AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FRIENDLY ICE CREAM FRIENDLY'S RESTAURANTS
CORPORATION FRANCHISE, INC.
(Exact name of registrant issuer as specified in its (Exact name of registrant guarantor as specified in its
charter) charter)
MASSACHUSETTS MASSACHUSETTS
(State of Incorporation) (State of Incorporation)
04-2053130 51-0296446
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
5812 5812
(Primary Standard Industrial (Primary Standard Industrial
Classification Code Number) Classification Code Number)
1855 BOSTON ROAD 1855 BOSTON ROAD
WILBRAHAM, MASSACHUSETTS 01095 WILBRAHAM, MASSACHUSETTS 01095
(413) 543-2400 (415) 543-2400
(Address, including zip code, and (Address, including zip code,
telephone number, including area code, and telephone number, including
of registrant's principal executive offices) area code, of agent for service)
AARON B. PARKER
FRIENDLY ICE CREAM CORPORATION
1855 BOSTON ROAD
WILBRAHAM, MASSACHUSETTS 01095
(413) 543-2400
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
--------------------------
COPIES TO:
MICHAEL A. CAMPBELL JOHN B. TEHAN
Mayer, Brown & Platt Simpson Thacher & Bartlett
190 South LaSalle Street 425 Lexington Avenue
Chicago, Illinois 60603-3441 New York, NY 10017
(312) 782-0600 (212) 455-2000
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
--------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462 (c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED SENIOR NOTE OFFERING PRICE(1) REGISTRATION FEE
% Senior Notes due 2007......................... $200,000,000 100% $200,000,000 $60,607
Guarantee of % Senior Notes due 2007 by
Friendly's Restaurants Franchise, Inc........... (2)
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) Pursuant to Rule 457(n), no separate filing fee is required for the
guarantee.
--------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED AUGUST 29, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO CHANGE, COMPLETION OR AMENDMENT,
WITHOUT NOTICE. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE
SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO
BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
$200,000,000
[LOGO]
FRIENDLY ICE CREAM CORPORATION
% SENIOR NOTES DUE 2007
----------------
Friendly Ice Cream Corporation (the "Company") is offering (the "Senior Note
Offering") its % Senior Notes due 2007 (the "Senior Notes"). Concurrently
with the Senior Note Offering, the Company is offering to the public 5,000,000
shares of the Company's Common Stock at an estimated initial public offering
price of between $19.00 and $21.00 per share (the "Common Stock Offering" and,
together with the Senior Note Offering, the "Offerings"). Contingent upon the
consummation of the Offerings, the Company will enter into the New Credit
Facility (as defined herein). The Offerings, the New Credit Facility and the
application of the estimated net proceeds therefrom are hereinafter referred to
as the "Recapitalization." Consummation of each of the Senior Note Offering and
the Common Stock Offering is contingent upon consummation of the other. See "Use
of Proceeds."
Interest on the Senior Notes will be payable semi-annually on and
of each year, commencing on , 1998. The Senior Notes will mature on
, 2007 unless previously redeemed. The Senior Notes will be redeemable, in
whole or in part, at the option of the Company, at any time on or after ,
2002, at the redemption prices set forth herein, plus accrued and unpaid
interest thereon, if any, to the date of redemption. In addition, on or prior to
, 2000, the Company may redeem, at any time and from time to time, up to
$70 million of the aggregate principal amount of the Senior Notes at a
redemption price of % of the principal amount thereof, plus accrued and
unpaid interest thereon, if any, to the date of redemption, with the net cash
proceeds from one or more Qualified Equity Offerings (as defined herein);
provided, however, that at least $130 million of the aggregate principal amount
of the Senior Notes remains outstanding following each such redemption. Upon the
occurrence of a Change of Control (as defined herein), each holder of Senior
Notes may require the Company to repurchase such holder's Senior Notes, in whole
or in part, at a repurchase price of 101% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the date of repurchase. See
"Description of Senior Notes."
The Senior Notes will be unsecured, senior obligations of the Company, will
rank PARI PASSU in right of payment with all other existing and future senior
indebtedness of the Company and will rank senior in right of payment to all
existing and future subordinated indebtedness of the Company. The Senior Notes
will be effectively subordinated to all existing and certain future secured
indebtedness of the Company, including indebtedness under the New Credit
Facility, to the extent of the value of the assets securing such secured
indebtedness. The Senior Notes will be structurally subordinated to all existing
and future indebtedness of any subsidiary of the Company that is not a guarantor
of the Senior Notes. The Senior Notes will be unconditionally guaranteed on an
unsecured, senior basis, by Friendly's Restaurants Franchise, Inc., the
Company's franchise subsidiary. As of June 29, 1997, on a pro forma basis after
giving effect to the Recapitalization and the Related Transactions (as defined
herein), the Company would have had a total of $293.3 million of long-term debt
and capital lease obligations outstanding, $91.4 million of which would have
been secured and none of which would have been subordinated. As of June 29,
1997, on a pro forma basis after giving effect to the Recapitalization and the
Related Transactions, non-guarantor subsidiaries of the Company would have had
no debt outstanding. The Indenture relating to the Senior Notes (the
"Indenture") will permit the Company to incur additional indebtedness, including
senior indebtedness and indebtedness of non-guarantor subsidiaries, subject to
certain limitations. See "Description of Senior Notes."
---------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SENIOR NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ---------------------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC (A) DISCOUNT (B) COMPANY (A) (C)
- ---------------------------------------------------------------------------------------------------------------------
Per Senior Note................................. % % %
Total........................................... $ $ $
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
(a) Plus accrued interest, if any, from the date of issuance.
(b) The Company and the Subsidiary Guarantor have agreed, jointly and severally,
to indemnify the Underwriters (as defined herein) against certain
liabilities, including liabilities under the Securities Act. See
"Underwriting."
(c) Before deducting expenses payable by the Company estimated at $ .
---------------------------
The Senior Notes are being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the Senior Notes will be made against payment therefor
on or about , 1997, in book-entry form through the facilities of The
Depository Trust Company.
SOCIETE GENERALE
SECURITIES CORPORATION
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES
-------------
, 1997
[ART WORK]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
OVERALLOTMENT, STABILIZING TRANSACTIONS AND SYNDICATE SHORT COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNLESS THE CONTEXT INDICATES OTHERWISE, (I) REFERENCES TO "FRIENDLY'S" OR THE
"COMPANY" REFER TO FRIENDLY ICE CREAM CORPORATION, ITS PREDECESSORS AND ITS
CONSOLIDATED SUBSIDIARIES, (II) ALL RESTAURANT NUMBERS STATED HEREIN ARE AS OF
JUNE 29, 1997, AFTER GIVING EFFECT TO THE DAVCO AGREEMENT (AS DEFINED HEREIN),
(III) AS USED HEREIN, "NORTHEAST" REFERS TO THE COMPANY'S CORE MARKETS WHICH
INCLUDE CONNECTICUT, MAINE, MASSACHUSETTS, NEW HAMPSHIRE, NEW JERSEY, NEW YORK,
PENNSYLVANIA, RHODE ISLAND AND VERMONT, (IV) THIS PROSPECTUS ASSUMES NO EXERCISE
OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION IN THE COMMON STOCK OFFERING AND (V)
THIS PROSPECTUS GIVES EFFECT TO THE 924-FOR-1 STOCK SPLIT WHICH WILL OCCUR PRIOR
TO THE COMMON STOCK OFFERING. THE COMPANY'S FISCAL YEARS ENDED DECEMBER 27,
1992, JANUARY 2, 1994, JANUARY 1, 1995, DECEMBER 31, 1995 AND DECEMBER 29, 1996
ARE REFERRED TO HEREIN AS 1992, 1993, 1994, 1995 AND 1996, RESPECTIVELY.
THE COMPANY
Friendly's is the leading full-service restaurant operator and has a leading
position in premium frozen dessert sales in the Northeast. The Company owns and
operates 666 and franchises 34 full-service restaurants and manufactures a
complete line of packaged frozen desserts distributed through more than 5,000
supermarkets and other retail locations in 15 states. Friendly's offers its
customers a unique dining experience by serving a variety of high-quality,
reasonably-priced breakfast, lunch and dinner items, as well as its signature
frozen desserts, in a fun and casual neighborhood setting. For the twelve-month
period ended June 29, 1997, Friendly's generated $664.9 million in total
revenues and $71.0 million in EBITDA (as defined herein). During the same
period, management estimates that over $225 million of total revenues were from
the sale of approximately 20 million gallons of frozen desserts.
Friendly's restaurants target families with children and adults who desire a
reasonably-priced meal in a full-service setting. The Company's menu offers a
broad selection of freshly-prepared foods which appeal to customers throughout
all day-parts. Breakfast items include specialty omelettes and breakfast
combinations featuring eggs, pancakes and bacon or sausage. Lunch and dinner
items include a new line of wrap sandwiches, entree salads, soups, super-melts,
specialty burgers and new stir-fry, chicken, pot pie, tenderloin steak and
seafood entrees. Friendly's is also recognized for its extensive line of ice
cream shoppe treats, including proprietary products such as the
Fribble-Registered Trademark-, Candy Shoppe-Registered Trademark- Sundaes and
the Wattamellon Roll-Registered Trademark-.
The Company believes that one of its key strengths is the strong consumer
awareness of the Friendly's brand name, particularly as it relates to the
Company's signature frozen desserts. This strength and the Company's
vertically-integrated operations provide several competitive advantages,
including the ability to (i) utilize its broad, high-quality menu to attract
customer traffic across multiple day-parts, particularly the afternoon and
evening snack periods, (ii) generate incremental revenues through strong
restaurant and retail market penetration, (iii) promote menu enhancements and
extensions in combination with its unique frozen desserts and (iv) control
quality and maintain operational flexibility through all stages of the
production process.
Friendly's, founded in 1935, was publicly held from 1968 until January 1979,
at which time it was acquired by Hershey Foods Corporation ("Hershey"). While
owned by Hershey, the Company increased the total number of restaurants from 601
to 849 yet devoted insufficient resources to product development and capital
improvements. In 1988, The Restaurant Company ("TRC"), an investor group led by
Donald Smith, the Company's current Chairman, Chief Executive Officer and
President, acquired Friendly's from Hershey (the "TRC Acquisition") and
implemented a number of initiatives to restore and improve operational and
financial efficiencies. From the date of the TRC Acquisition through 1994, the
Company (i) implemented a major revitalization of its restaurants, (ii)
repositioned the Friendly's concept from a sandwich and ice cream shoppe to a
full-service, family-oriented restaurant with broader menu and day-
3
part appeal, (iii) elevated customer service levels by recruiting more qualified
managers and expanding the Company's training program, (iv) disposed of 123
under-performing restaurants and (v) capitalized upon the Company's strong brand
name recognition by initiating the sale of Friendly's unique line of packaged
frozen desserts through retail locations.
Beginning in 1994, the Company began implementing several growth initiatives
including (i) testing and implementing a program to expand the Company's
domestic distribution network by selling frozen desserts and other menu items
through non-traditional locations, (ii) distributing frozen desserts
internationally by introducing dipping stores in the United Kingdom and South
Korea and (iii) implementing a franchising strategy to extend profitably the
Friendly's brand without the substantial capital required to build new
restaurants. As part of this strategy, on July 14, 1997 the Company entered into
the DavCo Agreement. See "--Recent Developments."
Implementation of these initiatives since the TRC Acquisition has resulted
in substantial improvements in revenues and EBITDA. Despite the closing of 148
restaurants (net of restaurants opened) since the beginning of 1989 and periods
of economic softness in the Northeast, the Company's restaurant revenues have
increased 9.0% from $557.3 million in 1989 to $607.2 million in the
twelve-months ended June 29, 1997, while average revenue per restaurant has
increased 28.6% from $665,000 to $855,000 during the same period. Retail,
institutional and other revenues have also increased from $1.4 million in 1989
to $57.7 million in the twelve months ended June 29, 1997. In addition, EBITDA
has increased 49.8% from $47.4 million in 1989 to $71.0 million in the
twelve-month period ended June 29, 1997, while operating income has increased
from $4.1 million to $37.7 million over the same period. See "Selected
Consolidated Financial Information" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Friendly's intends to continue to grow the Company's revenues and earnings
by implementing the following key business strategies: (i) continuously upgrade
the menu and introduce new products, (ii) revitalize and re-image existing
Friendly's restaurants, (iii) construct new restaurants, (iv) enhance the
Friendly's dining experience, (v) expand the restaurant base through
high-quality franchisees, (vi) increase market share through additional retail
accounts and restaurant locations, (vii) introduce modified formats of the
Friendly's concept into non-traditional locations and (viii) extend the
Friendly's brand into international markets.
COMPETITIVE STRENGTHS
THE COMPANY BELIEVES THAT, IN THE NORTHEAST, ITS LEADING POSITION IN
FULL-SERVICE RESTAURANT AND PREMIUM FROZEN DESSERT SALES IS ATTRIBUTABLE TO THE
FOLLOWING COMPETITIVE STRENGTHS:
STRONG BRAND NAME RECOGNITION. During the past 60 years, management
believes the Friendly's brand name has become synonymous with high-quality food
and innovative frozen desserts. The Company believes that the brand name
awareness created by its premium frozen dessert heritage drives customer
traffic, particularly during the afternoon and evening snack periods, promotes
menu enhancement and extension and generates incremental revenues from the
Company's retail and non-traditional distribution channels. The Company's
independent surveys indicate that, in the Northeast, over 90% of all households
recognize the Friendly's brand and that over 30% of these households visit a
Friendly's restaurant every three months.
SIGNATURE FROZEN DESSERTS. Friendly's produces an innovative line of
high-quality freshly-scooped and packaged frozen desserts, which have been cited
by customers as a key reason for choosing Friendly's. Accordingly, approximately
50% of all visits to a Friendly's restaurant include a frozen dessert purchase.
Freshly-scooped specialties served in Friendly's restaurants include the Jim
Dandy and Oreo-Registered Trademark- Brownie sundaes, and the
Fribble-Registered Trademark-, the Company's signature thick shake. Packaged
goods available for purchase in both restaurant and retail locations include
traditional and low-fat ice cream, yogurt and sorbets in half gallons, pints and
cups and a wide variety of ice cream cakes, pies and rolls such as the Jubilee
Roll-Registered Trademark- and
4
Wattamellon Roll-Registered Trademark-. In addition, the Company licenses from
Hershey the rights to feature in its signature desserts certain candy brands
such as Almond Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-,
Reeses Pieces-Registered Trademark-, Reeses-Registered Trademark- Peanut Butter
Cups and York-Registered Trademark- Peppermint Patties.
BROAD, HIGH-QUALITY MENU. The Company has successfully capitalized on
Friendly's reputation for high-quality, wholesome foods including the well-known
$2.22 Breakfast, Big Beef-Registered Trademark- Hamburger,
Fishamajig-Registered Trademark- Sandwich and Clamboat-Registered Trademark-
Platter by extending these offerings into a broader product line including
freshly-prepared omelettes, SuperMelt-TM- Sandwiches, Colossal Sirloin
Burgers-TM-, tenderloin steaks and stir-fry entrees. Reflecting this increased
menu variety, food products now account for over 70% of restaurant revenues, and
guest check averages have increased significantly over the last five years.
Friendly's also has an extensive Kid's Menu which encourages family dining due
to the significant appeal to children of the Friendly's concept.
MULTIPLE DAY-PART APPEAL. Due to the appeal of Friendly's frozen desserts,
the Company generates approximately 35% of its restaurant revenues during the
afternoon and evening snack periods (2:00 p.m. to 5:00 p.m. and 8:00 p.m. to
closing), providing Friendly's with the highest share of snack day-part sales in
the Northeast. Accordingly, the Company endeavors to maximize revenue across
multiple day-parts by linking sales of its high-margin frozen desserts with its
lunch and dinner entrees. The Company generates approximately 12%, 24% and 29%
of restaurant revenues from breakfast, lunch and dinner, respectively.
STRONG RESTAURANT AND RETAIL MARKET PENETRATION. The Company has the
highest market share among full-service restaurants and a leading position in
premium frozen dessert sales in the Northeast. The Company's strong restaurant
and retail market penetration provides incremental revenues and cash flow, as
multiple levels of visibility and availability provide cross promotion
opportunities and enhance consumer awareness and trial of the Company's unique
products while effectively targeting consumers for both planned and impulse
purchases. For example, the new Colossal Sirloin Burger-TM- was introduced with
a new 79 CENTS Caramel Fudge Nut Blast-TM- Sundae during the spring of 1997. In
addition to promoting sales of this new entree, this strategy increased consumer
awareness and trial of the new sundae combination, which in turn supported the
introduction of Caramel Fudge Nut Blast-TM- Sundae half gallons into restaurants
and retail locations.
VERTICALLY-INTEGRATED OPERATIONS. Friendly's vertically-integrated
operations are designed to deliver the highest quality food and frozen desserts
to its customers and to allow the Company to adapt to evolving customer tastes
and preferences. The Company formulates new products and upgrades existing food
and frozen desserts through its research and development group and controls all
stages in the production of its frozen desserts through its two manufacturing
facilities. In addition, the Company controls cost and product quality and
efficiently manages inventory levels from point of purchase through restaurant
delivery utilizing its three distribution facilities and fleet of 56 tractors
and 81 trailers. Furthermore, Friendly's maximizes its purchasing power when
sourcing materials and services for its restaurant and retail operations through
its integrated purchasing department.
MANAGEMENT EXPERIENCE AND EMPLOYEE RETENTION. The Company has a talented
senior management team with extensive restaurant industry experience and an
average tenure with the Company of 17 years. In addition, the Company minimizes
turnover of both managers and line personnel through extensive employee training
and retention programs. In 1996, the Company's turnover among its restaurant
salaried management was approximately 24%, which was significantly lower than
the industry average.
5
BUSINESS STRATEGIES
FRIENDLY'S OBJECTIVE IS TO CAPITALIZE ON ITS COMPETITIVE STRENGTHS TO GROW
ITS RESTAURANT AND RETAIL OPERATIONS BY IMPLEMENTING THE FOLLOWING KEY BUSINESS
STRATEGIES:
UPGRADE MENU AND SELECTIVELY INTRODUCE NEW PRODUCTS. Friendly's strategy is
to increase consumer awareness and restaurant patronage by continuously
upgrading its menu and introducing new products. As part of this strategy,
Friendly's dedicated research and development group regularly formulates
proprietary new menu items and frozen desserts to capitalize on the evolving
tastes and preferences of its customers. In the fall of 1996, the Company
introduced a new dinner line which includes a high-quality steak entree,
home-style chicken dinners, pot pies and stir-frys, as well as several premium
frozen desserts including the new Oreo-Registered Trademark- Brownie Sundae.
Largely as a result of new premium items, guest check averages have increased
7.7% during the first six months of 1997 as compared to the same period of 1996.
REVITALIZE AND RE-IMAGE RESTAURANTS. Friendly's seeks to continue to grow
restaurant revenues and cash flow through the ongoing revitalization and
re-imaging of existing restaurants and to increase total restaurant revenues
through the addition of new restaurants. The Company has revitalized
approximately 631 restaurants since the beginning of 1989, increasing average
restaurant revenues from $665,000 in 1989 to $855,000 in the twelve months ended
June 29, 1997. Further, the Company has initiated its FOCUS 2000 program which
includes an advanced re-imaging of restaurants and the installation of custom
designed restaurant automation systems in a majority of its restaurants. In
addition, as part of its ongoing capital spending program, the Company plans to
refurbish substantially all of its restaurants every five to six years to
further enhance customer appeal. The Company also expects to increase market
share in its existing and contiguous markets through the opening of five new
Company owned restaurants in 1997 (one of which has opened to date) and between
10 and 20 new restaurants per year through 2000.
ENHANCE THE FRIENDLY'S DINING EXPERIENCE. In addition to menu upgrades and
restaurant re-imaging, the FOCUS 2000 program includes initiatives to improve
food presentation and customer service. The Company believes that implementation
of this program will create a consistent, enhanced Friendly's restaurant brand
image. This strategy recognizes that food quality, dining atmosphere and
attentive service all contribute to customer satisfaction. The Company maintains
a consistently high standard of food preparation and customer service through
stringent operational controls and intensive employee training. To help
guarantee that employees perform in this manner, Friendly's maintains a
dedicated training and development center where managers are thoroughly trained
in customer service.
EXPAND RESTAURANT BASE AND MARKET PENETRATION THROUGH HIGH-QUALITY
FRANCHISEES. Friendly's is implementing a franchising strategy to further
develop the Friendly's brand and grow both revenue and cash flow without the
substantial capital required to build new restaurants. This strategy seeks to
(i) expand its restaurant presence in under-penetrated markets, (ii) accelerate
restaurant growth in new markets, (iii) increase marketing and distribution
efficiencies and (iv) preempt the Company's competition from acquiring certain
prime real estate sites. Friendly's will receive a royalty based on total
franchisee revenues and revenues and earnings from the sale of its frozen
desserts and other products to franchisees.
