
EBITDA
----------------
EL CHI-
FISCAL YEAR ENDED TORITO CHI'S
----------------- ------- --------
($ 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.
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. Furthermore, other companies
may compute EBITDA differently, and therefore, EBITDA amounts among companies
may not be comparable.
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 $62.6 million on June 28, 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
Q-8
<PAGE>
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 June 28, 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 ($16.0 million of such letters of credit were outstanding as of August
10, 1998). No revolving cash borrowings were outstanding as of August 10,
1998.
On June 9, 1998, the Company entered into an amendment to the Foothill
Credit Facility. The 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, (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 become effective upon execution of the
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 Credit 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 amendment, Foothill earned a line
increase fee of $500,000 of which $150,000 was paid upon execution of the
amendment and $350,000 is due upon consummation of the Hamlet Acquisition and
the Merger.
Senior Discount Notes. 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
an additional $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 continues to consider additional sources of cash, such
as the sale of non-core assets.
On June 9, 1998, FRI-MRD and the holders of the existing Senior Discount
Notes entered into an amendment to the Note Agreement governing the Senior
Discount Notes. Pursuant to the amendment, upon the closing of the Merger, the
Senior Discount 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 Foothill Credit Facility by up to $20.0 million.
Senior Secured Discount Notes. On June 9, 1998, FRI-MRD entered into a Note
Agreement pursuant to which FRI-MRD agreed to issue $24.0 million of 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 shares of Hamlet. The
closing of the sale of the New MRD Notes is subject to customary closing
conditions, including the consummation of the Hamlet Acquisition.
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
Q-9
<PAGE>
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 or the New MRD Notes, at their
respective maturities.
B. Capital Expenditures
Net cash used in investing activities was $14.4 million for the first six
months of 1998, including $9.7 million for capital expenditures, as compared
to net cash used in investing activities of $12.7 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 first of which opened on July 6, 1998 in Pasadena,
California. The Company also plans to upgrade El Torito's in-store POS
technology during fiscal 1998.
By August 10, 1998, the Company had completed the remodeling of 13
additional El Torito restaurants, primarily in the Los Angeles/Orange County
market, and 21 additional Chi-Chi's restaurants in various markets in 1998.
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. In addition to improving processes and
allowing wider access to data, the new software is designed to make the
Company's computer systems Year 2000 compliant. The Company expects to spend
approximately $1.6 million on the new software and related hardware and
installation costs in 1998, approximately $0.7 million of which has been spent
through June 28, 1998. The project is expected to be completed by year-end
1998. The Company is requesting Year 2000 compliance reports from its
significant vendors and service providers. If the computer systems of a
significant vendor or service provider are not Year 2000 compliant, it could
have a material adverse effect on the Company.
RESULTS OF OPERATIONS.
The Company's total sales of $120,095,000 for the second quarter of 1998
decreased by $3,008,000 or 2.4% as compared to the same period in 1997. For
the first six months of 1998, total Company sales of $233,401,000 decreased by
$4,680,000 or 2.0% as compared to the same period in 1997. As shown below,
these decreases were primarily due to restaurants divested or closed in 1997
and 1998.
<TABLE>
<CAPTION>
SECOND QUARTER FIRST SIX MONTHS
SALES DECREASE SALES DECREASE
-------------- ----------------
($ IN THOUSANDS)
<S> <C> <C>
Decrease in Sales of Restaurants Divested
or Closed................................. $(2,150) $(3,907)
Decrease in Sales of Comparable
Restaurants............................... (858) (773)
------- -------
Total.................................... $(3,008) $(4,680)
======= =======
</TABLE>
Q-10
<PAGE>
Sales for comparable restaurants of $119,101,000 for the second quarter of
1998 decreased by $858,000 or 0.6% as compared to the same period in 1997. For
the first six months of 1998, sales of comparable restaurants of $230,732,000
decreased by $773,000 or 0.3% as compared to the same period in 1997. As shown
below, these decreases were due to decreased sales for comparable Chi-Chi's
restaurants in both the quarter and six month periods and comparable El Torito
restaurants in the six month period which continue to reflect a competitive
operating environment for restaurants.