INCREASE MARKET SHARE OF PREMIUM FROZEN DESSERTS. Capitalizing on its
position as a recognized leader in premium frozen desserts, Friendly's seeks to
increase its market share. The Company expects to build market share by
expanding distribution beyond its 700 Company-owned and franchised restaurants
and its more than 5,000 retail locations by (i) adding new locations, (ii)
increasing shelf space in current locations through new product introductions
and more prominent freezer displays and (iii) increasing consumer and trade
merchandising.
INTRODUCE MODIFIED FORMATS INTO NON-TRADITIONAL LOCATIONS. In order to
capitalize on both planned and impulse purchases, the Company is leveraging the
Friendly's brand name and enhancing consumer awareness by introducing modified
formats of the Friendly's concept into non-traditional locations. These
6
modified formats include (i) Friendly's Cafe, a quick service concept offering
frozen desserts and a limited menu, (ii) Friendly's branded ice cream shoppes
offering freshly-scooped and packaged frozen desserts and (iii) Friendly's
branded display cases and novelty carts with packaged single-serve frozen
desserts. The first Friendly's Cafe is expected to open in early 1998. The
Company supplies frozen desserts to non-traditional locations such as colleges
and universities, sports facilities, amusement parks, secondary school systems
and business cafeterias directly or through selected vendors pursuant to
multi-year license agreements.
EXTEND THE FRIENDLY'S BRAND INTERNATIONALLY. The Company's long-term
international growth strategy is to utilize local partners and establish master
franchise or licensee agreements to extend the brand internationally and to
achieve profitable growth while minimizing capital investment. Currently, the
Company's Friendly's International, Inc. subsidiary ("FII") sells the Company's
frozen desserts in several chain restaurants, theaters and food courts in the
United Kingdom. In South Korea, FII participates in a licensing agreement with a
South Korean enterprise to develop Friendly's "Great American" ice cream
shoppes. As of August 22, 1997, the licensee and its sublicensees were operating
20 ice cream shoppes, and the Company expects such parties to operate 45 ice
cream shoppes by the end of 1997. The Company selects its international markets
based on the high quality of the Company's frozen desserts relative to
locally-produced frozen desserts and the propensity of consumers in these
regions to purchase American-branded products.
The principal executive offices of the Company are located at 1855 Boston
Road, Wilbraham, Massachusetts 01095, and the telephone number is (413)
543-2400.
RECENT DEVELOPMENTS
On July 14, 1997, the Company entered into a long-term agreement granting
DavCo Restaurants, Inc. ("DavCo"), a franchisor of more than 230 Wendy's
restaurants, exclusive rights to operate, manage and develop Friendly's
full-service restaurants in the franchising region of Maryland, Delaware, the
District of Columbia and northern Virginia (the "DavCo Agreement"). Pursuant to
the DavCo Agreement, DavCo has purchased certain assets and rights in 34
existing Friendly's restaurants in this franchising region, has committed to
open an additional 74 restaurants over the next six years and, subject to the
fulfillment of certain conditions, has further agreed to open 26 additional
restaurants, for a total of 100 new restaurants in this franchising region over
the next ten years. DavCo will also manage under contract 14 other Friendly's
locations in this franchising region with an option to acquire these restaurants
in the future. Friendly's received approximately $8.2 million in cash for the
sale of certain non-real property assets and in payment of franchise and
development fees, and will receive (i) a royalty based on franchised restaurant
revenues and (ii) revenues and earnings from the sale to DavCo of Friendly's
frozen desserts and other products. DavCo is required to purchase from
Friendly's all of the frozen desserts to be sold in these restaurants. See
"Business--Restaurant Operations--Franchising Program."
7
THE RECAPITALIZATION
The Offerings are part of a series of related transactions to refinance all
of the indebtedness under the Company's existing credit facilities (the "Old
Credit Facility") and thereby lengthen the average maturities of the Company's
outstanding indebtedness, reduce interest expense and increase liquidity and
operating and financial flexibility. Concurrent with, and contingent upon, the
consummation of the Offerings, the Company expects to enter into a new senior
secured credit facility consisting of (i) an $80 million term loan facility (the
"Term Loan Facility"), (ii) a $45 million revolving credit facility (the
"Revolving Credit Facility") and (iii) a $15 million letter of credit facility
(the "Letter of Credit Facility" and, together with the Revolving Credit
Facility and the Term Loan Facility, the "New Credit Facility"). The Offerings,
the New Credit Facility and the application of the estimated net proceeds
therefrom are hereinafter referred to as the "Recapitalization." In addition,
subsequent to June 29, 1997, the Company (i) has applied $8.2 million of cash
received pursuant to the DavCo Agreement toward amounts outstanding under the
Old Credit Facility and recorded $2.0 million of associated net income, (ii) has
paid $10.0 million of interest on the Old Credit Facility, (iii) will record
$1.7 million of net income related to deferred interest no longer payable under
the Old Credit Facility, (iv) will record $5.8 million of stock compensation
expense, net of taxes, arising out of the issuance of certain shares to
management and the vesting of certain restricted stock previously issued to
management, (v) will write-off $455,000 of deferred financing and debt
restructuring costs, net of taxes, related to the Old Credit Facility and (vi)
will apply $10.0 million of previously restricted cash to be received from
Restaurant Insurance Corporation, its insurance subsidiary ("RIC"), in exchange
for a letter of credit, toward amounts outstanding under the Old Credit Facility
(collectively, the "Related Transactions").
Upon completion of the Recapitalization, Friendly's total available
borrowings under the New Credit Facility are expected to be $45.0 million,
excluding $3.1 million of letter of credit availability (compared to $13.7
million as of June 29, 1997 under the Old Credit Facility, excluding $2.4
million of letter of credit availability), which borrowings may be used, with
certain limitations, for capital spending and general corporate purposes. After
giving effect to the Recapitalization and the Related Transactions, the
aggregate pro forma net decrease in interest expense would have been $14.5
million for 1996 and $7.3 million for the six-month period ended June 29, 1997.
See "Selected Consolidated Financial Information," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Description of New Credit Facility."
The following table sets forth the estimated sources and uses of funds in
connection with the Recapitalization after giving effect to the Related
Transactions:
AT CLOSING
---------------------
(DOLLARS IN
THOUSANDS)
SOURCES OF FUNDS:
Available cash........................................................ $ 1,339
Term Loan Facility (a)................................................ 80,000
Senior Note Offering (b).............................................. 200,000
Common Stock Offering (c)............................................. 100,000
--------
Total Sources..................................................... $ 381,339
--------
--------
USES OF FUNDS:
Retirement of Old Credit Facility (d)................................. $ 353,089
Retirement of capital leases.......................................... 9,000
Estimated fees and expenses (e)....................................... 19,250
--------
Total Uses........................................................ $ 381,339
--------
--------
- ----------------------------------
(a) Represents borrowing in full under the Term Loan Facility. As part of the
Recapitalization, the Company will have a $45,000 Revolving Credit Facility
which is expected to be undrawn at closing and $3,111 available under the
Letter of Credit Facility. These facilities are expected to be drawn in
part, from time to time, to finance the Company's working capital and other
general corporate requirements.
(b) Represents gross proceeds from the Senior Note Offering.
(c) Represents gross proceeds from the sale of 5,000,000 shares of Common Stock
at an assumed initial public offering price of $20.00 per share.
(d) Represents the balance of all amounts expected to be outstanding under the
Old Credit Facility ($371,327 as of June 29, 1997) after giving effect to
the application of (i) $8,238 received on July 15, 1997 pursuant to the
DavCo Agreement and (ii) $10,000 of previously restricted cash and
investments of RIC which is expected to be released to the Company in
exchange for a $11,889 letter of credit, with the $1,889 of additional
released cash and investments increasing the Company's cash balance.
(e) Includes estimated underwriting discounts and commissions and other fees and
expenses relating to the Offerings and the New Credit Facility of which
$8,427 relates to the Common Stock Offering and $10,823 relates to the
Senior Note Offering and the New Credit Facility. See "Underwriting."
8
THE SENIOR NOTE OFFERING
Issuer....................... Friendly Ice Cream Corporation.
Securities Offered........... $200,000,000 aggregate principal amount of % Senior Notes
due 2007 (the "Senior Notes").
Maturity Date................ , 2007.
Interest Payment Dates....... and of each year, commencing , 1998.
Optional Redemption.......... The Senior Notes will be redeemable, in whole or in part, at
the option of the Company, at any time on or after ,
2002, at the redemption prices set forth herein, plus
accrued and unpaid interest thereon, if any, to the date of
redemption. In addition, on or prior to , 2000, the
Company may redeem, at any time and from time to time, up to
$70 million of the aggregate principal amount of the Senior
Notes at a redemption price of % of the principal amount
thereof, plus accrued and unpaid interest thereon, if any,
to the date of redemption, with the net cash proceeds from
one or more Qualified Equity Offerings (as defined herein);
PROVIDED, HOWEVER, that at least $130 million of the
aggregate principal amount of the Senior Notes remains
outstanding following each such redemption.
Subsidiary Guarantees........ The Senior Notes will be fully and unconditionally
guaranteed (the "Subsidiary Guarantees"), on an unsecured,
senior basis, by Friendly's Restaurants Franchise, Inc., the
Company's franchise subsidiary, and will also be guaranteed
by each new subsidiary (other than Unrestricted Subsidiaries
and Foreign Subsidiaries (as defined herein)) created or
acquired after the issue date of the Senior Notes
(collectively, the "Subsidiary Guarantors"). See
"Description of Senior Notes--Guarantees."
Ranking...................... The Senior Notes will be unsecured, senior obligations of
the Company, will rank PARI PASSU in right of payment with
all existing and future senior indebtedness of the Company
and will rank senior in right of payment to all existing and
future subordinated indebtedness of the Company. The Senior
Notes will be effectively subordinated to all existing and
certain future secured indebtedness of the Company,
including indebtedness under the New Credit Facility, to the
extent of the value of the assets securing such secured
indebtedness. The Senior Notes will be structurally
subordinated to all existing and future indebtedness of any
subsidiary of the Company that is not a Subsidiary
Guarantor. As of June 29, 1997, on a pro forma basis after
giving effect to the Recapitalization and the Related
Transactions, the Company would have had a total of $293.3
million of long-term debt and capital lease obligations
outstanding, $91.4 million of which would have been secured
and none of which would have been subordinated. The
Subsidiary Guarantees will be unsecured, senior obligations
of the Subsidiary Guarantors. As of June 29, 1997, on a pro
forma basis after giving effect to the Recapitalization and
the Related Transactions, non-guarantor subsidiaries of the
Company would have
9
had no long-term debt or capital lease obligations
outstanding. See "Description of Senior Notes--Ranking."
Change of Control............ Upon the occurrence of a Change of Control (as defined
herein), each holder of Senior Notes may require the Company
to repurchase any or all outstanding Senior Notes owned by
such holder at a repurchase price of 101% of the principal
amount thereof, plus accrued and unpaid interest thereon, if
any, to the date of repurchase. See "Description of Senior
Notes--Change of Control."
Restrictive Covenants........ The Indenture under which the Senior Notes will be issued
will contain certain covenants pertaining to the Company and
its Restricted Subsidiaries (as defined herein), including
but not limited to covenants with respect to the following
matters: (i) limitations on indebtedness and preferred
stock, (ii) limitations on restricted payments such as
dividends, repurchases of the Company's or subsidiaries'
stock, repurchases of subordinated obligations, and
investments, (iii) limitations on restrictions on
distributions from Restricted Subsidiaries, (iv) limitations
on sales of assets and of subsidiary stock, (v) limitations
on transactions with affiliates, (vi) limitations on liens,
(vii) limitations on sales of subsidiary capital stock and
(viii) limitations on mergers, consolidations and transfers
of all or substantially all assets. However, all of these
covenants are subject to a number of important
qualifications and exceptions. See "Description of Senior
Notes--Certain Covenants."
Concurrent Common Stock
Offering................... Concurrent with the Senior Note Offering, the Company is
offering to the public 5,000,000 shares of Common Stock at
an estimated initial public offering price of between $19.00
and $21.00 per share. Consummation of each of the Senior
Note Offering and the Common Stock Offering is contingent
upon consummation of the other.
Use of Proceeds.............. The Company intends to use up to approximately $362 million
of the net proceeds from the Offerings and borrowings under
the New Credit Facility to refinance indebtedness and
thereby lengthen the average maturities of the Company's
outstanding indebtedness, reduce interest expense and
increase liquidity and operating and financial flexibility.
See "Use of Proceeds."
Risk Factors................. Prospective purchasers of the Senior Notes offered hereby
should carefully consider the information set forth under
the caption "Risk Factors" and all other information set
forth in this Prospectus before making any investment in the
Senior Notes.
10
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
TWELVE
MONTHS
SIX MONTHS ENDED ENDED
FISCAL YEAR (A) ------------------ --------
------------------------------------------------ JUNE 30, JUNE 29, JUNE 29,
1992 1993 1994 1995 1996 1996 1997 1997
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF RESTAURANTS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant...................................... $542,859 $580,161 $589,383 $593,570 $596,675 $284,025 $294,518 $607,168
Retail, institutional and other................. 20,346 30,472 41,631 55,579 54,132 24,759 28,310 57,683
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues.................................... 563,205 610,633 631,014 649,149 650,807 308,784 322,828 664,851
-------- -------- -------- -------- -------- -------- -------- --------
Non-cash write-downs (b).......................... -- 25,552 -- 7,352 227 -- 347 574
Depreciation and amortization..................... 35,734 35,535 32,069 33,343 32,979 16,606 16,401 32,774
Operating income.................................. 25,509 8,116 36,870 16,670 30,501 7,958 15,117 37,660
Interest expense, net (c)......................... 37,630 38,786 45,467 41,904 44,141 22,138 22,238 44,241
Cumulative effect of changes in accounting
principles, net of income taxes (d)............. -- (42,248) -- -- -- -- 2,236 2,236
Net income (loss)................................. $(13,321) $(61,448) $ (3,936) $(58,653) $ (7,772) $ (8,026) $ (2,404) $ (2,150)
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
OTHER DATA:
EBITDA (e)........................................ $ 61,243 $ 69,203 $ 68,939 $ 57,365 $ 63,707 $ 24,564 $ 31,865 $ 71,008
Net cash provided by operating activities......... 34,047 42,877 38,381 27,790 26,163 14,896 9,625 20,892
Capital expenditures:
Cash............................................ 33,577 37,361 29,507 19,092 24,217 10,912 8,810 22,115
Non-cash (f).................................... 3,121 7,129 7,767 3,305 5,951 2,811 2,057 5,197
-------- -------- -------- -------- -------- -------- -------- --------
Total capital expenditures...................... $ 36,698 $ 44,490 $ 37,274 $ 22,397 $ 30,168 $ 13,723 $ 10,867 $ 27,312
Ratio of earnings to fixed charges (g)............ -- -- -- -- -- -- -- --
PRO FORMA DATA (H):
EBITDA (e)........................................ $ 64,653 $ 31,865 $ 71,481
Interest expense, net (c)......................... 29,610 14,925 29,847
Net income........................................ 1,359 1,911 6,623
Net income per share.............................. $ 0.18 $ 0.25 $ 0.88
Weighted average shares outstanding............... 7,500 7,500 7,500
Ratio of EBITDA to interest expense, net.......... 2.2x 2.1x 2.4x
Ratio of earnings to fixed charges (g)............ 1.1x 1.0x 1.2x
Ratio of total long-term debt to EBITDA........... 4.0x
RESTAURANT OPERATING DATA:
Number of restaurants (end of period) (i)......... 764 757 750 735 707 721 700 700
Average revenue per restaurant (j)................ $ 708 $ 750 $ 783 $ 797 $ 828 -- -- $ 855
Change in comparable restaurant revenues (k)...... 6.0% 5.4% 3.4% 0.9% 1.8% (0.7)% 4.7% 7.7%
AS OF JUNE 29, 1997
------------------------------
ACTUAL AS ADJUSTED(H)
-------------- --------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit)..................................................................... $ (19,435) $ (19,130)
Total assets.................................................................................. 373,142 358,374
Total long-term debt and capital lease obligations, excluding current maturities.............. 385,622 289,050
Total stockholders' equity (deficit).......................................................... $ (175,534) $ (76,775)
11
(a) All fiscal years presented include 52 weeks of operations except 1993 which
includes 53 weeks of operations.
(b) Includes non-cash write-downs of approximately $16,337 in 1993 related to a
trademark license agreement and $3,346 in 1995 related to a postponed debt
restructuring. All other non-cash write-downs relate to property and
equipment disposed of in the normal course of the Company's operations. See
Notes 3, 5 and 6 of Notes to Consolidated Financial Statements.
(c) Interest expense, net is net of capitalized interest of $128, $156, $176,
$62, $49, $35, $17 and $31 and interest income of $222, $240, $187, $390,
$318, $215, $146 and $249 for 1992, 1993, 1994, 1995, 1996, the six months
ended June 30, 1996, the six months ended June 29, 1997 and the twelve
months ended June 29, 1997, respectively.
(d) Includes non-cash items, net of related income taxes, as a result of
adoption of accounting pronouncements related to income taxes of $30,968,
post-retirement benefits other than pensions of $4,140 and post-employment
benefits of $7,140 in 1993 and pensions of $2,236 in 1997.
(e) EBITDA represents consolidated Net income (loss) before (i) (Provision for)
benefit from income taxes, (ii) Interest expense, net, (iii) Depreciation
and amortization, (iv) Cumulative effect of changes in accounting
principles, net of income taxes, (v) Equity in net loss of joint venture and
(vi) Non-cash write-downs and all other non-cash items, plus cash
distributions from unconsolidated subsidiaries, each determined in
accordance with generally accepted accounting principles ("GAAP"). The
Company has included information concerning EBITDA in this Prospectus
because it believes that such information is used by certain investors as
one measure of an issuer's historical ability to service debt. EBITDA should
not be considered as an alternative to, or more meaningful than, earnings
from operations or other traditional indications of an issuer's operating
performance.
(f) Non-cash capital expenditures represent the cost of assets acquired through
the incurrence of capital lease obligations.
(g) The Ratio of earnings to fixed charges is computed by dividing (i) income
before interest, income taxes and other fixed charges by (ii) fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense which represents interest (assumed to be one-third).
For 1992, 1993, 1994, 1995, 1996, the six months ended June 30, 1996, the
six months ended June 29, 1997 and the twelve months ended June 29, 1997,
earnings were insufficient to cover fixed charges by $12,249, $30,826,
$8,773, $25,296, $13,689, $14,215, $7,881 and $7,355, respectively.
(h) Pro Forma Data represents the historical data for the periods adjusted to
give effect to the Recapitalization and the Related Transactions as if they
had occurred at the beginning of each period. Balance Sheet Data, As
Adjusted, represents the historical data as of June 29, 1997, adjusted to
give effect to the Recapitalization and the Related Transactions as if they
had occurred on such date. Pro forma EBITDA excludes the effect of the
Related Transactions. Pro forma EBITDA includes the benefit from the revised
method used in determining the return-on-asset component of annual pension
expense of $946 in 1996 and the incremental benefit of $473 for the twelve
months ended June 29, 1997. Additionally, effective December 30, 1996, the
Company changed the salary and expense actuarial assumptions used to
calculate pension expense. Had such changes been effective as of July 1,
1996, pro forma EBITDA, the Ratio of EBITDA to interest expense, net and the
Ratio of total long-term debt to EBITDA would have been $71,934, 2.4x and
4.0x, respectively for the twelve months ended June 29, 1997. See Note 10 of
Notes to Consolidated Financial Statements. Actual weighted average shares
outstanding were 2,414, 2,473 and 2,473 for 1996, the six months ended June
29, 1997 and the twelve months ended June 29, 1997. See Note 17 of Notes to
Consolidated Financial Statements.
The following table represents changes to Interest expense, net on a pro
forma basis, resulting from the Recapitalization and the Related
Transactions:
SIX MONTHS
FISCAL YEAR ENDED
1996 JUNE 29, 1997
------------- -------------
(IN THOUSANDS)
Elimination of interest on Old Credit Facility.......................................... $ (41,827) $ (21,213)
Reduction of interest on capital lease obligations...................................... (873) (437)
Interest on Revolving Credit Facility................................................... -- 233
Interest on Letter of Credit Facility................................................... 283 141
Interest on Term Loan Facility.......................................................... 6,386 3,213
Interest on Senior Notes................................................................ 21,500 10,750
------------- -------------
Net decrease in Interest expense, net................................................. $ (14,531) $ (7,313)
------------- -------------
------------- -------------
In calculating the interest expense adjustments arising from the
Recapitalization and the Related Transactions, the assumed rates on the
Revolving Credit Facility, Letter of Credit Facility, Term Loan Facility and
Senior Notes were 7.80%, 2.38%, 7.99%, and 10.75% for 1996, respectively,
and 7.84%, 2.38%, 8.03% and 10.75% for the six months ended June 29, 1997,
respectively.
(i) The number at June 29, 1997 includes the 34 restaurants acquired by DavCo
pursuant to the DavCo Agreement. See "Recent Developments."
(j) Average revenue per restaurant represents restaurant revenues divided by the
weighted average number of restaurants open during such period. Fiscal 1993
has been adjusted to conform to a 52-week year. The Company does not
consider six month results meaningful for this data.
(k) When computing comparable restaurant revenues, restaurants open for at least
twelve months are compared from period to period.
12
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN
THE SECURITIES OFFERED HEREBY.
SUBSTANTIAL LEVERAGE, STOCKHOLDERS' DEFICIT AND HISTORY OF LOSSES
The Company is highly leveraged. At June 29, 1997, on a pro forma basis
after giving effect to the Recapitalization and the Related Transactions, the
Company's total consolidated long-term debt and capital lease obligations
(including current maturities) would have been $293.3 million and the Company's
total consolidated stockholders' deficit would have been $76.8 million. Upon
completion of the Recapitalization, the Company's total available borrowings
under the New Credit Facility are estimated to be $45.0 million, excluding $3.1
million of availability under the Letter of Credit Facility (compared to $13.7
million as of June 29, 1997 under the Old Credit Facility, excluding $2.4
million of letter of credit availability). Additional borrowings may, subject to
certain limitations, be used for capital expenditures and general corporate
purposes, thereby increasing the Company's leverage. The Company's ability to
pay principal on the Senior Notes when due or to repurchase the Senior Notes
upon a Change of Control will be dependent upon the Company's ability to
generate cash from operations sufficient for such purposes or its ability to
refinance the Senior Notes. In addition, under the New Credit Facility, in the
event of circumstances which are similar to a Change of Control, repayment of
borrowings under the New Credit Facility will be subject to acceleration. See
"Description of New Credit Facility."
The degree to which the Company is leveraged could have important
consequences, including the following: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired, (ii)
a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of the principal of and interest on its indebtedness
and, because borrowings under the New Credit Facility in part will bear interest
at floating rates, the Company could be adversely affected by any increase in
prevailing rates, (iii) the New Credit Facility and the Indenture relating to
the Senior Notes will impose significant financial and operating restrictions on
the Company and its subsidiaries which, if violated, could permit the Company's
creditors to accelerate payments thereunder or foreclose upon the collateral
securing the New Credit Facility, (iv) the Company is more leveraged than
certain of its principal competitors, which may place the Company at a
competitive disadvantage and (v) the Company's substantial leverage may limit
its ability to respond to changing business and economic conditions and make it
more vulnerable to a downturn in general economic conditions. See "Use of
Proceeds," "Business--Competition," "Description of New Credit Facility" and
"Description of Senior Notes."
The Company has reported net losses of $13.3 million, $61.4 million, $3.9
million, $58.7 million, $7.8 million and $2.4 million for 1992, 1993, 1994,
1995, 1996 and for the six months ended June 29, 1997, respectively, and there
can be no assurance that the Company will be profitable in the future, or that,
if profitability is achieved, it will be sustained. The Company's earnings were
insufficient to cover fixed charges by $12.2 million, $30.8 million, $8.8
million, $25.3 million, $13.7 million and $7.9 million for 1992, 1993, 1994,
1995, 1996 and for the six months ended June 29, 1997, respectively, and there
can be no assurance that the Company's earnings will be sufficient to cover
fixed charges in the future. See "Selected Consolidated Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes thereto.
RESTRICTIONS IMPOSED UNDER NEW CREDIT FACILITY; SECURITY INTEREST
The New Credit Facility will impose significant operating and financial
restrictions on the Company's ability to, among other things, incur
indebtedness, create liens, sell assets, engage in mergers or consolidations,
pay dividends and engage in certain transactions with affiliates. The New Credit
Facility limits the amount which the Company may spend on capital expenditures
and requires the Company to comply with
13
certain financial ratios. These requirements may limit the ability of the
Company to meet its obligations, including its obligations with respect to the
Senior Notes. The ability of the Company to comply with the covenants in the New
Credit Facility and the Senior Notes may be affected by events beyond the
control of the Company. Failure to comply with any of these covenants could
result in a default under the New Credit Facility and the Senior Notes, and such
default could result in acceleration thereof. The New Credit Facility will
restrict the Company's ability to repurchase, directly or indirectly, the Senior
Notes. In addition, under the New Credit Facility, in the event of circumstances
which are similar to a Change of Control, repayment of borrowings under the New
Credit Facility will be subject to acceleration, which could further restrict
the Company's ability to repurchase the Senior Notes. There can be no assurance
that the Company will be permitted or have funds sufficient to repurchase the
Senior Notes when it would otherwise be required to offer to do so. It is
expected that the obligations of the Company under the New Credit Facility will
be (i) secured by a first priority security interest in substantially all
material assets of the Company and all other assets owned or hereafter acquired
and (ii) guaranteed, on a senior secured basis, by the Friendly's Restaurants
Franchise, Inc. subsidiary and may also be so guaranteed by certain subsidiaries
created or acquired after consummation of the Recapitalization. The Senior Notes
will be effectively subordinated to all existing and certain future secured
indebtedness of the Company, including indebtedness under the New Credit
Facility, to the extent of the value of the assets securing such secured
indebtedness. The Senior Notes will rank PARI PASSU to any future senior
indebtedness of the Company and be structurally subordinated to all existing and
future indebtedness of any subsidiary of the Company that is not a guarantor of
the Senior Notes. Lenders under the New Credit Facility will also have a prior
claim on the assets of subsidiaries of the Company that are guarantors under the
New Credit Facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Description of New Credit Facility" and "Description of Senior Notes."
SUCCESS OF NEW BUSINESS CONCEPTS AND STRATEGIES
The Company has recently initiated several new business concepts and
strategies, including the remodeling and re-imaging of selected restaurants, the
upgrading of its menu and the development of modified restaurant formats in
non-traditional locations. There can be no assurance that the Company will
continue to develop such concepts and strategies, that such concepts and
strategies will be successful or profitable or that such concepts and strategies
will fill the strategic roles intended for them by the Company. See
"Business--Business Strategies."
The success of the Company's business strategy will also depend, in part, on
the development and implementation of a franchising program. The Company does
not have significant experience in franchising restaurants and there can be no
assurance that the Company will continue to successfully locate and attract
suitable franchisees or that such franchisees will have the business abilities
or sufficient access to capital to open restaurants or will operate restaurants
in a manner consistent with the Company's concept and standards or in compliance
with franchise agreements. The success of the Company's franchising program will
also be dependent upon certain other factors, certain of which are not within
the control of the Company or its franchisees, including the availability of
suitable sites on acceptable lease or purchase terms, permitting and regulatory
compliance and general economic and business conditions. See "Prospectus
Summary--Recent Developments" and "Business--Restaurant Operations--Franchising
Program."
The Company has operations in the United Kingdom, South Korea and the
People's Republic of China ("China"). These international operations are subject
to various risks, including changing political and economic conditions, currency
fluctuations, trade barriers, trademark rights, adverse tax consequences, import
tariffs, customs and duties and government regulations. Government regulations,
relating to, among other things, the preparation and sale of food, building and
zoning requirements, wages, working conditions and the Company's relationship
with its employees, may vary widely from those in the United States. There can
be no assurance that the Company will be successful in maintaining or expanding
its international operations.
14
GEOGRAPHIC CONCENTRATION
Approximately 80% of the Company's restaurants are located, and
substantially all of its retail sales are generated, in the Northeast. As a
result, a severe or prolonged economic recession or changes in demographic mix,
employment levels, population density, weather, real estate market conditions or
other factors unique to this geographic region may adversely affect the Company
more than certain of its competitors which are more geographically diverse.
RELATIONSHIPS WITH PERKINS; POTENTIAL CONFLICTS OF INTEREST; DEPENDENCE ON
SENIOR MANAGEMENT
After giving effect to the Recapitalization and the Related Transactions,
approximately 7.4%, 2.4% and 2.0% of the Company's Common Stock would have been
owned, as of June 29, 1997, by Donald N. Smith, Harrah's Operating Company Inc.
("Harrah's") and The Equitable Life Assurance Society of the United States (the
"Equitable"), respectively. These stockholders indirectly own 33.2%, 33.2% and
28.1%, respectively, of the general partner of Perkins Family Restaurants, L.P.
("PFR"), which, through Perkins Restaurants Operating Company, L.P. ("Perkins"),
owns and franchises family-style restaurants. Mr. Smith, the Company's Chairman,
Chief Executive Officer and President, is an officer of the general partner of
PFR. In addition, three of the directors of the general partner of PFR serve as
directors of the Company. In the ordinary course of business, the Company enters
into transactions with Perkins. The Company's policy is to only enter into a
transaction with an affiliate, such as Perkins, in the ordinary course of, and
pursuant to the reasonable requirements of, its business and upon terms that are
no less favorable to the Company than could be obtained if the transaction was
entered into with an unaffiliated third party. See "Certain Transactions."
After giving effect to the Recapitalization and the Related Transactions,
the directors and officers of the Company would have owned approximately 18.6%
of the Common Stock as of June 29, 1997. Circumstances could arise in which the
interests of such stockholders could be in conflict with the interests of the
other stockholders of the Company and the holders of the Senior Notes. In
addition, Mr. Smith serves as Chairman, Chief Executive Officer and President of
the Company and as Chairman and Chief Executive Officer of Perkins and,
consequently, devotes a portion of his time to the affairs of each Company and
may be required to limit his involvement in those areas, if any, where the
interests of the Company conflict with those of Perkins. Mr. Smith does not have
an employment agreement with the Company nor is he contractually prohibited from
engaging in other business ventures in the future, any of which could compete
with the Company or its subsidiaries. See "Ownership of Common Stock."
The Company's business is managed, and its business strategies formulated,
by a relatively small number of key executive officers and other personnel,
certain of whom have joined the Company since Mr. Smith's arrival. The loss of
these key management persons, including Mr. Smith, could have a material adverse
effect on the Company. See "Management."
COMPETITION
The restaurant business is highly competitive and is affected by changes in
the public's eating habits and preferences, population trends and traffic
patterns, as well as by local and national economic conditions affecting
consumer spending habits, many of which are beyond the Company's control. Key
competitive factors in the industry are the quality and value of the food
products offered, quality and speed of service, attractiveness of facilities,
advertising, name brand awareness and image and restaurant location. Each of the
Company's restaurants competes directly or indirectly with locally-owned
restaurants as well as restaurants with national or regional images, and to a
limited extent, restaurants operated by its franchisees. A number of the
Company's significant competitors are larger or more diversified and have
substantially greater resources than the Company. The Company's retail
operations compete with national and regional manufacturers of frozen desserts,
many of which have greater financial resources and more
15
established channels of distribution than the Company. Key competitive factors
in the retail food business include brand awareness, access to retail locations,
price and quality.
EXPOSURE TO COMMODITY PRICING
The basic raw materials for the Company's frozen desserts are dairy products
and sugar. The Company's purchasing department purchases other food products,
such as coffee, in large quantities. Although the Company does not hedge its
positions in any of these commodities as a matter of policy, it may
opportunistically purchase some of these items in advance of a specific need. As
a result, the Company is subject to the risk of substantial and sudden price
increases, shortages or interruptions in supply of such items, which could have
a material adverse effect on the Company.
RISKS ASSOCIATED WITH THE FOOD SERVICE INDUSTRY
Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns, the cost and availability of labor, purchasing power, availability of
products and the type, number and location of competing restaurants. The Company
could also be substantially adversely affected by publicity resulting from food
quality, illness, injury or other health concerns or alleged discrimination or
other operating issues stemming from one location or a limited number of
locations, whether or not the Company is liable. In addition, factors such as
increased costs of goods, regional weather conditions and the potential scarcity
of experienced management and hourly employees may also adversely affect the
food service industry in general and the results of operations and financial
condition of the Company.
REGULATION
The restaurant and food distribution industries are subject to numerous
Federal, state and local government regulations, including those relating to the
preparation and sale of food and building and zoning requirements. Also, the
Company is subject to laws governing its relationship with employees, including
minimum wage requirements, overtime, working conditions and citizenship
requirements. The failure to obtain or retain food licenses or an increase in
the minimum wage rate, employee benefit costs or other costs associated with
employees could adversely affect the Company. In September 1997, the second
phase of an increase in the minimum wage will be implemented in accordance with
the Federal Fair Labor Standards Act of 1996, which could adversely affect the
Company. See "Business--Government Regulation."
FRAUDULENT CONVEYANCE
The incurrence of indebtedness and other obligations in connection with the
Recapitalization, including the issuance of the Senior Notes, may be subject to
review by a court under federal bankruptcy law or comparable provisions of state
fraudulent transfer law. Generally, if a court or other trier of fact were to
find that the Company did not receive fair consideration or reasonably
equivalent value for incurring such indebtedness or obligation and, at the time
of such incurrence, the Company (i) was insolvent, (ii) was rendered insolvent
by reason of such incurrence, (iii) was engaged in a business or transaction for
which the assets remaining in the Company constituted unreasonably small capital
or (iv) intended to incur or believed it would incur debts beyond its ability to
pay such debts as they mature, such court, subject to applicable statutes of
limitations, could determine to invalidate, in whole or in part, such
indebtedness and obligations as fraudulent conveyances or subordinate such
indebtedness and obligations to existing or future creditors of the Company. The
definition or measure of such matters as fair consideration, reasonably
equivalent value, insolvency or unreasonably small capital for purposes of the
foregoing will vary depending on the law of the jurisdiction which is being
applied. Generally, however, the Company would be considered insolvent if, at
the time it incurred indebtedness, either the fair market value (or fair
saleable value) of its assets was less than the amount required to pay its total
debts and
16
liabilities (including contingent liabilities) as they became absolute and
matured or it had incurred debt beyond its ability to repay such debt as it
matures.
The proceeds of the Recapitalization will be used primarily to repay debt of
the Company. The Company believes that it is receiving fair consideration or
reasonably equivalent value in return for incurring the indebtedness and other
obligations in connection with the Recapitalization. The Company also believes
that, after giving effect to indebtedness incurred in connection with the
Recapitalization and the use of the proceeds of such indebtedness, it will have
sufficient capital for the businesses in which it is engaged. There can be no
assurance, however, as to what standard a court would apply in making such
determinations or whether a court would agree with the Company's assessments. In
addition, as of June 29, 1997 on a pro forma basis giving effect to the
Recapitalization and the Related Transactions as if they had occurred on such
date, the Company would have had a negative net worth as determined pursuant to
generally accepted accounting principles.
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Senior Note Offering, there has been no public market for the
Senior Notes. The Company has no present plans to list the Senior Notes on any
national securities exchange or to apply for quotation thereof on the Nasdaq
National Market. The Company has been advised by the Underwriters that the
Underwriters presently intend to make a market in the Senior Notes as permitted
by applicable laws and regulations. However, the Underwriters are not obligated
to do so, and any such market-making may be discontinued at any time without
notice at the sole discretion of the Underwriters. Accordingly, no assurance can
be given that any market for the Senior Notes will develop, or, if any such
market develops, as to the liquidity of such market.
17
USE OF PROCEEDS
The Company is implementing the Recapitalization to refinance all of the
indebtedness under the Old Credit Facility and thereby lengthen the average
maturities of the Company's outstanding indebtedness, reduce interest expense
and increase liquidity and operating and financial flexibility. Concurrent with,
and contingent upon, the consummation of the Offerings, the Company will enter
into the New Credit Facility.
As of June 29, 1997, borrowings under the Old Credit Facility accrued
interest at a rate of 11.0% per annum, and such borrowings will become due in
May 1998, unless repaid or previously extended for an additional year pursuant
to the terms of the Old Credit Facility. Borrowings under the New Credit
Facility will bear interest at a floating rate equal to LIBOR plus 2.375% per
annum for drawings under the Revolving Credit Facility and issuances under the
Letter of Credit Facility, 2.375% per annum for amounts undrawn and available
under the Letter of Credit Facility and an average floating rate equal to LIBOR
plus 2.563% for the Term Loan Facility. See "Description of New Credit
Facility."
The following table sets forth the estimated sources and uses of funds in
connection with the Recapitalization after giving effect to the Related
Transactions:
AT CLOSING
--------------------
(DOLLARS IN
THOUSANDS)
SOURCES OF FUNDS:
Available cash........................................................ $ 1,339
Term Loan Facility (a)................................................ 80,000
Senior Note Offering (b).............................................. 200,000
Common Stock Offering (c)............................................. 100,000
--------
Total Sources..................................................... $ 381,339
--------
--------
USES OF FUNDS:
Retirement of Old Credit Facility (d)................................. $ 353,089
Retirement of capital leases.......................................... 9,000
Estimated fees and expenses (e)....................................... 19,250
--------
Total Uses........................................................ $ 381,339
--------
--------
- ------------------------
(a) Represents borrowing in full under the Term Loan Facility. As part of the
Recapitalization, the Company will have a $45,000 Revolving Credit Facility
which is expected to be undrawn at closing and $3,111 available under the
Letter of Credit Facility. These facilities are expected to be drawn in
part, from time to time, to finance the Company's working capital and other
general corporate requirements.
(b) Represents gross proceeds from the Senior Note Offering.
(c) Represents gross proceeds from the sale of 5,000,000 shares of Common Stock
at an assumed initial public offering price of $20.00 per share.
(d) Represents the balance of all amounts expected to be outstanding under the
Old Credit Facility ($371,327 as of June 29, 1997) after giving effect to
the application of (i) $8,238 received on July 15, 1997 pursuant to the
DavCo Agreement and (ii) $10,000 of previously restricted cash and
investments of RIC which is expected to be released to the Company in
exchange for a $11,889 letter of credit, with the $1,889 of additional
released cash and investments increasing the Company's cash balance.
(e) Includes estimated underwriting discounts and commissions and other fees and
expenses relating to the Offerings and the New Credit Facility of which
$8,427 relates to the Common Stock Offering and $10,823 relates to the
Senior Note Offering and the New Credit Facility. See "Underwriting."
18
CAPITALIZATION
The following table sets forth the balance of Cash and cash equivalents,
Current maturities of long-term debt and capital lease obligations and
capitalization of the Company (i) as of June 29, 1997 and (ii) as of June 29,
1997, as adjusted to give effect to the Recapitalization and the Related
Transactions. This table should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
AS OF JUNE 29, 1997
------------------------
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
Cash and cash equivalents.............................................................. $ 16,899 $ 7,466(a)
----------- -----------
----------- -----------
Current maturities of long-term debt and capital lease obligations..................... $ 7,956 $ 4,201
----------- -----------
----------- -----------
Long-term debt
Old Credit Facility.................................................................. $ 371,327 $ --(b)
Revolving Credit Facility............................................................ -- --(c)
Term Loan Facility................................................................... -- 80,000
Senior Notes......................................................................... -- 200,000
Capital lease obligations and other.................................................. 14,295 9,050
----------- -----------
Total long-term debt................................................................... 385,622 289,050
----------- -----------
Stockholders' equity (d)
Preferred Stock, $0.01 par value, 1,000,000 shares authorized and none outstanding,
as adjusted........................................................................ -- --
Common Stock, $0.01 par value, 7,389 shares authorized and 2,473 shares outstanding;
50,000 shares authorized and 7,500 shares outstanding, as adjusted................. 25 75
Paid-in capital...................................................................... 46,905 148,210
Unrealized gain on investment securities............................................. 28 28
Accumulated deficit.................................................................. (222,563) (225,159)
Cumulative translation adjustment.................................................... 71 71
----------- -----------
Total stockholders' equity (deficit)................................................... (175,534) (76,775)
----------- -----------
Total capitalization................................................................... $ 210,088 $ 212,275
----------- -----------
----------- -----------
- ------------------------
(a) Gives effect to (i) the $9,983 interest payment made on July 1, 1997 under
the Old Credit Facility, (ii) the receipt of $11,889 of previously
restricted cash from the Company's insurance subsidiary released in exchange
for a letter of credit, net of $10,000 applied to the Old Credit Facility
and (iii) $1,339 required as a source of funds for the Recapitalization.
(b) Gives effect to the application of (i) $353,089 of the gross proceeds from
the Recapitalization, (ii) $10,000 of restricted cash released from the
Company's insurance subsidiary and (iii) $8,238 received by the Company
pursuant to the DavCo Agreement on July 15, 1997. See "Use of Proceeds."
(c) As part of the Recapitalization, the Company will have a $45,000 Revolving
Credit Facility which is expected to be undrawn at closing and $3,111
available under the Letter of Credit Facility. These facilities are expected
to be drawn in part, from time to time, to finance the Company's working
capital and other general corporate requirements.
(d) Historical share information includes Class A common shares and Class B
common shares. In connection with the Recapitalization, the Class A common
shares and Class B common shares will be converted into Common Stock.
19
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated historical financial
information of the Company and its consolidated subsidiaries for each of the
periods presented below. This information should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein. The selected consolidated historical financial
information for each of 1994, 1995 and 1996, and as of December 31, 1995 and
December 29, 1996, has been derived from the Company's audited Consolidated
Financial Statements which are included elsewhere herein. The selected
consolidated historical financial information as of and for the six months ended
June 30, 1996 and June 29, 1997 and for the latest twelve months ended June 29,
1997 has been derived from the Company's unaudited consolidated financial
statements which, in the opinion of management, reflect all adjustments
(consisting only of normal recurring accruals) necessary to present fairly, in
accordance with GAAP, the information contained therein. See Note 3 of Notes to
Consolidated Financial Statements for a discussion of the basis of the
presentation and significant accounting policies of the consolidated historical
financial information set forth below. Results for interim periods are not
necessarily indicative of full fiscal year results. No stock dividends were
declared or paid for any period presented.