<TABLE>
<CAPTION>
FIRST SIX
SECOND QUARTER MONTHS SALES
SALES DECREASE DECREASE
--------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Comparable Chi-Chi's.......................... $(968) (1.4)% $(267) (0.2)%
Comparable El Torito.......................... 110 0.3 (506) (0.5)
----- ---- ----- ----
Total....................................... $(858) (0.6)% $(773) (0.3)%
===== ==== ===== ====
</TABLE>
El Torito comparable sales in the second quarter were up 0.3% as compared to
the same period in 1997. This was an improvement over the first quarter when
El Torito reported comparable sales down 1.2%. The "Getaway to Mexico at El
Torito" advertising campaign continued into the second quarter, with a focus
on the Sonora region via promotional television and radio advertising. In
addition, the El Torito concept reintroduced Rolled Grilled Tacos with a free
Mexican Caesar Salad as the second quarter promotional product.
Comparable sales for Chi-Chi's were down 1.4% for the second quarter as
compared with the same period in 1997. After a disappointing sales month in
April, comparable sales results improved throughout the second quarter, with
June comparable sales up 2.1% as compared with the same period in 1997. For
the first six months of 1998, Chi-Chi's comparable sales were down 0.2% as
compared with the same period in 1997, a continuation of the positive trend in
the rate of sales improvement begun in the second quarter of 1997. From a
marketing perspective, Chi-Chi's began its third advertising campaign of the
year on May 11, featuring the Twice Grilled Burrito and supported by
television, radio and print advertising. Additionally, sales for the
traditional Cinco de Mayo celebration increased 25% over the 1997 holiday.
Cinco de Mayo was bolstered by print advertising in all markets and featured
food and drink specials as well as festive activities.
Product costs of $32,033,000 for the second quarter of 1998 decreased by
$733,000 or 2.2% as compared to the same period in 1997. For the first six
months of 1998, product costs of $62,796,000 decreased by $335,000 or 0.5% as
compared to the same period in 1997. The decreases are primarily due to 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 costs increased to 26.7% in the second quarter of
1998 as compared to 26.6% in the same period of 1997 and increased to 26.9%
for the first six months of 1998 as compared to 26.5% in the same period of
1997.
Payroll and related costs of $41,712,000 for the second quarter of 1998
decreased by $791,000 or 1.9% as compared to the same period in 1997. For the
first six months of 1998, payroll and related costs of $81,918,000 decreased
by $1,452,000 or 1.7% as compared to the same period of 1997. The decreases
are primarily 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
increased to 34.7% in the second quarter of 1998 as compared to 34.5% in the
same period of 1997 and increased to 35.1% for the first six months of 1998 as
compared to 35.0% in the same period of 1997. Savings realized from the El
Torito and Chi-Chi's cost reduction strategies which have focused on improving
labor scheduling and efficiencies have been 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
Q-11
<PAGE>
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, in 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, 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.
Occupancy and other operating expenses of $31,331,000 for the second quarter
of 1998 decreased by $2,343,000 or 7.0% as compared to the same period in
1997. For the first six months of 1998, occupancy and other operating expenses
of $62,179,000 decreased by $4,245,000 or 6.4% as compared to the same period
in 1997. The decreases are 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 26.1% in the second
quarter of 1998 as compared to 27.4% in the same period in 1997 and decreased
to 26.6% for the first six months of 1998 as compared to 27.9% in the same
period of 1997. These decreases primarily reflect (i) the impact of El Torito
and Chi-Chi's cost reduction strategies and (ii) a decrease in media expense
in El Torito in the first six months of 1998 as compared to the same period of
1997.