SIX MONTHS ENDED
FISCAL YEAR (A) --------------------
----------------------------------------------------- JUNE 30, JUNE 29,
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant........................................ $ 542,859 $ 580,161 $ 589,383 $ 593,570 $ 596,675 $ 284,025 $ 294,518
Retail, institutional and other................... 20,346 30,472 41,631 55,579 54,132 24,759 28,310
--------- --------- --------- --------- --------- --------- ---------
Total revenues...................................... 563,205 610,633 631,014 649,149 650,807 308,784 322,828
--------- --------- --------- --------- --------- --------- ---------
Cost of sales..................................... 154,796 170,431 179,793 192,600 191,956 89,696 92,186
Labor and benefits................................ 201,431 209,522 211,838 214,625 209,260 102,674 104,898
Operating expenses................................ 108,363 120,626 132,010 143,854 143,163 70,620 71,284
General and administrative expenses............... 37,372 40,851 38,434 40,705 42,721 21,230 22,595
Non-cash write-downs (b).......................... -- 25,552 -- 7,352 227 -- 347
Depreciation and amortization..................... 35,734 35,535 32,069 33,343 32,979 16,606 16,401
--------- --------- --------- --------- --------- --------- ---------
Operating income.................................... 25,509 8,116 36,870 16,670 30,501 7,958 15,117
Interest expense, net (c)........................... 37,630 38,786 45,467 41,904 44,141 22,138 22,238
Equity in net loss of joint venture................. -- -- -- -- -- -- 743
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before (provision for) benefit from
income taxes and cumulative effect of changes in
accounting principles............................. (12,121) (30,670) (8,597) (25,234) (13,640) (14,180) (7,864)
(Provision for) benefit from income taxes........... (1,200) 11,470 4,661 (33,419) 5,868 6,154 3,224
Cumulative effect of changes in accounting
principles, net of income taxes (d)............... -- (42,248) -- -- -- -- 2,236
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................................... $ (13,321) $ (61,448) $ (3,936) $ (58,653) $ (7,772) $ (8,026) $ (2,404)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
OTHER DATA:
EBITDA (e).......................................... $ 61,243 $ 69,203 $ 68,939 $ 57,365 $ 63,707 $ 24,564 $ 31,865
Net cash provided by operating activities........... 34,047 42,877 38,381 27,790 26,163 14,896 9,625
Capital expenditures:
Cash.............................................. 33,577 37,361 29,507 19,092 24,217 10,912 8,810
Non-cash (f)...................................... 3,121 7,129 7,767 3,305 5,951 2,811 2,057
--------- --------- --------- --------- --------- --------- ---------
Total capital expenditures.......................... $ 36,698 $ 44,490 $ 37,274 $ 22,397 $ 30,168 $ 13,723 $ 10,867
Ratio of earnings to fixed charges (g).............. -- -- -- -- -- -- --
PRO FORMA DATA (H):
EBITDA (e).......................................... $ 64,653 $ 31,865
Interest expense, net (c)........................... 29,610 14,925
Net income.......................................... 1,359 1,911
Net income per share................................ $ 0.18 $ 0.25
Weighted average shares outstanding................. 7,500 7,500
Ratio of EBITDA to interest expense, net............ 2.2x 2.1x
Ratio of earnings to fixed charges (g).............. 1.1x 1.0x
Ratio of total long-term debt to EBITDA.............
TWELVE
MONTHS
ENDED
---------
JUNE 29,
1997
---------
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant........................................ $ 607,168
Retail, institutional and other................... 57,683
---------
Total revenues...................................... 664,851
---------
Cost of sales..................................... 194,446
Labor and benefits................................ 211,484
Operating expenses................................ 143,827
General and administrative expenses............... 44,086
Non-cash write-downs (b).......................... 574
Depreciation and amortization..................... 32,774
---------
Operating income.................................... 37,660
Interest expense, net (c)........................... 44,241
Equity in net loss of joint venture................. 743
---------
Income (loss) before (provision for) benefit from
income taxes and cumulative effect of changes in
accounting principles............................. (7,324)
(Provision for) benefit from income taxes........... 2,938
Cumulative effect of changes in accounting
principles, net of income taxes (d)............... 2,236
---------
Net income (loss)................................... $ (2,150)
---------
---------
OTHER DATA:
EBITDA (e).......................................... $ 71,008
Net cash provided by operating activities........... 20,892
Capital expenditures:
Cash.............................................. 22,115
Non-cash (f)...................................... 5,197
---------
Total capital expenditures.......................... $ 27,312
Ratio of earnings to fixed charges (g).............. --
PRO FORMA DATA (H):
EBITDA (e).......................................... $ 71,481
Interest expense, net (c)........................... 29,847
Net income.......................................... 6,623
Net income per share................................ $ 0.88
Weighted average shares outstanding................. 7,500
Ratio of EBITDA to interest expense, net............ 2.4x
Ratio of earnings to fixed charges (g).............. 1.2x
Ratio of total long-term debt to EBITDA............. 4.0x
20
FISCAL YEAR (A) AS OF AS OF
----------------------------------------------------- JUNE 30, JUNE 29,
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital (deficit).................. $ (28,451) $ (27,919) $ (35,856) $ (14,678) $ (20,700) $ (24,394) $ (19,435)
Total assets............................... 380,087 365,330 374,669 370,292 360,126 371,519 373,142
Total long-term debt and capital lease
obligations, excluding current
maturities............................... 358,102 363,028 369,549 389,144 385,977 390,083 385,622
Total stockholders' equity (deficit)....... $ (43,993) $(102,965) $(106,901) $(165,534) $(173,156) $(176,019) $(175,534)
AS
ADJUSTED(H)
-----------
JUNE 29,
1997
-----------
BALANCE SHEET DATA:
Working capital (deficit).................. $ (19,130)
Total assets............................... 358,374
Total long-term debt and capital lease
obligations, excluding current
maturities............................... 289,050
Total stockholders' equity (deficit)....... $ (76,775)
- ------------------------
(a) All fiscal years presented include 52 weeks of operations except 1993 which
includes 53 weeks of operations.
(b) Includes non-cash write-downs of approximately $16,337 in 1993 related to a
trademark license agreement and $3,346 in 1995 related to a postponed debt
restructuring. All other non-cash write-downs relate to property and
equipment disposed of in the normal course of the Company's operations. See
Notes 3, 5 and 6 of Notes to Consolidated Financial Statements.
(c) Interest expense, net is net of capitalized interest of $128, $156, $176,
$62, $49, $35, $17 and $31 and interest income of $222, $240, $187, $390,
$318, $215, $146 and $249 for 1992, 1993, 1994, 1995, 1996, the six months
ended June 30, 1996, the six months ended June 29, 1997 and the twelve
months ended June 29, 1997, respectively.
(d) Includes non-cash items, net of related income taxes, as a result of
adoption of accounting pronouncements related to income taxes of $30,968,
post-retirement benefits other than pensions of $4,140 and post-employment
benefits of $7,140 in 1993 and pensions of $2,236 in 1997.
(e) EBITDA represents consolidated Net income (loss) before (i) (Provision for)
benefit from income taxes, (ii) Interest expense, net, (iii) Depreciation
and amortization, (iv) Cumulative effect of changes in accounting
principles, net of income taxes, (v) Equity in net loss of joint venture and
(vi) Non-cash write-downs and all other non-cash items, plus cash
distributions from unconsolidated subsidiaries, each determined in
accordance with GAAP. The Company has included information concerning EBITDA
in this Prospectus because it believes that such information is used by
certain investors as one measure of an issuer's historical ability to
service debt. EBITDA should not be considered as an alternative to, or more
meaningful than, earnings from operations or other traditional indications
of an issuer's operating performance.
(f) Non-cash capital expenditures represent the cost of assets acquired through
the incurrence of capital lease obligations.
(g) The Ratio of earnings to fixed charges is computed by dividing (i) income
before interest, income taxes and other fixed charges by (ii) fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense which represents interest (assumed to be one-third).
For 1992, 1993, 1994, 1995, 1996, the six months ended June 30, 1996, the
six months ended June 29, 1997 and the twelve months ended June 29, 1997,
earnings were insufficient to cover fixed charges by $12,249, $30,826,
$8,773, $25,296, $13,689, $14,215, $7,881 and $7,355, respectively.
(h) Pro Forma Data represents the historical data for the periods adjusted to
give effect to the Recapitalization and the Related Transactions as if they
had occurred at the beginning of each period. Balance Sheet Data, As
Adjusted, represents the historical data as of June 29, 1997, adjusted to
give effect to the Recapitalization and the Related Transactions as if they
had occurred on such date. Pro forma EBITDA excludes the effect of the
Related Transactions. Pro forma EBITDA includes the benefit from the revised
method used in determining the return-on-asset component of annual pension
expense of $946 in 1996 and the incremental benefit of $473 for the twelve
months ended June 29, 1997. Additionally, effective December 30, 1996, the
Company changed the salary and expense actuarial assumptions used to
calculate pension expense. Had such changes been effective as of July 1,
1996, pro forma EBITDA, the Ratio of EBITDA to interest expense, net and the
Ratio of total long-term debt to EBITDA would have been $71,934, 2.4x and
4.0x, respectively for the twelve months ended June 29, 1997. See Note 10 of
Notes to Consolidated Financial Statements. Actual weighted average shares
outstanding were 2,414, 2,473 and 2,473 for 1996, the six months ended June
29, 1997 and the twelve months ended June 29, 1997. See Note 17 of Notes to
Consolidated Financial Statements.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE IN
THIS PROSPECTUS.
OVERVIEW
Friendly's owns and operates 666 restaurants, franchises 34 restaurants and
distributes a full line of frozen desserts through more than 5,000 supermarkets
and other retail locations in 15 states. The Company was publicly held from 1968
until January 1979 at which time it was acquired by Hershey. Under Hershey's
ownership, the number of Company restaurants increased from 601 to 849. Hershey
subsequently sold the Company in September 1988 to TRC in a highly-leveraged
transaction.
Beginning in 1989, the new management focused on improving operating
performance through revitalizing and renovating restaurants, upgrading and
expanding the menu and improving management hiring, training, development and
retention. Also in 1989, the Company introduced its signature frozen desserts
into retail locations in the Northeast. Since the beginning of 1989, 22 new
restaurants have been opened while 170 under-performing restaurants have been
closed.
The high leverage associated with the TRC Acquisition has severely impacted
the liquidity and profitability of the Company. As of June 29, 1997, the Company
had a stockholders' deficit of $175.5 million. Cumulative interest expense of
$373.3 million since the TRC Acquisition has significantly contributed to the
deficit. The Company's net loss in 1996 of $7.8 million included $44.1 million
of interest expense.
The Company's revenue, EBITDA and operating income have improved
significantly since the TRC Acquisition. Despite the closing of 148 restaurants
(net of restaurants opened) since the beginning of 1989, Restaurant revenues
have increased 9.0% from $557.3 million in 1989 to $607.2 million in the twelve-
months ended June 29, 1997, while average revenue per restaurant has increased
28.6% from $665,000 to $855,000 during the same period. Retail, institutional
and other revenues have also increased from $1.4 million in 1989 to $57.7
million in the twelve months ended June 29, 1997. In addition, EBITDA has
increased 49.8% from $47.4 million in 1989 to $71.0 million in the twelve-month
period ended June 29, 1997, while operating income has increased from $4.1
million to $37.7 million over the same period. As a result of the positive
impact of the Company's revitalization program, the closing of under-performing
restaurants and the growth of the retail, institutional and other businesses,
period to period comparisons may not be meaningful.
The Company's revenues are derived primarily from the operation of
full-service restaurants and from the distribution and sale of frozen desserts
through retail locations. In addition, the Company derives a small amount of
revenue from the sale of frozen desserts in the United Kingdom and South Korea
under various distribution and licensing arrangements. Furthermore, the Company
is a 50% partner in a joint venture in Shanghai, China which has manufactured
and distributed frozen desserts on a limited basis. The joint venture is
currently seeking to establish additional distribution for its products in
China.
On July 14, 1997, the Company entered into the DavCo Agreement pursuant to
which the Company received $8.2 million in cash for the sale of certain non-real
property assets and in payment of franchise and development fees, and will
receive (i) a royalty based on franchised restaurant revenues and (ii) revenues
and earnings from the sale to DavCo of Friendly's frozen desserts and other
products. The Company anticipates receiving similar fees and royalty streams in
connection with future franchising arrangements. See "Prospectus Summary--Recent
Developments."
Cost of sales includes direct food costs, the Company's costs to manufacture
frozen desserts and the Company's costs to distribute frozen desserts and other
food products to its restaurants and its retail, institutional and other
customers. Retail, institutional and other revenues have higher food costs as a
percentage of sales than Restaurant revenues. Labor and benefits include labor
and related payroll
22
expenses for restaurant employees. Operating expenses include all other
restaurant-level expenses including supplies, utilities, maintenance, insurance
and occupancy-related expenses, the costs associated with Retail, institutional
and other revenues including salaries for sales personnel and other selling
expenses and advertising costs.
General and administrative expenses include costs associated with restaurant
field supervision and the Company's headquarters personnel. Non-cash write-downs
include the write-downs of long-lived assets and certain intangible assets when
circumstances indicate that the carrying amount of an asset may not be
recoverable. See Notes 3 and 6 of Notes to Consolidated Financial Statements.
Interest expense, net is net of capitalized interest and interest income.
RESULTS OF OPERATIONS
The operating results of the Company expressed as a percentage of Total
revenues are set forth below.
FISCAL YEAR SIX MONTHS ENDED
------------------------------ -------------------
JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
Revenues:
Restaurant.................. 93.4% 91.4% 91.7% 92.0% 91.2%
Retail, institutional and
other..................... 6.6 8.6 8.3 8.0 8.8
-------- -------- -------- -------- --------
Total revenues................ 100.0 100.0 100.0 100.0 100.0
-------- -------- -------- -------- --------
Less:
Cost of sales............... 28.5 29.7 29.5 29.0 28.5
Labor and benefits.......... 33.6 33.1 32.2 33.3 32.5
Operating expenses.......... 20.9 22.2 22.0 22.9 22.1
General and administrative
expenses.................. 6.1 6.2 6.5 6.9 7.0
-------- -------- -------- -------- --------
EBITDA........................ 10.9 8.8 9.8 7.9 9.9
Non-cash write-downs.......... 0.0 1.1 0.0 0.0 0.1
Depreciation and
amortization................ 5.1 5.1 5.1 5.3 5.1
-------- -------- -------- -------- --------
Operating income.............. 5.8 2.6 4.7 2.6 4.7
Interest expense, net......... 7.2 6.5 6.8 7.2 6.9
Equity in net loss of joint
venture..................... 0.0 0.0 0.0 0.0 0.2
-------- -------- -------- -------- --------
Loss before benefit from
(provision for) income taxes
and cumulative effect of
change in accounting
principle................... (1.4) (3.9) (2.1) (4.6) (2.4)
Benefit from (provision for)
income taxes................ 0.8 (5.1) 0.9 2.0 1.0
Cumulative effect of change in
accounting principle, net of
income tax expense.......... 0.0 0.0 0.0 0.0 0.7
-------- -------- -------- -------- --------
Net income (loss)............. (0.6)% (9.0)% (1.2)% (2.6)% (0.7)%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
SIX MONTHS ENDED JUNE 29, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES--Total revenues increased $14.0 million, or 4.5%, to $322.8 million
for the six months ended June 29, 1997 from $308.8 million for the six months
ended June 30, 1996. Restaurant revenues increased $10.5 million, or 3.7%, to
$294.5 million for the six months ended June 29, 1997 from $284.0 million for
the six months ended June 30, 1996. Comparable restaurant revenues increased
4.7%. The increase in Restaurant revenues and comparable restaurant revenues was
due to the introduction of higher-priced lunch and dinner entrees, selected menu
price increases, a shift in sales mix to higher-priced items, the opening of one
new restaurant, the revitalization of 21 restaurants, building expansions at
four restaurants and a milder winter in the 1997 period, which allowed for
favorable traffic comparisons. The increase was
23
partially offset by the closing of 22 under-performing restaurants. Retail,
institutional and other revenues increased by $3.5 million, or 14.1%, to $28.3
million for the six months ended June 29, 1997 from $24.8 million for the six
months ended June 30, 1996. The increase was primarily due to a more effective
sales promotion program.
COST OF SALES--Cost of sales increased $2.5 million, or 2.8%, to $92.2
million for the six months ended June 29, 1997 from $89.7 million for the six
months ended June 30, 1996. Cost of sales as a percentage of Total revenues
decreased to 28.5% in the 1997 period from 29.0% in the 1996 period. The
decrease was due to a 0.8% reduction in food costs at the restaurant level
despite higher guest check averages because of reduced promotional discounts.
The decrease was offset by a 0.3% increase in food costs at the retail and
institutional level.
LABOR AND BENEFITS--Labor and benefits increased $2.2 million, or 2.1%, to
$104.9 million for the six months ended June 29, 1997 from $102.7 million for
the six months ended June 30, 1996. Labor and benefits as a percentage of Total
revenues decreased to 32.5% in the 1997 period from 33.3% in the 1996 period.
The decrease was due to an increase in Retail, institutional and other revenues
as a percent of Total revenues as these revenues have no associated labor and
benefits costs, and to an improvement in labor utilization and lower workers'
compensation insurance and pension costs.
OPERATING EXPENSES--Operating expenses increased $0.7 million, or 1.0%, to
$71.3 million for the six months ended June 29, 1997 from $70.6 million for the
six months ended June 30, 1996. Operating expenses as a percentage of Total
revenues decreased to 22.1% in the 1997 period from 22.9% in the 1996 period.
The decrease was due to reduced costs for snow removal in the 1997 period and
the allocation of fixed costs over higher Total revenues.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $1.4 million, or 6.6%, to $22.6 million for the six months ended June
29, 1997 from $21.2 million for the six months ended June 30, 1996. General and
administrative expenses as a percentage of Total revenues increased to 7.0% in
the 1997 period from 6.9% in the 1996 period. This increase was due to an
increase in management bonuses and the annual merit-based salary increases,
partially offset by reductions in pension costs and the elimination of field
management positions associated with the closing of 22 restaurants since the end
of the 1996 period.
EBITDA--As a result of the above, EBITDA increased $7.3 million, or 29.7%,
to $31.9 million for the six months ended June 29, 1997 from $24.6 million for
the six months ended June 30, 1996. EBITDA as a percentage of Total revenues
increased to 9.9% in the 1997 period from 7.9% in the 1996 period.
NON-CASH WRITE-DOWNS--Non-cash write-downs were $0.3 million for the six
months ended June 29, 1997; there were no such write-downs during the six months
ended June 30, 1996.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased $0.2
million, or 1.2%, to $16.4 million for the six months ended June 29, 1997 from
$16.6 million for the six months ended June 30, 1996. Depreciation and
amortization as a percentage of Total revenues decreased to 5.1% in the 1997
period from 5.3% in the 1996 period. The decrease was due to the closing of 22
units since the end of the 1996 period, partially offset by higher amortization
of debt restructuring costs incurred as a result of a debt restructuring which
was effective January 1, 1996.
INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and
interest income, increased by $0.1 million, or 0.5%, to $22.2 million for the
six months ended June 29, 1997 from $22.1 million for the six months ended June
30, 1996. The increase in interest expense was due to higher average borrowings
under the revolving portion of the Company's Old Credit Facility in the 1997
period.
EQUITY IN NET LOSS OF JOINT VENTURE--The equity in net loss of the China
joint venture of $0.7 million for the six month period ended June 29, 1997
reflected the Company's 50% share of the China joint venture's net loss for such
period. Sales for the joint venture were minimal during the 1997 period.
24
BENEFIT FROM (PROVISION FOR) INCOME TAXES--The benefit from income taxes
decreased $3.0 million to a benefit of $3.2 million for the six months ended
June 29, 1997 from a benefit of $6.2 million for the six months ended June 30,
1996. The decrease was due to a decrease in the loss before taxes.
In 1997, the Company revised the method used in determining the
return-on-asset component of annual pension expense as described in Note 10 of
Notes to Consolidated Financial Statements. The cumulative effect of this change
was $2.2 million, net of income tax expense of $1.6 million.
NET INCOME (LOSS)--Net loss decreased by $5.6 million, or 70.0%, to a net
loss of $2.4 million for the six months ended June 29, 1997 from a net loss of
$8.0 million for the six months ended June 30, 1996.
1996 COMPARED TO 1995
REVENUES--Total revenues increased $1.7 million, or 0.3%, to $650.8 million
in 1996 from $649.1 million in 1995. Restaurant revenues increased $3.1 million,
or 0.5%, to $596.7 million in 1996 from $593.6 million in 1995. Comparable
restaurant revenues increased by 1.8%. The increase in Restaurant revenues and
comparable restaurant revenues was due to the introduction of higher-priced
lunch and dinner entrees in the fourth quarter of 1996, selected menu price
increases, a shift in sales mix to higher priced items, the opening of three new
restaurants, the revitalization of 17 restaurants and building expansions at
four existing locations. The increase was partially offset by the closing of 31
restaurants in 1996. Retail, institutional and other revenues declined by $1.5
million, or 2.7%, to $54.1 million in 1996 from $55.6 million in 1995. The
decrease was primarily attributable to the effects of a reduction in promotional
activities.
COST OF SALES--Cost of sales decreased $0.6 million, or 0.3%, to $192.0
million in 1996 from $192.6 million in 1995. Cost of sales as a percentage of
Total revenues decreased to 29.5% in 1996 from 29.7% in 1995. The decrease was
due to a 0.2% reduction in food costs at the restaurant level as a result of
reduced waste in food preparation.
LABOR AND BENEFITS--Labor and benefits decreased $5.3 million, or 2.5%, to
$209.3 million in 1996 from $214.6 million in 1995. Labor and benefits as a
percentage of Total revenues decreased to 32.2% in 1996 from 33.1% in 1995. The
decrease was due to a 1.1% reduction in labor and benefits as a percentage of
Restaurant revenues as a result of an improvement in labor utilization and lower
group and workers' compensation insurance costs. The decrease was offset by a
0.3% reduction in Retail, institutional and other revenues as a percentage of
Total revenues as these revenues have no associated labor and benefits.
OPERATING EXPENSES--Operating expenses decreased $0.7 million, or 0.5%, to
$143.2 million in 1996 from $143.9 million in 1995. Operating expenses as a
percentage of Total revenues decreased in 1996 to 22.0% from 22.2% in 1995. The
decrease was due to the allocation of fixed costs over higher total revenues.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $2.0 million, or 4.9%, to $42.7 million in 1996 from $40.7 million in
1995. General and administrative expenses as a percentage of Total revenues
increased to 6.5% in 1996 from 6.2% in 1995. This increase was due to an
increase in management bonuses and the annual merit-based salary increases,
partially offset by reductions in group medical insurance claims and the
elimination of field management positions associated with the closing of 31
restaurants in 1996. General and administrative expenses, exclusive of
management bonuses, increased $0.3 million in 1996.
EBITDA--As a result of the above, EBITDA increased by $6.3 million, or
11.0%, to $63.7 million in 1996 from $57.4 million in 1995. EBITDA as a
percentage of Total revenues increased to 9.8% in 1996 from 8.8% in 1995.
NON-CASH WRITE-DOWNS--Non-cash write-downs decreased $7.2 million to $0.2
million in 1996 from $7.4 million in 1995. The decrease was due to a reduction
in the carrying value of properties held for disposition
25
of $0.2 million in 1996 and $4.0 million in 1995. In 1995, the Company also
incurred a non-cash write-down of $3.3 million relating to costs resulting from
a postponed debt refinancing. For further explanation of the non-cash
write-downs, see Notes 3, 5 and 6 of Notes to Consolidated Financial Statements.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased $0.3
million, or 0.9%, to $33.0 million in 1996 from $33.3 million in 1995. The
decrease was due to lower amortization of debt restructuring costs, partially
offset by an increase in depreciation due to the addition of three restaurants
and the ongoing implementation of the Company's revitalization program.
Depreciation and amortization as a percentage of Total revenues was 5.1% for
both periods.
INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and
interest income, increased by $2.2 million, or 5.3%, to $44.1 million in 1996
from $41.9 million in 1995. The increase was due to an increase in the interest
rate on the Company's bank debt as a result of the debt restructuring effective
January 1, 1996.
BENEFIT FROM (PROVISION FOR) INCOME TAXES--The benefit from income taxes was
$5.9 million in 1996 as compared to a provision for income taxes of $33.4
million in 1995. The benefit from income taxes of $5.9 million in 1996
represented the statutory federal and state tax benefit of the Company's loss
partially offset by the impact of the federal and state tax valuation
allowances. The income tax provision of $33.4 million in 1995 resulted primarily
from the Company's deconsolidation from TRC as described in Note 9 of Notes to
Consolidated Financial Statements. See "Net Operating Loss Carryforwards."
NET INCOME (LOSS)--As a result of the above, net loss decreased by $50.9
million, or 86.7%, to a net loss of $7.8 million in 1996 from a net loss of
$58.7 million in 1995.
1995 COMPARED TO 1994
REVENUES--Total revenues increased $18.1 million, or 2.9%, to $649.1 million
in 1995 from $631.0 million in 1994. Restaurant revenues increased $4.2 million,
or 0.7%, to $593.6 million in 1995 from $589.4 million in 1994. Comparable
restaurant revenues increased by 0.9%. The increase in Restaurant revenues and
comparable restaurant revenues was due to the introduction of frozen yogurt,
selected menu price increases, a shift in sales mix to higher-priced items, the
opening of one new restaurant, the revitalization of 13 restaurants and building
expansions at seven existing restaurants. The increase was partially offset by
the closing of 16 restaurants in 1995. Retail, institutional and other revenues
increased $14.0 million, or 33.7%, to $55.6 million in 1995 from $41.6 million
in 1994. This increase was due to a successful promotional campaign in existing
markets and the introduction of frozen yogurt into these markets.
COST OF SALES--Cost of sales increased $12.8 million, or 7.1%, to $192.6
million in 1995 from $179.8 million in 1994. Cost of sales as a percentage of
Total revenues increased to 29.7% in 1995 from 28.5% in 1994. The increase was
due to a 0.8% rise in food costs at the restaurant level as a result of a sales
mix shift to higher quality items and increased waste in food preparation and to
a 0.4% rise in food costs at the retail and institutional level.
LABOR AND BENEFITS--Labor and benefits increased $2.8 million, or 1.3%, to
$214.6 million in 1995 from $211.8 million in 1994. Labor and benefits as a
percentage of Total revenues decreased in 1995 to 33.1% from 33.6% in 1994.
Approximately 0.7% of the decrease was due to an increase in Retail,
institutional and other revenues as a percent of Total revenues as these
revenues have no associated labor and benefits. This decrease was partially
offset by a 0.2% rise in labor and benefits as a percentage of Restaurant
revenue due to several large group medical claims and the introduction of a
restaurant leadership team concept which placed more focus on customer service
by increasing the hours of supervisory restaurant employees.
OPERATING EXPENSES--Operating expenses increased $11.9 million, or 9.0%, to
$143.9 million in 1995 from $132.0 million in 1994. Operating expenses as a
percentage of Total revenues increased to 22.2% in 1995 from 20.9% in 1994. The
increase was due to the cost of sponsoring a Ladies Professional Golf
26
Association golf tournament ("The Friendly Classic") for the first time, an
increase in restaurant advertising expenses, higher restaurant renovation
expenses, an increase in credit card fees as a result of greater use of credit
cards by consumers and an increase in selling expenses associated with the
growth in the retail and institutional business.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $2.3 million, or 6.0%, to $40.7 million in 1995 from $38.4 million in
1994. General and administrative expenses as a percentage of Total revenues
increased to 6.2% in 1995 from 6.1% in 1994. The increase was due to several
large group insurance claims in 1995, the annual merit-based salary increases
and the benefit in 1994 from eliminating a long-term bonus plan.
EBITDA--As a result of the above, EBITDA decreased by $11.5 million, or
16.7%, to $57.4 million in 1995 from $68.9 million in 1994. EBITDA as a
percentage of Total revenues decreased to 8.8% in 1995 from 10.9% in 1994.
NON-CASH WRITE-DOWNS--During 1995, the Company incurred a $3.3 million
non-cash write-down relating to costs resulting from a postponed debt
refinancing and a $4.0 million write-down of the carrying value of 51 restaurant
properties. For a further explanation of the write-downs, see Notes 3, 5 and 6
of Notes to Consolidated Financial Statements.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased $1.2
million, or 3.7%, to $33.3 million in 1995 from $32.1 million in 1994. The
increase was due to the addition of one new restaurant and the ongoing
implementation of the Company's revitalization program, partially offset by a
decrease in amortization as a result of TRC Acquisition financing costs being
fully amortized. Depreciation and amortization as a percentage of Total revenues
was 5.1% for both periods.
INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and
interest income, decreased by $3.6 million, or 7.9%, to $41.9 million in 1995
from $45.5 million in 1994. The decrease was due to the payment of a $3.6
million fee to the Company's lenders in 1994 to facilitate a refinancing of the
Company's debt which was never consummated.
BENEFIT FROM (PROVISION FOR) INCOME TAXES--The provision for income taxes
was $33.4 million as compared to the benefit from income taxes of $4.7 million
in 1994. The provision for income taxes of $33.4 million in 1995 was due to the
impact on deferred taxes from the Company's anticipated deconsolidation from its
parent and the statutory federal and state tax benefit of the Company's loss
partially offset by both federal and state limitations as described in Note 9 of
Notes to Consolidated Financial Statements. The benefit from income taxes of
$4.7 million in 1994 represented the statutory federal and state tax benefit of
the Company's loss partially offset by the impact of the state tax valuation
allowance.
NET INCOME (LOSS)--As a result of the above, net loss increased by $54.8
million to a net loss of $58.7 million in 1995 from a net loss of $3.9 million
in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources have been
cash generated from operations and borrowings under the Old Credit Facility. Net
cash provided by operating activities was $9.6 million for the six months ended
June 29, 1997, $26.2 million in 1996, $27.8 million in 1995 and $38.4 million in
1994. Available borrowings under the Old Credit Facility were $13.7 million as
of June 29, 1997, excluding $2.4 million of letter of credit availability.
Additional sources of cash consist of capital and operating leases for
financing leased restaurant locations (in malls and shopping centers and land or
building leases), restaurant equipment, manufacturing equipment, distribution
vehicles and computer equipment. Additionally, sales of under-performing
existing restaurant properties and other assets (to the extent the Company's and
its subsidiaries' debt instruments, if any, permit) are sources of cash. The
amounts of debt financing that the Company will be able to incur under capital
leases and for property and casualty insurance financing and the amount of asset
sales by the
27
Company will be limited by the terms of the New Credit Facility and the
Indenture relating to the Senior Notes. See "Description of New Credit Facility"
and "Description of Senior Notes."
The Company requires capital principally to maintain existing restaurant and
plant facilities, to continue to renovate and re-image existing restaurants, to
convert restaurants, to construct new restaurants and for general corporate
purposes. Since the TRC Acquisition, the Company has spent $264.3 million on
capital expenditures, including $86.9 million on the renovation and re-imaging
of restaurants under its revitalization program.
The following table presents for the periods indicated the number of (i)
restaurants opened and closed during, and the number of restaurants open at the
end of, each period, (ii) the number of restaurants in which (a) seating
capacity was expanded and (b) certain exterior and interior renovation and
re-imaging was completed under the Company's revitalization program and (iii)
the aggregate number of restaurants expanded and revitalized at the end of each
period.
SIX MONTHS
FISCAL YEAR ENDED
------------------------------------------------- JUNE 29,
1994 1995 1996 1997
--------------- --------------- --------------- ---------------
Restaurants opened............................................ 8 1 3 --
Restaurants closed............................................ 15 16 31 7
Restaurants open (end of period).............................. 750 735 707 700
Restaurants expanded.......................................... 7 5 4 3
Aggregate restaurants expanded................................ 12 17 21 24
Restaurants revitalized....................................... 67 14 16 7
Aggregate restaurants revitalized............................. 594 608 624 631
Net cash used in investing activities was $8.3 million for the six months
ended June 29, 1997, $20.3 million in 1996, $18.2 million in 1995 and $28.0
million in 1994. Capital expenditures for restaurant operations, including
capitalized leases, were approximately $8.3 million in the six months ended June
29, 1997, $22.6 million in 1996, $14.5 million in 1995 and $32.6 million in
1994. Capital expenditures were offset by proceeds from the sale of property and
equipment of $0.9 million, $8.4 million, $0.9 million and $1.5 million in the
six months ended June 29, 1997, and in 1996, 1995 and 1994, respectively.
The Company also uses capital to repay borrowings when cash is sufficient to
allow for net repayments. Net cash used in financing activities to repay
borrowings was $3.1 million for the six months ended June 29, 1997, $11.0
million in 1996 and $7.9 million in 1994 as compared to net cash provided by
financing activities of $0.2 million in 1995.
The Company had a working capital deficit of $19.4 million as of June 29,
1997. The Company is able to operate with a substantial working capital deficit
because (i) restaurant operations are conducted primarily on a cash (and cash
equivalent) basis with a low level of accounts receivable, (ii) rapid turnover
allows a limited investment in inventories and (iii) cash from sales is usually
received before related accounts for food, supplies and payroll become due.
It is expected that the full amount of the Term Loan Facility will be drawn
at the closing of the Offerings. Amounts repaid or prepaid under the Term Loan
Facility may not be reborrowed. The Company's primary sources of liquidity and
capital resources in the future will be cash generated from operations and
borrowings under the Revolving Credit Facility and the Letter of Credit
Facility. The Revolving Credit Facility will be a five-year facility providing
for revolving loans to the Company in a principal amount not to exceed $45
million, including a $5 million sublimit for each of trade and standby letters
of credit. The Letter of Credit Facility will mature contemporaneously with the
Revolving Credit Facility and will provide for up to $15 million of standby
letters of credit. It is expected that no amounts will initially be drawn under
the Revolving Credit Facility and $3.1 million will be available under the
Letter of Credit Facility at the consummation of the Recapitalization. These
facilities are expected to be
28
drawn in part, from time to time, to finance the Company's working capital and
other general corporate requirements. See "Description of New Credit Facility."
It is expected that the Term Loan Facility will require quarterly
amortization payments beginning on April 15, 1999. Annual amortization amounts
will total $4.4 million, $10.4 million, $12.4 million, $14.4 million, $18.4
million and $20.0 million in 1999 through 2004, respectively. In addition to the
scheduled amortization, it is expected that the Term Loan Facility will be
permanently reduced by (i) specified percentages of each year's Excess Cash Flow
(as defined in the New Credit Facility) and (ii) 100% of the aggregate net
proceeds from asset sales not in the ordinary course of business and not
re-employed within a specified period in the Company's business, exclusive of up
to $7.5 million of aggregate net proceeds received from asset sales subsequent
to the closing relating to the New Credit Facility. Such applicable proceeds
shall be applied to the Term Loan Facility in inverse order of maturity. At the
Company's option, loans may be prepaid at any time with certain notice and
breakage cost provisions.
It is expected that the obligations of the Company under the New Credit
Facility will (i) be secured by a first priority security interest in
substantially all material assets of the Company and its subsidiaries and all
other assets owned or hereafter acquired and (ii) be guaranteed, on a senior
secured basis, by the Company's Friendly's Restaurants Franchise, Inc.
subsidiary and may also be so guaranteed by certain subsidiaries created or
acquired after consummation of the Recapitalization.
It is expected that, at the Company's option, the interest rates per annum
applicable to the New Credit Facility will be either LIBOR (as defined in the
New Credit Facility), plus a margin ranging from 2.375% to 2.75%, or the
Alternative Base Rate (as defined in the New Credit Facility), plus a margin
ranging from 0.875% to 1.25%. The Alternative Base Rate is the greater of (a)
Societe Generale's Prime Rate or (b) the Federal Funds Rate plus 0.50%. It is
expected that after the first twelve calendar months of the New Credit Facility,
pricing reductions will be available in certain circumstances.
The Company anticipates requiring capital in the future principally to
maintain existing restaurant and plant facilities, to continue to renovate and
re-image existing restaurants, to convert restaurants and to construct new
restaurants. Capital expenditures for the second half of 1997 and for 1998 are
anticipated to be $66.5 million in the aggregate, of which $56.4 million will be
spent on restaurant operations. See "Business--Restaurant Operations--Capital
Investment Program" for a further description of the Company's estimated 1997
and 1998 capital expenditures. The Company's actual 1997 and 1998 capital
expenditures may vary from the estimated amounts set forth herein. See "Risk
Factors--Substantial Leverage, Stockholders' Deficit and History of Losses" for
a discussion of certain factors, many of which are beyond the Company's control,
that could affect the Company's ability to make its planned capital
expenditures.
In addition, the Company may need capital in connection with (i) commitments
as of June 29, 1997 to purchase $53.1 million of raw materials, food products
and supplies used in the normal course of business and (ii) its self-insurance
through retentions or deductibles of the majority of its workers' compensation,
automobile, general liability and group health insurance programs. The Company's
self-insurance obligations may exceed its reserves. See Notes 12 and 15 of Notes
to Consolidated Financial Statements.
The Company believes that the combination of the funds anticipated to be
generated from operating activities and borrowing availability under the New
Credit Facility will be sufficient to meet the Company's anticipated operating
and capital requirements for the foreseeable future. See "Risk
Factors--Substantial Leverage, Stockholders' Deficit and History of Losses" and
"--Restrictions Imposed Under New Credit Facility."
OLD CREDIT FACILITY
In January 1995, the Company and its lenders amended the Old Credit Facility
as a result of certain covenant violations and, in connection therewith, the
lenders were granted the right to receive a contingent payment in certain
circumstances. In January 1996, the Old Credit Facility was amended and restated
pursuant to which revolving credit and term loans totaling $373.6 million were
converted to revolving credit loans of $38.5 million and term loans of $335.1
million. In connection therewith, the lenders received
29
Class B common shares which increased their interests in the Company to an
aggregate of 50% of the then-issued and outstanding common shares. As a result
of the issuance of certain stock to management and the exercise of certain
warrants, additional shares were issued to the lenders in 1996 to maintain their
minimum equity interest at 47.50%. As a result of their ownership of Class B
common shares, the lenders obtained the right to elect two of the five members
of the Company's Board of Directors. The lenders were given the right to
increased board representation and voting rights and the right to receive
additional shares upon certain events. As part of the Recapitalization, the Old
Credit Facility will be replaced by the New Credit Facility, and as the result
of the Recapitalization, the outstanding Class B common shares will be converted
into shares of Common Stock and the ownership of such lenders will decrease to
approximately 9.35% of the outstanding Common Stock ( % if the Underwriters'
over-allotment option in the Common Stock Offering is exercised in full). See
"Ownership of Common Stock," and Note 7 of Notes to Consolidated Financial
Statements.
NET OPERATING LOSS CARRYFORWARDS
As of December 29, 1996, the Company and its subsidiaries had a federal net
operating loss ("NOL") carryforward of $40.1 million. Because of a change of
ownership of the Company under Section 382 of the Internal Revenue Code on March
26, 1996 (see Note 9 of Notes to Consolidated Financial Statements), $29.7
million of the NOL carryforward can be used only to offset the recognition of
unrealized built-in gains which existed at March 26, 1996. Accordingly, a
valuation allowance has been recorded to offset the $29.7 million of the NOL
carryforward. The consolidated balance sheet of the Company as of December 29,
1996 includes the tax effect of the remaining federal and state NOLs of $4.6
million for the periods prior to March 26, 1996 and $5.8 million for the period
from March 27, 1996 to December 29, 1996. It is expected that the Common Stock
Offering will result in the Company having another change of ownership under
Section 382 of the Internal Revenue Code. Accordingly, in tax years ending after
the Common Stock Offering, the Company will be limited in how much of its NOL
carryforwards at the date of the Common Stock Offering that are not limited
under the first ownership change ("New NOLs") it can utilize. The amount of New
NOLs that can be utilized in any tax year ending after the date of the Common
Stock Offering will be limited to an amount equal to the equity value of the
Company immediately prior to the Common Stock Offering (without taking into
account the proceeds of the Offerings) multiplied by the long-term tax exempt
rate in effect for the month of the Common Stock Offering (5.6% for August,
1997). While the limitation on the use of the New NOLs will delay when the New
NOLs are utilized, the Company expects all of the New NOLs to be utilized before
they expire. Accordingly, no valuation allowance is required related to any New
NOLs. The NOLs expire, if unused, between 2001 and 2012. In addition, the NOL
carryforwards are subject to adjustment upon review by the Internal Revenue
Service. See Note 9 of Notes to Consolidated Financial Statements.
INFLATION
The inflationary factors which have historically affected the Company's
results of operations include increases in cost of milk, sweeteners, purchased
food, labor and other operating expenses. Approximately 17% of wages paid in the
Company's restaurants are impacted by changes in the federal or state minimum
hourly wage rate. Accordingly, changes in the federal or states minimum hourly
wage rate directly affect the Company's labor cost. The Company is able to
minimize the impact of inflation on occupancy costs by owning the underlying
real estate for approximately 42% of its restaurants. The Company and the
restaurant industry typically attempt to offset the effect of inflation, at
least in part, through periodic menu price increases and various cost reduction
programs. However, no assurance can be given that the Company will be able to
offset such inflationary cost increases in the future.
SEASONALITY
Due to the seasonality of frozen dessert consumption, and the effect from
time to time of weather on patronage in its restaurants, the Company's revenues
and EBITDA are typically higher in its second and third quarters.
30
BUSINESS
GENERAL
Friendly's is the leading full-service restaurant operator and has a leading
position in premium frozen dessert sales in the Northeast. The Company owns and
operates 666 and franchises 34 full-service restaurants and manufactures a
complete line of packaged frozen desserts distributed through more than 5,000
supermarkets and other retail locations in 15 states. Friendly's offers its
customers a unique dining experience by serving a variety of high-quality,
reasonably-priced breakfast, lunch and dinner items, as well as its signature
frozen desserts, in a fun and casual neighborhood setting. For the twelve-month
period ended June 29, 1997, Friendly's generated $664.9 million in total
revenues and $71.0 million in EBITDA (as defined herein). During the same
period, management estimates that over $225 million of total revenues were from
the sale of approximately 20 million gallons of frozen desserts.