Depreciation and amortization of $5,283,000 for the second quarter of 1998
decreased by $328,000 or 5.9% as compared to the same period in 1997. For the
first six months of 1998, depreciation and amortization of $10,622,000
decreased by $559,000 or 5.0% as compared to the same period in 1997. These
decreases reflect 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 $6,998,000 for the second quarter of
1998 increased by $34,000 or 0.5% as compared to the same period of 1997. For
the first six months of 1998, general and administrative expenses of
$14,116,000 decreased by $326,000 or 2.3% as compared to the same period in
1997. As a percentage of sales, general and administrative expenses increased
to 5.8% in the second quarter of 1998 as compared to 5.7% in the same period
of 1997 and remained flat at 6.1% for the first six months of 1998 and the
same period of 1997. 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 second quarter of 1998 and $1.4 million for the first six months of 1998
as compared to a loss of $0.4 million for the second quarter in 1997 and $1.9
million for the first six months of 1997. These amounts reflect losses
associated with restaurant divestments and closures in such periods.
The Company recorded a write-down of long-lived assets in the second quarter
of 1997 of $2.6 million.
Interest expense, net for the second quarter of 1998 of $5,999,000 increased
by $1,443,000 or 31.7% as compared to the same period in 1997. Interest
expense, net for the first six months of 1998 of $11,826,000 increased by
$2,864,000 or 32.0% as compared to the same period in 1997. These increases
were 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 $15.6
million of Senior Notes received as part of the exchange on August 12, 1997.
Q-12
<PAGE>
SELECTED DIVISION OPERATING DATA.
The Company primarily operates full-service Mexican restaurants in two
divisions under the El Torito, Chi-Chi's, Casa Gallardo and other names. At
June 28, 1998 the Company's El Torito restaurant division operated 94 full-
service restaurants and the Company's Chi-Chi's restaurant division operated
179 full-service restaurants.
The following table sets forth certain information regarding the Company,
its El Torito and Chi-Chi's restaurant divisions, and the various operations
divested in 1996.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
------------------------------ ------------------------------
JUNE 28, JUNE 29, JUNE 30, JUNE 28, JUNE 29, JUNE 30,
1998 1997 1996 1998 1997 1996
-------- -------- -------- -------- -------- --------
($ IN THOUSANDS, EXCEPT AVERAGE CHECK AMOUNT)
<S> <C> <C> <C> <C> <C> <C>
EL TORITO RESTAURANT
DIVISION
Restaurants Open at End
of Period:
Owned/operated........ 94 97 99 94 97 99
Franchised and
Licensed............. 8 7 5 8 7 5
Sales................... $ 57,583 $ 58,780 $ 58,593 $109,392 $112,380 $113,027
Restaurant Level
Cashflow(a)............ 9,943 9,345 7,884 17,030 16,579 13,732
Divisional EBITDA(b).... 6,985 6,187 4,475 11,298 10,436 7,349
Percentage increase
(decrease) in
comparable restaurant
sales.................. 0.3% 0.4% (2.8)% (0.5)% (0.5)% (3.3)%
Average check........... $ 10.10 $ 9.80 $ 9.33 $ 9.95 $ 9.66 $ 9.37
CHI-CHI'S RESTAURANT
DIVISION
Restaurants Open at End
of Period:
Owned/operated........ 179 180 191 179 180 191
Franchised and
Licensed............. 13 18 18 13 18 18
Sales................... $ 62,512 $ 64,323 $ 74,628 $124,009 $125,701 $149,381
Restaurant Level
Cashflow(a)............ 4,809 4,539 2,268 8,937 8,017 1,661
Divisional EBITDA(b).... 1,102 1,048 (1,122) 1,204 358 (5,634)
Percentage decrease in
comparable restaurant
sales.................. (1.4)% (9.2)% (8.8)% (0.2)% (10.9)% (10.5)%
Average check........... $ 7.80 $ 7.48 $ 7.28 $ 7.80 $ 7.50 $ 7.37
ONGOING OPERATIONS
Restaurants Open at End
of Period:
Owned/operated........ 273 277 290 273 277 290
Franchised and
Licensed............. 21 25 23 21 25 23
Sales................... $120,095 $123,103 $133,221 $233,401 $238,081 $262,408
Divisional EBITDA(b).... 8,087 7,235 3,353 12,502 10,794 1,715
DIVESTED OPERATIONS(C)
Restaurants Open at End
of Period:
Owned/operated........ 0 0 17 0 0 17
Franchised and
Licensed............. 0 0 0 0 0 0
Sales................... $ 0 $ 0 $ 85,802 $ 0 $ 0 $215,667
Divisional EBITDA(b).... 0 0 7,740 0 0 19,688
TOTAL COMPANY
Restaurants Open at End
of Period:
Owned/operated........ 273 277 307 273 277 307
Franchised and
Licensed............. 21 25 23 21 25 23
Sales................... $120,095 $123,103 $219,023 $233,401 $238,081 $478,075
EBITDA(d)............... 8,021 7,196 11,251 12,392 10,714 21,682
</TABLE>
Q-13
<PAGE>
- --------
(a) Restaurant Level Cashflow with respect to any operating division
represents Divisional EBITDA (as defined below) before general and
administrative expenses and any net franchise profit or miscellaneous
income (expense) reported by the respective division.