Friendly's restaurants target families with children and adults who desire a
reasonably-priced meal in a full-service setting. The Company's menu offers a
broad selection of freshly-prepared foods which appeal to customers throughout
all day-parts. Breakfast items include specialty omelettes and breakfast
combinations featuring eggs, pancakes and bacon or sausage. Lunch and dinner
items include a new line of wrap sandwiches, entree salads, soups, super-melts,
specialty burgers and new stir-fry, chicken, pot pie, tenderloin steak and
seafood entrees. Friendly's is also recognized for its extensive line of ice
cream shoppe treats, including proprietary products such as the
Fribble-Registered Trademark-, Candy Shoppe-Registered Trademark- Sundaes and
the Wattamellon Roll-Registered Trademark-.
The Company believes that one of its key strengths is the strong consumer
awareness of the Friendly's brand name, particularly as it relates to the
Company's signature frozen desserts. This strength and the Company's
vertically-integrated operations provide several competitive advantages,
including the ability to (i) utilize its broad, high-quality menu to attract
customer traffic across multiple day-parts, particularly the afternoon and
evening snack periods, (ii) generate incremental revenues through strong
restaurant and retail market penetration, (iii) promote menu enhancements and
extensions in combination with its unique frozen desserts and (iv) control
quality and maintain operational flexibility through all stages of the
production process.
Friendly's, founded in 1935, was publicly held from 1968 until January 1979,
at which time it was acquired by Hershey Foods Corporation ("Hershey"). While
owned by Hershey, the Company increased the total number of restaurants from 601
to 849 yet devoted insufficient resources to product development and capital
improvements. In 1988, The Restaurant Company ("TRC"), an investor group led by
Donald Smith, the Company's current Chairman, Chief Executive Officer and
President, acquired Friendly's from Hershey (the "TRC Acquisition") and
implemented a number of initiatives to restore and improve operational and
financial efficiencies. From the date of the TRC Acquisition through 1994, the
Company (i) implemented a major revitalization of its restaurants, (ii)
repositioned the Friendly's concept from a sandwich and ice cream shoppe to a
full-service, family-oriented restaurant with broader menu and day-part appeal,
(iii) elevated customer service levels by recruiting more qualified managers and
expanding the Company's training program, (iv) disposed of 123 under-performing
restaurants and (v) capitalized upon the Company's strong brand name recognition
by initiating the sale of Friendly's unique line of packaged frozen desserts
through retail locations.
Beginning in 1994, the Company began implementing several growth initiatives
including (i) testing and implementing a program to expand the Company's
domestic distribution network by selling frozen desserts and other menu items
through non-traditional locations, (ii) distributing frozen desserts
internationally by introducing dipping stores in the United Kingdom and South
Korea and (iii) implementing a franchising strategy to extend profitably the
Friendly's brand without the substantial capital required to build new
restaurants. As part of this strategy, on July 14, 1997 the Company entered into
the DavCo Agreement. See "Prospectus Summary--Recent Developments."
31
Implementation of these initiatives since the TRC Acquisition has resulted
in substantial improvements in revenues and EBITDA. Despite the closing of 148
restaurants (net of restaurants opened) since the beginning of 1989 and periods
of economic softness in the Northeast, the Company's restaurant revenues have
increased 9.0% from $557.3 million in 1989 to $607.2 million in the
twelve-months ended June 29, 1997, while average revenue per restaurant has
increased 28.6% from $665,000 to $855,000 during the same period. Retail,
institutional and other revenues have also increased from $1.4 million in 1989
to $57.7 million in the twelve months ended June 29, 1997. In addition, EBITDA
has increased 49.8% from $47.4 million in 1989 to $71.0 million in the
twelve-month period ended June 29, 1997, while operating income has increased
from $4.1 million to $37.7 million over the same period. See "Selected
Consolidated Financial Information" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Friendly's intends to continue to grow the Company's revenues and earnings
by implementing the following key business strategies: (i) continuously upgrade
the menu and introduce new products, (ii) revitalize and re-image existing
Friendly's restaurants, (iii) construct new restaurants, (iv) enhance the
Friendly's dining experience, (v) expand the restaurant base through
high-quality franchisees, (vi) increase market share through additional retail
accounts and restaurant locations, (vii) introduce modified formats of the
Friendly's concept into non-traditional locations and (viii) extend the
Friendly's brand into international markets.
COMPETITIVE STRENGTHS
THE COMPANY BELIEVES THAT, IN THE NORTHEAST, ITS LEADING POSITION IN
FULL-SERVICE RESTAURANT AND PREMIUM FROZEN DESSERT SALES IS ATTRIBUTABLE TO THE
FOLLOWING COMPETITIVE STRENGTHS:
STRONG BRAND NAME RECOGNITION. During the past 60 years, management
believes the Friendly's brand name has become synonymous with high-quality food
and innovative frozen desserts. The Company believes that the brand name
awareness created by its premium frozen dessert heritage drives customer
traffic, particularly during the afternoon and evening snack periods, promotes
menu enhancement and extension and generates incremental revenues from the
Company's retail and non-traditional distribution channels. The Company's
independent surveys indicate that, in the Northeast, over 90% of all households
recognize the Friendly's brand and that over 30% of these households visit a
Friendly's restaurant every three months.
SIGNATURE FROZEN DESSERTS. Friendly's produces an innovative line of
high-quality freshly-scooped and packaged frozen desserts, which have been cited
by customers as a key reason for choosing Friendly's. Accordingly, approximately
50% of all visits to a Friendly's restaurant include a frozen dessert purchase.
Freshly-scooped specialties served in Friendly's restaurants include the Jim
Dandy and Oreo-Registered Trademark- Brownie sundaes, and the
Fribble-Registered Trademark-, the Company's signature thick shake. Packaged
goods available for purchase in both restaurant and retail locations include
traditional and low-fat ice cream, yogurt and sorbets in half gallons, pints and
cups and a wide variety of ice cream cakes, pies and rolls such as the Jubilee
Roll-Registered Trademark- and Wattamellon Roll-Registered Trademark-. In
addition, the Company licenses from Hershey the rights to feature in its
signature desserts certain candy brands such as Almond
Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-, Reeses
Pieces-Registered Trademark-, Reeses-Registered Trademark- Peanut Butter Cups
and York-Registered Trademark- Peppermint Patties.
BROAD, HIGH-QUALITY MENU. The Company has successfully capitalized on
Friendly's reputation for high-quality, wholesome foods including the well-known
$2.22 Breakfast, Big Beef-Registered Trademark- Hamburger,
Fishamajig-Registered Trademark- Sandwich and Clamboat-Registered Trademark-
Platter by extending these offerings into a broader product line including
freshly-prepared omelettes, SuperMelt-TM- Sandwiches, Colossal Sirloin
Burgers-TM-, tenderloin steaks and stir-fry entrees. Reflecting this increased
menu variety, food products now account for over 70% of restaurant revenues, and
guest check averages have increased significantly over the last five years.
Friendly's also has an extensive Kid's Menu which encourages family dining due
to the significant appeal to children of the Friendly's concept.
32
MULTIPLE DAY-PART APPEAL. Due to the appeal of Friendly's frozen desserts,
the Company generates approximately 35% of its restaurant revenues during the
afternoon and evening snack periods (2:00 p.m. to 5:00 p.m. and 8:00 p.m. to
closing), providing Friendly's with the highest share of snack day-part sales in
the Northeast. Accordingly, the Company endeavors to maximize revenue across
multiple day-parts by linking sales of its high-margin frozen desserts with its
lunch and dinner entrees. The Company generates approximately 12%, 24% and 29%
of restaurant revenues from breakfast, lunch and dinner, respectively.
STRONG RESTAURANT AND RETAIL MARKET PENETRATION. The Company has the
highest market share among full-service restaurants and a leading position in
premium frozen dessert sales in the Northeast. The Company's strong restaurant
and retail market penetration provides incremental revenues and cash flow, as
multiple levels of visibility and availability provide cross promotion
opportunities and enhance consumer awareness and trial of the Company's unique
products while effectively targeting consumers for both planned and impulse
purchases. For example, the new Colossal Sirloin Burger-TM- was introduced with
a new 79 CENTS Caramel Fudge Nut Blast-TM- Sundae during the spring of 1997. In
addition to promoting sales of this new entree, this strategy increased consumer
awareness and trial of the new sundae combination, which in turn supported the
introduction of Caramel Fudge Nut Blast-TM- Sundae half gallons into restaurants
and retail locations.
VERTICALLY-INTEGRATED OPERATIONS. Friendly's vertically-integrated
operations are designed to deliver the highest quality food and frozen desserts
to its customers and to allow the Company to adapt to evolving customer tastes
and preferences. The Company formulates new products and upgrades existing food
and frozen desserts through its research and development group and controls all
stages in the production of its frozen desserts through its two manufacturing
facilities. In addition, the Company controls cost and product quality and
efficiently manages inventory levels from point of purchase through restaurant
delivery utilizing its three distribution facilities and fleet of 56 tractors
and 81 trailers. Furthermore, Friendly's maximizes its purchasing power when
sourcing materials and services for its restaurant and retail operations through
its integrated purchasing department.
MANAGEMENT EXPERIENCE AND EMPLOYEE RETENTION. The Company has a talented
senior management team with extensive restaurant industry experience and an
average tenure with the Company of 17 years. In addition, the Company minimizes
turnover of both managers and line personnel through extensive employee training
and retention programs. In 1996, the Company's turnover among its restaurant
salaried management was approximately 24%, which was significantly lower than
the industry average.
BUSINESS STRATEGIES
FRIENDLY'S OBJECTIVE IS TO CAPITALIZE ON ITS COMPETITIVE STRENGTHS TO GROW
ITS RESTAURANT AND RETAIL OPERATIONS BY IMPLEMENTING THE FOLLOWING KEY BUSINESS
STRATEGIES:
UPGRADE MENU AND SELECTIVELY INTRODUCE NEW PRODUCTS. Friendly's strategy is
to increase consumer awareness and restaurant patronage by continuously
upgrading its menu and introducing new products. As part of this strategy,
Friendly's dedicated research and development group regularly formulates
proprietary new menu items and frozen desserts to capitalize on the evolving
tastes and preferences of its customers. In the fall of 1996, the Company
introduced a new dinner line which includes a high-quality steak entree,
home-style chicken dinners, pot pies and stir-frys, as well as several premium
frozen desserts including the new Oreo-Registered Trademark- Brownie Sundae.
Largely as a result of new premium items, guest check averages have increased
7.7% during the first six months of 1997 as compared to the same period of 1996.
REVITALIZE AND RE-IMAGE RESTAURANTS. Friendly's seeks to continue to grow
restaurant revenues and cash flow through the ongoing revitalization and
re-imaging of existing restaurants and to increase total restaurant revenues
through the addition of new restaurants. The Company has revitalized
approximately 631 restaurants since the beginning of 1989, increasing average
restaurant revenues from $665,000 in 1989 to $855,000 in the twelve months ended
June 29, 1997. Further, the Company has initiated its FOCUS 2000
33
program which includes an advanced re-imaging of restaurants and the
installation of custom designed restaurant automation systems in a majority of
its restaurants. In addition, as part of its ongoing capital spending program,
the Company plans to refurbish substantially all of its restaurants every five
to six years to further enhance customer appeal. The Company also expects to
increase market share in its existing and contiguous markets through the opening
of five new Company owned restaurants in 1997 (one of which has opened to date)
and between 10 and 20 new restaurants per year through 2000.
ENHANCE THE FRIENDLY'S DINING EXPERIENCE. In addition to menu upgrades and
restaurant re-imaging, the FOCUS 2000 program includes initiatives to improve
food presentation and customer service. The Company believes that implementation
of this program will create a consistent, enhanced Friendly's restaurant brand
image. This strategy recognizes that food quality, dining atmosphere and
attentive service all contribute to customer satisfaction. The Company maintains
a consistently high standard of food preparation and customer service through
stringent operational controls and intensive employee training. To help
guarantee that employees perform in this manner, Friendly's maintains a
dedicated training and development center where managers are thoroughly trained
in customer service.
EXPAND RESTAURANT BASE AND MARKET PENETRATION THROUGH HIGH-QUALITY
FRANCHISEES. Friendly's is implementing a franchising strategy to further
develop the Friendly's brand and grow both revenue and cash flow without the
substantial capital required to build new restaurants. This strategy seeks to
(i) expand its restaurant presence in under-penetrated markets, (ii) accelerate
restaurant growth in new markets, (iii) increase marketing and distribution
efficiencies and (iv) preempt the Company's competition from acquiring certain
prime real estate sites. Friendly's will receive a royalty based on total
franchisee revenues and revenues and earnings from the sale of its frozen
desserts and other products to franchisees.
INCREASE MARKET SHARE OF PREMIUM FROZEN DESSERTS. Capitalizing on its
position as a recognized leader in premium frozen desserts, Friendly's seeks to
increase its market share. The Company expects to build market share by
expanding distribution beyond its 700 Company-owned and franchised restaurants
and its more than 5,000 retail locations by (i) adding new locations, (ii)
increasing shelf space in current locations through new product introductions
and more prominent freezer displays and (iii) increasing consumer and trade
merchandising.
INTRODUCE MODIFIED FORMATS INTO NON-TRADITIONAL LOCATIONS. In order to
capitalize on both planned and impulse purchases, the Company is leveraging the
Friendly's brand name and enhancing consumer awareness by introducing modified
formats of the Friendly's concept into non-traditional locations. These modified
formats include (i) Friendly's Cafe, a quick service concept offering frozen
desserts and a limited menu, (ii) Friendly's branded ice cream shoppes offering
freshly-scooped and packaged frozen desserts and (iii) Friendly's branded
display cases and novelty carts with packaged single-serve frozen desserts. The
first Friendly's Cafe is expected to open in early 1998. The Company supplies
frozen desserts to non-traditional locations such as colleges and universities,
sports facilities, amusement parks, secondary school systems and business
cafeterias directly or through selected vendors pursuant to multi-year license
agreements.
EXTEND THE FRIENDLY'S BRAND INTERNATIONALLY. The Company's long-term
international growth strategy is to utilize local partners and establish master
franchise or licensee agreements to extend the brand internationally and to
achieve profitable growth while minimizing capital investment. Currently, the
Company's Friendly's International, Inc. subsidiary ("FII") sells the Company's
frozen desserts in several chain restaurants, theaters and food courts in the
United Kingdom. In South Korea, FII participates in a licensing agreement with a
South Korean enterprise to develop Friendly's "Great American" ice cream
shoppes. As of August 22, 1997, the licensee and its sublicensees were operating
20 ice cream shoppes, and the Company expects such parties to operate 45 ice
cream shoppes by the end of 1997. The Company selects its international markets
based on the high quality of the Company's frozen desserts relative to
locally-produced frozen desserts and the propensity of consumers in these
regions to purchase American-branded products.
34
RESTAURANT OPERATIONS
MENU
Friendly's believes it provides significant value to consumers by offering a
wide variety of freshly-prepared, wholesome foods and frozen desserts at a
reasonable price. The menu currently features over 100 items comprised of a
broad selection of breakfast, lunch, dinner and afternoon and evening snack
items. Breakfast items include specialty omelettes and breakfast combinations
featuring eggs, pancakes and bacon or sausage. Breakfasts generally range from
$2.00 to $6.00 and account for approximately 12% of average restaurant revenues.
Lunch and dinner items include a new line of wrap sandwiches, entree salads,
soups, super-melts, specialty burgers, appetizers including quesadillas,
mozzarella cheese sticks and "Fronions," and stir-fry, chicken, pot pie,
tenderloin steak and seafood entrees. These lunch and dinner items generally
range from $4.00 to $9.00, and these day-parts account for approximately 53% of
average restaurant revenues. Entree selections are complemented by Friendly's
premium frozen desserts, including the Fribble-Registered Trademark-, the
Company's signature thick shake, Happy Ending-Registered Trademark- Sundaes and
fat-free Sorbet Smoothies. The Company's frozen desserts are an important
component of the success of the Company's snack day-part which accounts for 35%
of average restaurant revenues.
RESTAURANT LOCATIONS AND PROPERTIES
The table below identifies by state the location of the 700 restaurants
operating as of June 29, 1997, after giving effect to the DavCo Agreement as
though it had occurred on June 29, 1997.
COMPANY-OWNED/LEASED
------------------------------------
FREESTANDING OTHER FRANCHISED TOTAL
STATE RESTAURANTS RESTAURANTS (A) RESTAURANTS (B) RESTAURANTS
- ----------------------------------------------------- --------------- ------------------- ------------------- ---------------
Connecticut.......................................... 50 21 -- 71
Delaware............................................. -- 1 6 7
Florida.............................................. 13 2 -- 15
Maine................................................ 9(c) -- -- 9
Maryland............................................. 3 9 22 34
Massachusetts........................................ 116 37 -- 153
Michigan............................................. 2 -- -- 2
New Hampshire........................................ 14 6 -- 20
New Jersey........................................... 47 18 -- 65
New York............................................. 130 35 -- 165
Ohio................................................. 57 3 -- 60
Pennsylvania......................................... 51 13 -- 64
Rhode Island......................................... 8 -- -- 8
Vermont.............................................. 7 2 -- 9
Virginia............................................. 10 2 6 18
--- --- --- ---
Total............................................ 517 149 34 700
- ------------------------
(a) Includes primarily malls and strip centers.
(b) The franchised restaurants (representing 30 freestanding and four other
restaurants) have been leased or subleased to DavCo pursuant to the DavCo
Agreement. See "Prospectus Summary--Recent Developments."
(c) Excludes the Company's new 156-seat prototype restaurant opened in
Waterville, Maine in July 1997.
The 547 freestanding restaurants, including the 30 franchised to DavCo,
range in size from approximately 2,600 square feet to approximately 5,000 square
feet. The 153 mall and strip center restaurants, including the four franchised
to DavCo, average approximately 3,000 square feet. Of the 700 restaurants
operated by the Company at June 29, 1997, the Company owned the buildings and
the land for 294 restaurants, owned the buildings and leased the land for 161
restaurants, and leased both the buildings and land for 245 restaurants. The
Company's leases generally provide for the payment of fixed monthly rentals
35
and related occupancy costs (e.g. property taxes, common area maintenance and
insurance). Additionally, most mall and strip center leases require the payment
of common area maintenance charges and incremental rent of between 3.0% and 6.0%
of the restaurant's sales.
RESTAURANT ECONOMICS
During the twelve-month period ended June 29, 1997, average revenue per
restaurant was $855,000, average restaurant cash flow was $155,000 (after rent
expense of $21,000) and average restaurant operating income was $122,000.
Average cash flow represents operating income before depreciation and
amortization. Average revenue per restaurant for the 243 freestanding
restaurants with more than 100 seats was $1,089,000, average revenue per
restaurant for the 304 freestanding restaurants with less than 100 seats was
$707,000 and average revenue per restaurant for the 153 other restaurants was
$812,000. The Company has opened 12 new restaurants since the beginning of 1994,
ten of which had been operating for at least 12 months as of June 29, 1997. Such
ten restaurants, which had an average of 136 seats, generated average revenue
per restaurant of $1,193,000, average restaurant cash flow of $186,000 (after
rent expense of $82,000) and average restaurant operating income of $139,000.
The average cash investment to open such ten restaurants (all of which were
conversions) was approximately $528,000, excluding pre-opening expenses, or
$1,368,000 including rent expense capitalized at 9.0%. Pre-opening expenses were
approximately $85,000 per restaurant. The Company plans to continue to convert
restaurants and estimates that the three conversions planned for 1997 will cost
approximately $500,000 to $600,000 per restaurant, excluding land and
pre-opening expenses. The Company converted a 180-seat restaurant in Burlington,
Vermont in December 1996 at a total cost including land of $1,562,000, and this
restaurant has achieved average weekly revenues of $35,000 through June 29,
1997. While conversions generally cost less than new construction, the Company
plans to selectively construct new restaurants when the anticipated return is
sufficient to warrant the increased cost of new construction. The Company has
developed two new freestanding restaurant prototypes for construction, including
108-seat and 156-seat prototypes, which are anticipated to cost approximately
$730,000 and $780,000 per restaurant, respectively, excluding pre-opening
expenses. Pre-opening expenses are estimated to be $85,000 per restaurant. The
Company opened its first 156-seat prototype restaurant in Waterville, Maine in
July 1997 at a cost of $778,000, or $1,056,000 including rent expense
capitalized at 9.0%.
CAPITAL INVESTMENT PROGRAM
A significant component of the Company's capital investment program is the
FOCUS 2000 initiative which is designed to establish a consistent, enhanced
Friendly's brand image across the Company's entire restaurant operations. The
Company's capital spending strategy seeks to increase comparable restaurant
revenues and restaurant cash flow through the on-going revitalizing and
re-imaging of existing restaurants and to increase total restaurant revenues
through the addition of new restaurants. The following illustrates the key
components of the Company's capital spending program. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of New Credit
Facility."
RESTAURANT RE-IMAGING. The Company expects to complete the re-imaging of 70
restaurants in 1997 (two of which have been completed to date) at an estimated
cost of $132,000 per restaurant. This cost typically includes interior and
exterior redecoration and a new exterior lighting package. The Company expects
to complete the re-imaging of approximately 110 restaurants during 1998.
NEW RESTAURANT CONVERSION AND CONSTRUCTION. The Company expects to convert
three restaurants in 1997 (none of which has been completed to date) at an
estimated cost of $500,000 to $600,000 per restaurant. The Company also expects
to construct two new restaurants in 1997 (one of which has been completed to
date) at an estimated cost of $785,000, excluding land and pre-opening expenses.
The
36
Company expects to complete the conversion or construction of approximately ten
restaurants during 1998.
SEATING CAPACITY EXPANSION PROGRAM. Since the TRC Acquisition and through
June 29, 1997, the Company has expanded seating capacity by an average of 50
seats at 24 restaurants at an average cost of $310,000 per restaurant. Revenue
per restaurant increased approximately 24% in the full year following completion
of this expansion compared to the comparable prior period. The Company expects
to complete the expansion of six restaurants in 1997 (four of which have been
completed to date) at an estimated cost of $250,000 per restaurant. This cost
typically includes adding 50 seats per restaurant, relocating certain equipment
and increasing parking capacity where necessary. The Company expects to complete
the expansion of approximately four restaurants during 1998.
INSTALLATION OF RESTAURANT AUTOMATION SYSTEMS. Since the TRC Acquisition
and through June 29, 1997, the Company has installed touch-screen point of sale
("POS") register systems in approximately 340 restaurants at an average cost of
$34,000 per restaurant. These POS register systems are designed to improve
revenue realization, food cost management and labor scheduling while increasing
the speed and accuracy of processing customer orders. The Company expects to
install POS register systems in approximately 40 restaurants during 1998.
FRANCHISING PROGRAM
The Company recently initiated a franchising strategy to expand its
restaurant presence in under-penetrated markets, accelerate restaurant growth in
new markets, increase marketing and distribution efficiencies and preempt
competition by acquiring restaurant locations in the Company's targeted markets.
With the substantial completion of the Company's restaurant revitalization
program, the development and initial deployment of its two new freestanding
restaurant prototypes and the successful introduction of its new dinner line,
the Company believes it is in a position to maximize the value of its brand
appeal to prospective franchisees. The Company seeks franchisees who have
related business experience, capital adequacy to build-out the Friendly's
concept and no operations which have directly competitive restaurant or food
concepts. On July 14, 1997, the Company entered into the DavCo Agreement
pursuant to which DavCo purchased certain assets and rights in 34 existing
Friendly's restaurants in Maryland, Delaware, the District of Columbia and
northern Virginia, committed to open an additional 74 restaurants over the next
six years and, subject to the fulfillment of certain conditions, further agreed
to open 26 additional restaurants, for a total of 100 new restaurants in this
franchising region over the next ten years.
QUALITY CONTROL PROGRAMS
The Company's high quality standards are promoted through strict product
specifications, guest service programs and defined daily operating systems and
procedures for maintenance, cleanliness and safety. Policy and operating manuals
and video support materials for employee training are maintained in all
Friendly's restaurants. The Company uses a variety of guest feedback systems to
measure, monitor and react to service performance including comment cards, "800"
telephone call-in lines, guest commentary follow-up systems, focus groups and an
independent quarterly consumer tracking study conducted by National Purchase
Diary, Inc. The Company's customer service center is implementing a chainwide
program to receive and log customer feedback by restaurant and to report monthly
to field management. All levels of field management are directly responsible for
and evaluated according to guest satisfaction levels.
CARRYOUT OPERATIONS
Through dedicated carryout areas, Friendly's restaurants offer the Company's
full line of frozen desserts and certain of its food menu items. Reserved
parking is available at many of the Company's free-standing restaurants to
facilitate quick carryout service. Approximately 15% of the Company's average
free
37
standing restaurant revenues are derived from its carryout business with a
significant portion of these sales occurring during the afternoon and evening
snack periods. Of this 15%, approximately 5% comes from sales of packaged frozen
desserts in display cases within its restaurants.
RETAIL AND RELATED OPERATIONS
RETAIL OPERATIONS
In 1989, the Company extended its premium packaged frozen dessert line from
its restaurants into retail locations. The Company has profitably grown its
revenue from the sale of such products to retail outlets from $1.4 million in
1989 to $53.9 million in the twelve months ended June 29, 1997. The Company
offers a branded product line that includes approximately 60 half gallon
varieties featuring premium ice cream shoppe flavors and unique sundae
combinations, low and no fat frozen yogurt, low fat ice cream and sherbet.
Specialty flavors include Royal Banana Split, Cappuccino Dream-TM- and Caramel
Fudge Nut Blast-TM-, and proprietary products include the Jubilee
Roll-Registered Trademark-, Wattamelon Roll-Registered Trademark- and Friendly's
branded ice cream cakes and pies. The Company also licenses from Hershey the
right to feature certain candy brands including Almond
Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-, Reese's
Pieces-Registered Trademark-, Reese's-Registered Trademark- Peanut Butter Cups
and York-Registered Trademark- Peppermint Patties on packaged sundae cups and
pints. See "Licenses and Trademarks."
The Company focuses its marketing and distribution efforts in areas where it
has higher restaurant penetration and consumer awareness. During the initial
expansion of its retail business in 1989 and 1990, Albany, Boston and
Hartford/Springfield were primary markets of opportunity, currently with 35, 118
and 95 restaurant locations, respectively. Targeting other markets with high
growth potential and strong Friendly's brand awareness, the Company added the
New York and Philadelphia markets, currently with 135 and 64 restaurants,
respectively, to its retail distribution efforts in 1992 and 1993. According to
recent A.C. Nielsen reports, the Company currently maintains a weighted average
market share of approximately 11% in the Albany, Boston and Hartford/Springfield
markets and 4% in the New York and Philadelphia markets.
The Company expects to continue building its retail distribution business by
increasing market share in its current retail markets. In these markets, the
Company intends to increase shelf space with existing accounts and add new
accounts by (i) capitalizing on its integrated restaurant and retail consumer
advertising and promotion programs, (ii) continuing new product introductions
and (iii) improving trade merchandising initiatives. Additionally, the Company
expects to continue to selectively enter new markets where its brand awareness
is high according to market surveys. In Pittsburgh, where the Company currently
has no restaurants, the Company has a packaged frozen dessert market share of
approximately 4%, according to A.C. Nielsen.
The Company has developed a broker/distributor network designed to protect
product quality through proper product handling and to enhance the merchandising
of the Company's frozen desserts. The Company's experienced sales force manages
this network to serve specific retailer needs on a market-by-market basis. In
addition, the Company's retail marketing and sales departments coordinate market
development plans and key account management programs.
NON-TRADITIONAL LOCATIONS
In order to capitalize on both planned and impulse purchases, the Company is
leveraging the Friendly's brand name and enhancing consumer awareness by
introducing modified formats of the Friendly's concept into non-traditional
locations. These modified formats include (i) Friendly's Cafe, a quick service
concept offering frozen desserts and a limited menu, (ii) Friendly's branded ice
cream shoppes offering freshly-scooped and packaged frozen desserts and (iii)
Friendly's branded display cases and novelty carts with packaged single-serve
frozen desserts. The first Friendly's Cafe is expected to open in early 1998.
The Company supplies frozen desserts to non-traditional locations such as
colleges and
38
universities, sports facilities, amusement parks, secondary school systems and
business cafeterias directly or through selected vendors pursuant to multi-year
license agreements.
INTERNATIONAL OPERATIONS
The Company, through its FII subsidiary, has various licensing arrangements
with several companies in the United Kingdom under which certain of the
Company's frozen desserts are distributed in the United Kingdom. The Company's
strategy in the United Kingdom is to sell Friendly's branded frozen deserts in
full and quick-service restaurants, movie theaters, railway and bus stations,
shopping malls and airport locations pursuant to license agreements.
Non-restaurant locations will vary from full dipping stations to sundae station
kiosks or sundae carts. In addition, the Company's products will be distributed
to selected retailers for resale. FII also has a master license agreement with a
South Korean enterprise to develop Friendly's "Great American" ice cream shoppes
offering freshly-scooped and packaged frozen desserts. As of August 22, 1997,
the licensee and its sublicensees were operating 20 ice cream shoppes, and the
Company expects such parties to operate 45 ice cream shoppes by the end of 1997.
In addition, the Company is a 50% partner in a joint venture in Shanghai, China
which has manufactured and distributed frozen desserts on a limited basis. The
joint venture is currently seeking additional distribution for its products in
China. In markets where a capital investment by the Company is required to
introduce its brand, the Company seeks to monetize such investment by entering
into franchising or licensing arrangements, and subsequently to redeploy its
capital, if necessary, into new international markets. The Company believes that
there are significant growth opportunities within the United Kingdom, South
Korea and China, as well as in other countries, in particular those within the
Pacific Rim.
MARKETING
The Company's marketing strategy is to continue to strengthen Friendly's
brand equity and further capitalize on its strong consumer awareness to
profitably build revenues across all businesses. The primary advertising
message, built around its "Leave room for the ice cream-TM-" slogan, focuses on
introducing new lunch and dinner products or line extensions in combination with
unique frozen desserts. For example, in 1996, Friendly's introduced a new line
of steak dinners and promoted trial of the line with a free Happy
Ending-Registered Trademark- Sundae. Management utilizes this strategy to
encourage consumer trial of new products and increase the average guest check
while reinforcing Friendly's unique "food with ice cream" experience. The
Company's food-with-ice-cream promotions also build sales of packaged frozen
desserts in its restaurants and in retail locations.
The Company's media plan is designed to build awareness and increase trial
among key target audiences while optimizing spending by market based on media
cost efficiencies. The Company classifies markets based upon restaurant
penetration and the resulting advertising and promotion costs per restaurant.
The Company's 19 most highly-penetrated markets are supported with regular spot
television advertisements from March through December. The Company augments its
marketing efforts in these markets with radio advertising to target the
breakfast day-part or to increase the frequency of the promotional message. In
addition, the Company supports certain of these highly-penetrated markets
(Albany, Boston, Hartford-Springfield and Providence) during the peak summer
season with additional television media focusing on freshly-scooped and packaged
frozen desserts. In its secondary markets, the Company utilizes more cost
effective local store marketing initiatives such as radio, direct mail and
newspaper advertising. All of the Company's markets are supported with an
extensive promotional coupon program.
The Company believes that its integrated restaurant and retail marketing
efforts provide a significant competitive advantage supporting development of
its retail business. Specifically, the retail business benefits from the
awareness and trial of Friendly's product offerings generated by 32 weeks of
food-with-ice-cream advertising and couponing efforts. The Company believes that
this approach delivers a significantly higher level of consumer exposure and
usage compared to the Company's packaged frozen dessert
39
competitors which have only retail distribution. In turn, sales of the Company's
products through more than 5,000 retail locations, supported by trade
merchandising efforts, build incremental awareness and usage of Friendly's which
management believes benefits the restaurants. The Company estimates that
advertising and promotion expenditures will be approximately $20 million for
1997.
MANUFACTURING
The Company produces substantially all of its frozen desserts in two
Company-owned manufacturing plants which employ a total of approximately 300
people. The Wilbraham, Massachusetts plant occupies approximately 41,000 square
feet of manufacturing space while the Troy, Ohio plant utilizes approximately
18,000 square feet. During 1996, the combined plants operated at an average
capacity of 68.0% and produced (i) over 17.0 million gallons of ice cream,
sherbets and yogurt in bulk, half-gallons and pints, (ii) nine million sundae
cups, (iii) 2.5 million frozen dessert rolls, pies and cakes and (iv) more than
1.4 million gallons of fountain syrups and toppings. The Company, through its
Shanghai, China joint venture, also owns a 13,000 square foot ice cream
manufacturing facility. The quality of the Company's products is important, both
to sustain Friendly's image and to enable the Company to satisfy customer
expectations. Wherever possible, the Company "engineers in" quality by
installing modern processes such as computerized mix-making equipment and
monitoring devices to ensure all storage tanks and rooms are kept at proper
temperatures for maximum quality.
PURCHASING AND DISTRIBUTION
In conjunction with the Company's product development department, the
Company's purchasing department evaluates the cost and quality of all major food
items on a quarterly basis and purchases these items through numerous vendors
with which it has long-term relationships. The Company contracts with vendors on
an annual, semiannual, or monthly basis depending on the item and the
opportunities within the marketplace. In order to promote competitive pricing
and uniform vendor specifications, the Company contracts directly for such
products as produce, milk and bread and other commodities and services. The
Company also minimizes the cost of all restaurant capital equipment by
purchasing directly from manufacturers or pooling volumes with master
distributors.
The Company owns two distribution centers and leases a third which allow the
Company to control quality, costs and inventory from the point of purchase
through restaurant delivery. The Company distributes most product lines to its
restaurants, and its packaged frozen desserts to its retail customers, from
warehouses in Chicopee and Wilbraham, Massachusetts and Troy, Ohio with a
combined non-union workforce of approximately 250 employees. The Company's truck
fleet delivers all but locally-sourced produce, milk and selected bakery
products to its restaurants at least weekly, and during the highest-sales
periods, delivers to over 50% of Friendly's restaurants twice-per-week. The
Chicopee, Wilbraham and Troy warehouses encompass 54,000 square feet, 109,000
square feet and 42,000 square feet, respectively. The Company believes that
these distribution facilities operate at or above industry standards with
respect to timeliness and accuracy of deliveries.
The Company has distributed its products since its inception to protect the
product integrity of its frozen desserts. The Company delivers products to its
restaurants on its own fleet of 56 tractors and 81 trailers which display
large-scale images of the Company's featured products. The entire fleet is
specially built to be compatible with storage access doors, thus protecting
frozen desserts from "temperature shock." Recently acquired trailers have an
innovative design which provides individual temperature control for three
distinct compartments. To provide additional economies to the Company, the truck
fleet backhauls on over 50% of its delivery trips, bringing the Company's
purchased raw materials and finished products back to the distribution centers.
40
HUMAN RESOURCES AND TRAINING
The average Friendly's restaurant employs between two and four salaried team
members, which may include one General Manager, one Assistant Manager, one Guest
Service Supervisor and one Manager-in-Training. The General Manager is directly
responsible for day-to-day operations. General Managers report to a District
Manager who typically has responsibility for an average of seven restaurants.
District Managers report to a Division Manager who typically has responsibility
for approximately 50 restaurants. Division Managers report to a Regional Vice
President who typically has responsibility for six or seven Division Managers
covering approximately 350 restaurants.
The average Friendly's restaurant is staffed with four to ten employees per
shift, including the salaried restaurant management. Shift staffing levels vary
by sales volume level, building configuration and time of day. The average
restaurant typically utilized approximately 37,500 hourly-wage labor hours in
1996 in addition to salaried management.
To maintain its high service and quality standards, Friendly's has developed
its Restaurant Leadership Team ("RLT"). The RLT is comprised of highly-qualified
management employees, each of whom has received extensive training in Company
policies and procedures, as well as applicable federal, state and local
regulations. This team approach helps to ensure that the Company has the strong
leadership and management staff required to efficiently operate Friendly's
restaurants, provide quality service to customers and develop a pool of
well-qualified management candidates. These management candidates undergo
extensive training at the Company's dedicated training and development center.
Moreover, the Company has significantly improved its human resources training to
include sexual harassment, racial discrimination, diversity, employment
practices, government regulations, selection and assessment and other programs.
The Company also requires its District and Division Managers to participate in
training and development programs, provides courses to improve management skills
and offers development support for its headquarters employees.
EMPLOYEES
The total number of employees at the Company varies between 25,000 and
28,000 depending on the season of the year. As of June 29, 1997, the Company
employed approximately 28,000 employees, of which approximately 27,000 were
employed in Friendly's restaurants (including 130 in field management),
approximately 550 were employed at the Company's two manufacturing and three
distribution facilities and approximately 450 were employed at the Company's
corporate headquarters and other offices. None of the Company's employees is a
party to a collective bargaining agreement.
HEADQUARTERS AND OTHER NON-RESTAURANT PROPERTIES
In addition to the Company's restaurants, the Company owns (i) an
approximately 260,000 square foot facility on 46 acres in Wilbraham,
Massachusetts which houses the corporate headquarters, a manufacturing facility
and a warehouse, (ii) an approximately 77,000 square foot office, manufacturing
and warehouse facility on 13 acres in Troy, Ohio and (iii) an approximately
18,000 square foot restaurant construction and maintenance service facility
located in Wilbraham, Massachusetts. The Company leases (i) an approximately
60,000 square foot distribution facility in Chicopee, Masschusetts, (ii) an
approximately 38,000 square foot restaurant construction and maintenance support
facility in Ludlow, Massachusetts and (iii) on a short-term basis, space for its
division and regional offices, its training and development center and other
support facilities.
LICENSES AND TRADEMARKS
The Company is the owner or licensee of the trademarks and service marks
(the "Marks") used in its business. The Marks "Friendly-Registered Trademark-"
and "Friendly's-Registered Trademark-" are owned by the Company pursuant to
registrations with the U.S. Patent and Trademark office.
41
Upon the sale of the Company by Hershey in 1988, all of the Marks used in
the Company's business at that time which did not contain the word "Friendly" as
a component of such Marks (the "1988 Non-Friendly Marks"), such as
Fribble-Registered Trademark-, Fishamajig-Registered Trademark- and
Clamboat-Registered Trademark- were licensed by Hershey to the Company. The 1988
Non-Friendly Marks license has a term of 40 years expiring on September 2, 2028.
Such license included a prepaid license fee for the term of the license which is
renewable at the Company's option for an additional term of 40 years and has a
license renewal fee of $20.0 million.
Hershey also entered into non-exclusive licenses with the Company for
certain candy trademarks used by the Company in its frozen dessert sundae cups
(the "Cup License") and pints (the "Pint License"). The Cup License and Pint
License automatically renew for unlimited one-year terms subject to certain
nonrenewal rights held by both parties. Hershey is subject to a noncompete
provision in the sundae cup business for a period of two years if the Cup
License is terminated by Hershey without cause, provided that the Company
maintains its current level of market penetration in the sundae cup business.
However, Hershey is not subject to a noncompete provision if it terminates the
Pint License without cause.
The Company also has a non-exclusive license agreement with Leaf, Inc.
("Leaf") for use of the Heath-Registered Trademark- Bar candy trademark. The
term of the royalty-free Leaf license continues indefinitely subject to
termination by Leaf upon 60 days notice. Excluding the Marks subject to the
licenses with Hershey and Leaf, the Company is the owner of its Marks.
COMPETITION
The restaurant business is highly competitive and is affected by changes in
the public's eating habits and preferences, population trends and traffic
patterns, as well as by local and national economic conditions affecting
consumer spending habits, many of which are beyond the Company's control. Key
competitive factors in the industry are the quality and value of the food
products offered, quality and speed of service, attractiveness of facilities,
advertising, name brand awareness and image and restaurant location. Each of the
Company's restaurants competes directly or indirectly with locally-owned
restaurants as well as restaurants with national or regional images, and to a
limited extent, restaurants operated by its franchisees. A number of the
Company's significant competitors are larger or more diversified and have
substantially greater resources than the Company. The Company's retail
operations compete with national and regional manufacturers of frozen desserts,
many of which have greater financial resources and more established channels of
distribution than the Company. Key competitive factors in the retail food
business include brand awareness, access to retail locations, price and quality.
GOVERNMENT REGULATION
The Company is subject to various Federal, state and local laws affecting
its business. Each Friendly's restaurant is subject to licensing and regulation
by a number of governmental authorities, which include health, safety,
sanitation, building and fire agencies in the state or municipality in which the
restaurant is located. Difficulties in obtaining or failures to obtain required
licenses or approvals, or the loss of such licences and approvals once obtained,
can delay, prevent the opening of, or close, a restaurant in a particular area.
The Company is also subject to Federal and state environmental regulations, but
these have not had a material adverse effect on the Company's operations.
The Company's relationships with its current and potential franchisees is
governed by the laws of its several states which regulate substantive aspects of
the franchisor-franchisee relationship. Substantive state laws that regulate the
franchisor-franchisee relationship presently exist or are being considered in a
substantial number of states, and bills have been introduced in Congress (one of
which is now pending) which would provide for Federal regulation of substantive
aspects of the franchisor-franchisee relationship. These current and proposed
franchise relationship laws limit, among other things, the duration and scope of
non-competition provisions, the ability of a franchisor to terminate or refuse
to renew a franchise and the ability of a franchisor to designate sources of
supply.
42
The Company's restaurant operations are also subject to Federal and state
laws governing such matters as wages, working conditions, citizenship
requirements and overtime. Some states have set minimum wage requirements higher
than the Federal level, and the Federal government recently increased the
Federal minimum wage. In September 1997, the second phase of an increase in the
minimum wage will be implemented in accordance with the Federal Fair Labor
Standards Act of 1996. Significant numbers of hourly personnel at the Company's
restaurants are paid at rates related to the Federal minimum wage and,
accordingly, increases in the minimum wage will increase labor costs at the
Company's restaurants. Other governmental initiatives such as mandated health
insurance, if implemented, could adversely affect the Company as well as the
restaurant industry in general. The Company is also subject to the Americans
with Disabilities Act of 1990, which, among other things, may require certain
minor renovations to its restaurants to meet federally-mandated requirements.