(b) 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.
(c) 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.
(d) 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. Furthermore, other companies may compute EBITDA differently,
and therefore, EBITDA amounts among companies may not be comparable.
Q-14
<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.)
2(b) Agreement and Plan of Merger, dated as of June 9, 1998, by and
among the Company, FRI-Sub, Inc. and Koo Koo Roo, Inc.
("KRR"). (Filed as Exhibit 2.1 to the Company's Form S-4
filed with the SEC on July 1, 1998.)
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.)
</TABLE>
Q-15
<PAGE>
<TABLE>
<C> <S>
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.)
4(g) First Amendment dated as of June 9, 1998 to the Note Agreement
dated August 12, 1997. (Filed as Exhibit 4.7 to the Company's
Form S-4 filed with the SEC on July 1, 1998.)
4(h) Note Agreement dated as of June 9, 1998 Re: $24,000,000 FRI-
MRD Corporation Senior Secured Discount Notes due January 24,
2002. (Filed as Exhibit 4.8 to the Company's Form S-4 filed
with the SEC on July 1, 1998.)
10(ee) Stock Purchase Agreement dated as of June 9, 1998 by and
between FRI-MRD Corporation and KKR. (Filed as Exhibit 10.1
to the Company's Form S-4 filed with the SEC on July 1,
1998.)
10(ff) Bridge Loan Agreement dated as of 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. (Filed as Exhibit 10.2 to the
Company's Form S-4 filed with the SEC on July 1, 1998.)
10(gg) Amendment Number Three to Loan and Security Agreement, dated
as of April 9, 1998 by and among the parties thereto. (Filed
as Exhibit 10.29 to the Company's Form S-4 filed with the SEC
on July 1, 1998.)
10(hh) Amendment Number Four to Loan and Security Agreement dated as
of June 9, 1998 by and among the parties thereto. (Filed as
Exhibit 10.30 to the Company's Form S-4 filed with the SEC on
July 1, 1998.)
27 Financial Data Schedule. (Filed as Exhibit 27 to the Company's
Form 10-Q filed with the SEC on August 12, 1998.)
</TABLE>
(b) Reports on Form 8-K.
On June 16, 1998 the Company filed a report on Form 8-K announcing the
planned merger between the Company and Koo Koo Roo, Inc. (see Note 5 of the
Notes to Condensed Consolidated Financial Statements included herein).
Q-16
<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: September 9, 1998
Q-17
<PAGE>
[LOGO OF KOO KOO ROO, INC.(R)]
<PAGE>
- --------------------------------------------------------------------------------
KOO KOO ROO, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF KOO KOO ROO, INC. FOR THE SPECIAL MEETING ON OCTOBER 30, 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 the Hyatt Regency Irvine, 17900 Jamboree Road, Irvine, California at
9:00 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 proposals.
SEE REVERSE SIDE
- --------------------------------------------------------------------------------
-- FOLD AND DETACH HERE --
<PAGE>
- --------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE STATED PROPOSALS
Please mark [X]
your votes
as in this
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
[_] [_] [_]
2. To approve any proposal to adjourn the Special Meeting in the event that
the Chairman of the Special Meeting determines, in his sole discretion, that
such adjournment is necessary or appropriate.
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 SEPTEMBER 14, 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.
September 14, 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.
- --------------------------------------------------------------------------------
-- FOLD AND DETACH HERE --