The cost of these renovations is not expected to be material to the Company.
LEGAL PROCEEDINGS
From time to time the Company is named as a defendant in legal actions
arising in the ordinary course of its business. The Company is not party to any
pending legal proceedings other than routine litigation incidental to its
business. The Company does not believe that the resolutions of these claims
should have a material adverse effect on the Company's financial condition or
results of operations.
43
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The executive officers and directors of the Company and their respective
ages and positions with the Company are as follows:
NAME AGE POSITION WITH COMPANY
- ------------------------------ --- ---------------------------------------------------------------------------
Donald N. Smith 56 Chairman, Chief Executive Officer and President
Paul J. McDonald 53 Senior Executive Vice President, Chief Administrative Officer and Assistant
Secretary
Joseph A. O'Shaughnessy 61 Senior Executive Vice President
Larry W. Browne 51 Executive Vice President, Corporate Finance, General Counsel and Secretary
Gerald E. Sinsigalli 58 President, Food Service Division
Dennis J. Roberts 48 Senior Vice President, Restaurant Operations
Scott D. Colwell 39 Vice President, Marketing
Henry V. Pettis III 52 Vice President, Franchising and Operations Services
George G. Roller 49 Vice President, Finance, Chief Financial Officer and Treasurer
Garrett J. Ulrich 46 Vice President, Human Resources
Charles L. Atwood 48 Director
Steven L. Ezzes 50 Director
Barry Krantz 53 Director
Gregory L. Segall 34 Director
DONALD N. SMITH has been Chairman, Chief Executive Officer and President of
the Company since September 1988. Mr. Smith has also been Chairman of the Board
and Chief Executive Officer of TRC and Perkins since November 1985. Prior to
joining TRC, Mr. Smith was President and Chief Executive Officer for
Diversifoods, Inc. from 1983 to October 1985. From 1980 to 1983, Mr. Smith was
Senior Vice President, PepsiCo., Inc. and was President of its Food Service
Division. He was responsible for the operations of Pizza Hut Inc. and Taco Bell
Corp., as well as North American Van Lines, Lee Way Motor Freight, Inc.,
PepsiCo. Foods International and La Petite Boulangerie. Prior to 1980, Mr. Smith
was President and Chief Executive Officer of Burger King Corporation and Senior
Executive Vice President and Chief Operations Officer for McDonald's
Corporation.
PAUL J. MCDONALD has been Senior Executive Vice President, Chief
Administrative Officer and Assistant Secretary since January 1996. Mr. McDonald
has been employed in various capacities with the Company since 1976. Mr.
McDonald has held the positions of Director of Management Information Systems,
Vice President/Controller and Vice President Corporate Development. Mr. McDonald
is a certified public accountant.
JOSEPH A. O'SHAUGHNESSY has been Senior Executive Vice President since
October 1988. Mr. O'Shaughnessy has been employed in various capacities with the
Company since 1957. Mr. O'Shaughnessy's duties have included District and
Division Manager, Director and Vice President of Operations and Executive Vice
President.
LARRY W. BROWNE has been Executive Vice President, Corporate Finance,
General Counsel and Secretary of the Company since September 1988. Mr. Browne
has also been President and Managing Director of Friendly's International, Inc.
since 1996. Mr. Browne has been the Executive Vice President,
44
Corporate Finance, General Counsel and Secretary of TRC since November 1985 and
was with Perkins from 1985 until 1996, most recently holding the position of
Senior Vice President, Corporate Finance.
GERALD E. SINSIGALLI has been President, Food Service Division of the
Company since January 1989. Mr. Sinsigalli has been employed in various
capacities with the Company since 1965. Mr. Sinsigalli's duties have included
District and Division Manager, Director and Vice President of Operations and
Senior Vice President.
DENNIS J. ROBERTS has been Senior Vice President, Restaurant Operations of
the Company since January 1996. Mr. Roberts has been employed in various
capacities with the Company since 1969. Mr. Roberts' duties have included
Restaurant, District and Division Manager, Regional Training Manager, Director
and Vice President of Restaurant Operations.
SCOTT D. COLWELL has been Vice President, Marketing of the Company since
January 1996. Mr. Colwell has been employed in various capacities with the
Company since 1982 including Director, New Business Development; Senior
Director, Marketing and Sales and Senior Director, Retail Business.
HENRY V. PETTIS III has been employed by the Company since 1990 and became
Vice President, Franchising and Operations Services in 1996. Mr. Pettis was
President and Chief Executive Officer of Florida Food Industries from 1988 to
1990.
GEORGE G. ROLLER has been Vice President, Finance and Chief Financial
Officer and Treasurer of the Company since January 1996. Mr. Roller was Vice
President and Treasurer of the Company from 1989 until January 1996. Mr. Roller
is a certified public accountant.
GARRETT J. ULRICH has been Vice President, Human Resources since September
1991. Mr. Ulrich held the position of Vice President, Human Resources for Dun &
Bradstreet Information Services, North America from 1988 to 1991. From 1978 to
1988, Mr. Ulrich held various Human Resource executive and managerial positions
at Pepsi Cola Company, a division of PepsiCo.
CHARLES L. ATWOOD has been a director of the Company since July 1997. Mr.
Atwood has been with Harrah's Entertainment, Inc. since 1979 and is currently
serving as Vice President and Treasurer, a position he has held since October
1996. Mr. Atwood also served Harrah's as Corporate Director, Investor Relations
from 1988 to 1996. Mr. Atwood is a certified public accountant.
STEVEN L. EZZES was reelected as a director of the Company in December 1995.
Mr. Ezzes previously served as a director of the Company from January 1991 to
May 1992. Mr. Ezzes has been a Managing Director of Scotia Capital Markets
(USA), an investment banking firm, since November 1996. Prior to that he was a
partner of the Airlie Group, a private investment firm, since 1988. Mr. Ezzes
has also been a Managing Director of Lehman Brothers, an investment banking
firm.
BARRY KRANTZ has been a director of the Company since April 1996. From
January 1994 to August 1995, Mr. Krantz served as President and Chief Operating
Officer of Family Restaurants, Inc. Mr. Krantz served at Restaurant Enterprises
Group, Inc. from December 1988 until January 1994 where he held the positions of
Chief Operating Officer and President of the Family Restaurant Division.
GREGORY L. SEGALL has been a director of the Company since April 1996. Mr.
Segall has served as Chairman, President & CEO of Consolidated Vision Group,
Inc. since April 1997. Since October 1992, Mr. Segall has also been Managing
Director and Principal of Chrysalis Management Group, LLC. Prior to 1992, Mr.
Segall was a Managing Director of Sigoloff & Associates, Inc. Mr. Segall has
also served as Chief Executive Officer of a number of retail, real estate and
technology companies. In connection with his management consulting practice, Mr.
Segall has, over the past ten years, served as an officer and/or director of a
variety of companies which have either filed petitions or had petitions filed
against them under the U.S. Bankruptcy Code. Mr. Segall's involvement in these
companies was required by his employment by Chrysalis Management Group, LLC and
Sigoloff & Associates, Inc., both of which are management consulting groups
which specialize in restructuring and reorganizing businesses. In each case,
45
Mr. Segall became an officer and/or director only after his employer had been
retained for the purpose of taking a company through the reorganization process.
The executive officers of the Company serve at the discretion of the Board
of Directors.
INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES
CLASSES OF DIRECTORS
Following the closing of the Common Stock Offering, the Board of Directors
will be divided into three classes, each of whose members will serve for a
staggered three-year term. Two directors will serve in the class whose term
expires in 1998; two directors will serve in the class whose term expires in
1999; and one will serve in the class whose term expires in 2000. Upon the
expiration of the term of a class of directors, directors within such class will
be elected for a three-year term at the annual meeting of stockholders in the
year in which such term expires.
BOARD COMMITTEES
The Company's Board of Directors has established an Audit Committee, a
Compensation Committee and a Nominating Committee. The Audit Committee is
responsible for nominating the Company's independent accountants for approval by
the Board of Directors, reviewing the scope, results and costs of the audit by
the Company's independent accountants and reviewing the financial statements of
the Company. Messrs. Atwood and Segall are the members of the Audit Committee.
The Compensation Committee is responsible for recommending compensation and
benefits for the executive officers of the Company to the Board of Directors and
for administering the Company's stock plans. are the members of the
Compensation Committee. The Nominating Committee is responsible for nominating
individuals to stand for election to the Board of Directors. Messrs. Atwood,
Ezzes and Smith are the members of the Nominating Committee.
The Company's Restated Articles empower the Board of Directors to fix the
number of directors and to fill any vacancies on the Board of Directors.
Each Director of the Company who is not an employee of the Company will
receive a fee of $2,500 per month and $1,500 per board and special board meeting
attended, plus expenses.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
After consideration of the recommendations of Mr. Smith, compensation
matters of the Company are determined by Messrs. , members of the
Company's Board of Directors.
46
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Summary Compensation Table below sets forth the annual base salary and
other annual compensation paid during the last three fiscal years to the
Company's chief executive officer and each of the other four most highly
compensated executive officers whose cash compensation exceeded $100,000 in a
combination of salary and bonus (the "named executive officers"). During 1994,
1995 and 1996, no long-term compensation was paid to the named executive
officers.
ANNUAL COMPENSATION
------------------------------------------------------
RESTRICTED
STOCK OTHER ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS AWARDS(A) COMPENSATION COMPENSATION
- ---------------------------------- ------------- ---------- ---------- ----------- ----------------- -----------------
Donald N. Smith (b)............... 1996 $ 495,355 $ 150,000 $ 0 $ 0 $ 0
Chairman, Chief Executive 1995 472,640
Officer and President 1994 450,736
Larry W. Browne................... 1996 265,822 30,000 201 0 0
Executive Vice President, 1995 257,788
Corporate Finance, General 1994 249,619
Counsel and Secretary
Joseph A. O'Shaughnessy........... 1996 255,974 37,000 201 0 0
Senior Executive Vice President 1995 253,348
1994 245,720
Gerald E. Sinsigalli.............. 1996 249,552 40,000 201 0 0
President, Food Service Division 1995 239,646
1994 229,582
Paul J. McDonald.................. 1996 246,145 47,000 201 0 0
Senior Executive Vice President, 1995 236,780
Chief Administrative Officer and 1994 213,076
Assistant Secretary
- ------------------------
(a) Represents the value of restricted stock awarded on March 25, 1996 under the
Company's management stock plan (the "Management Stock Plan"), which was
issued in substitution of stock rights awarded under a subsequently
terminated stock rights plan. As of December 29, 1996, Messrs. Browne,
O'Shaughnessy, Sinsigalli and McDonald each had 3,765 shares with a value of
$151 as of such date. Twenty-five percent of the shares of restricted stock
vested on December 29, 1996 upon the attainment of a minimum operating cash
flow target. The remaining shares of restricted stock will vest upon
consummation of the Common Stock Offering. No dividends were payable on the
restricted shares.
(b) The Company paid a management fee to TRC in the amount of $800,000, $785,000
and $773,000 in 1996, 1995 and 1994, respectively. From these fees, TRC paid
Mr. Smith the salary and bonus amounts listed above. Mr. Smith serves as
Chairman, Chief Executive Officer and President of the Company and as
Chairman and Chief Executive Officer of Perkins and, consequently, devotes a
portion of his time to the affairs of each of the Company and Perkins.
47
PENSION PLAN TABLE
The following table sets forth the estimated annual benefits payable, based
on the indicated credited years of service and the indicated average annual
remuneration used in calculating benefits, under the Pension Plan (as defined
below).
ESTIMATED BENEFIT BASED ON YEARS OF SERVICE (A)
----------------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------- ---------- ---------- ---------- ---------- ----------
$ 125,000 $ 11,171 $ 17,544 $ 24,444 $ 31,475 $ 39,031
150,000 13,405 21,053 29,333 37,770 46,837
175,000 15,639 24,562 34,222 44,065 54,643
200,000 17,873 28,071 39,111 50,360 62,451
300,000 26,809 42,106 58,664 75,539 93,675
400,000 35,746 56,142 78,221 100,720 124,901
500,000 44,682 70,177 97,775 125,899 156,123
600,000 53,619 84,214 117,330 151,078 187,350
700,000 62,555 98,249 136,885 176,259 218,573
- ------------------------------
(a) Benefits under the Friendly Ice Cream Corporation Cash Balance Pension Plan
(the "Pension Plan") are generally determined based on the value of a
participant's cash balance account under the plan. Each year, a percentage
of compensation (limited to $150,000 for 1996 in accordance with rules
promulgated under the Internal Revenue Code of 1986 (the "Code")) is
contributed to an individual's cash balance account under the Pension Plan
based on his years of credited service. Interest credits are also
contributed to each cash balance account annually. The cash balance formula
was implemented effective January 1, 1992, at which time the accrued
benefits of participants were converted to the opening balance in the cash
balance account. The above amounts are annual straight life annuity amounts
(which are not reduced for social security benefits) payable upon retirement
at age 65 and assume salary increases of 5.0% per year, interest credits of
5.0% per year and that the cash balance formula under the Pension Plan has
always been in effect. The foregoing amounts also reflect amounts
attributable to benefits payable under the Friendly Ice Cream Corporation
Supplemental Executive Retirement Plan, (the "SERP"), which provides
benefits to the covered individuals which cannot be provided under the
Pension Plan due to the certain limitations of the Internal Revenue Code,
including the limitation on compensation. The SERP was implemented effective
as of January 1, 1995. Mr. Smith did not become a participant in the SERP
until January 1, 1996. As of January 1, 1997, Messrs. Brown, McDonald and
Smith had 8, 21 and 8 years of credited service, respectively, under the
Pension Plan. Benefits under the Pension Plan for Messrs. O'Shaughnessy and
Sinsigalli are determined primarily on final compensation and years of
credited service although such individuals would be entitled to a benefit
under the formula described above if such formula resulted in a larger
benefit. As of January 1, 1996, the estimated annual benefit payable upon
retirement at age 65 (expressed in the form of a straight life annuity) for
Messrs. O'Shaughnessy and Sinsigalli is $63,825 and $89,773, respectively,
taking into account benefits provided to such individuals under the SERP. As
of January 1, 1997, Messrs. O'Shaughnessy and Sinsigalli had 40 and 32 years
of credited service, respectively, under the Pension Plan.
LIMITED STOCK COMPENSATION PROGRAMS
In connection with the Common Stock Offering, the Company established a
program pursuant to which a one-time award of Common Stock will be made to
approximately employees of the Company in recognition of their services to
the Company. Approximately 300,000 shares of Common Stock will be awarded under
the program (after giving effect to the Recapitalization). The Common Stock
awards will vest upon consummation of the Common Stock Offering, however, the
shares will be subject to transfer restrictions for a period of four years. The
shares will become transferable on a pro rata basis on the first through fourth
anniversaries of the Common Stock Offering. Messrs. Browne, O'Shaughnessy,
Sinsigalli and McDonald will be awarded , , and
shares respectively under the program.
Under a separate arrangement, Mr. Smith will be awarded approximately
100,742 shares of Common Stock which will vest upon consummation of the Common
Stock Offering. This one-time award was made in recognition of his services to
the Company.
48
RESTRICTED STOCK PLAN
The Company currently maintains a restricted stock plan for the benefit of
eligible employees. All outstanding awards under such restricted stock plan will
vest upon consummation of the Common Stock Offering, and no new awards will be
issued under that plan. Prior to the Common Stock Offering, the Company will
adopt a new restricted stock plan (the "Restricted Stock Plan"), pursuant to
which 375,000 shares of Common Stock will be reserved for issuance, subject to
adjustment in the case of certain corporate transactions affecting the number or
type of shares of outstanding common stock. The Restricted Stock Plan will
provide for the award of Common Stock, the vesting of which will be subject to
such conditions and limitations as shall be established by the Board of
Directors, which may include conditions relating to continued employment with
the Company or the achievement of performance measures. Unless the Board of
Directors determines otherwise, any shares of restricted stock which are not
vested upon the participant's termination of employment with the Company shall
be forfeited. Upon a change in control of the Company, all restrictions on
outstanding shares of restricted stock shall lapse and such shares shall become
nonforfeitable.
The Restricted Stock Plan shall be administered by the Board of Directors,
which shall have the authority to determine the employees who will receive
awards under the Restricted Stock Plan and the terms and conditions of such
awards. Approximately 70 employees of the Company who are classified as salary
grade 109 and above will initially be eligible for participation in the
Restricted Stock Plan. The Board of Directors, in its sole discretion, may
designate other employees and persons providing material services to the Company
as eligible for participation in the Restricted Stock Plan.
STOCK OPTION PLAN
The Company does not currently maintain a stock option plan, although
certain employees of the Company participated in a previously terminated stock
rights plan. See Note 13 of Notes to Consolidated Financial Statements.
In connection with the Common Stock Offering, the Company will adopt a stock
option plan (the "Stock Option Plan"), pursuant to which approximately 400,000
shares of Common Stock will be reserved for issuance, subject to adjustment in
the case of certain corporate transactions affecting the number or type of
shares of outstanding Common Stock. The Stock Option Plan will provide for the
issuance of nonqualified stock options and incentive stock options which are
intended to satisfy the requirements of section 422 of the Code and stock
appreciation rights.
The Stock Option Plan will be administered by the Board of Directors. The
Board of Directors will determine the employees who will receive awards under
the Stock Option Plan and the terms of such awards. The award of a stock option
will entitle the recipient thereof to purchase a specified number of shares of
Common Stock at the exercise price specified by the Board of Directors. The
award of a stock appreciation right entitles the recipient thereof to a payment
equal to the excess of the fair market value of a share of Common Stock on the
date of exercise over the exercise price specified by the Board of Directors.
The exercise price of a stock option or stock appreciation right shall not be
less than the fair market value of a share of Common Stock on the date the stock
option or stock appreciation right is granted. The Board of Directors may
delegate its authority under the Stock Option Plan to a committee of the Board
of Directors.
Stock options and stock appreciation rights shall become exercisable in
accordance with the terms established by the Board of Directors, which terms may
relate to continued service with the Company or attainment of performance goals.
Stock options awarded in connection with the Common Stock Offering will become
exercisable over a five-year period, subject to the optionee's continued
employment with the Company. All awards under the Stock Option Plan will become
fully vested and exercisable upon a change in control of the Company.
49
Approximately 120 employees of the Company who are classified as salary
grade 107 or 108 will initially be eligible for participation in the Stock
Option Plan. The Board of Directors, in its sole discretion, may designate other
employees and persons providing material services to the Company as eligible for
participation in the Stock Option Plan.
Generally, a participant who is granted a stock option or stock appreciation
right will not be subject to federal income tax at the time of the grant, and
the Company will not be entitled to a corresponding tax deduction. Upon the
exercise of a nonqualified stock option, generally the difference between the
option price and the fair market value of the Common Stock will be considered
ordinary income to the participant, and generally the Company will be entitled
to a tax deduction.
Upon exercise of an incentive stock option, no taxable income will be
recognized by the participant, and the Company will not be entitled to a tax
deduction. However, if the Common Stock purchased upon exercise of the incentive
stock option is sold within two years of the option's grant date or within one
year after the exercise, then the difference, with certain adjustments, between
the fair market value of the Common Stock at the date of exercise and the option
price will be considered ordinary income to the participant, and generally the
Company will be entitled to a tax deduction. If the participant disposes of the
Common Stock after such holding periods, any gain or loss upon such disposition
will be treated as a capital gain or loss and the Company will not be entitled
to a deduction.
Upon exercise of a stock appreciation right, the participant will recognize
ordinary income in an amount equal to the payment received, and generally the
Company will be entitled to a corresponding tax deduction.
The following individuals will be granted awards under the Restricted Stock
Plan and Stock Option Plan as of the effective date of the Common Stock
Offering.
RESTRICTED STOCK PLAN AND STOCK OPTION PLAN BENEFITS
NUMBER OF SHARES NUMBER OF SHARES
OF RESTRICTED STOCK SUBJECT TO OPTIONS
NAME AND POSITION (A) (B)
- --------------------------------------------------------------------- --------------------- ---------------------
Donald N. Smith
Chairman, Chief Executive Officer and President....................
Joseph A. O'Shaughnessy
Senior Executive Vice President....................................
Gerald E. Sinsigalli
President, Food Service Division...................................
Larry W. Browne
Executive Vice President, Corporate Finance, General Counsel and
Secretary..........................................................
Paul J. McDonald
Senior Executive Vice President, Chief Administrative Officer and
Assistant Secretary................................................
All executive officers as a group....................................
Non-executive officers as a group....................................
- ------------------------
(a) Restricted shares vest pro rata over an eight year period, subject to
earlier vesting upon the attainment of annual or cumulative performance
targets specified by the Board of Directors.
(b) Options will become exercisable over five years, subject to certain
conditions, at a price equal to the initial public offering price in the
Common Stock Offering.
50
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding beneficial
ownership of (i) the Class A and Class B common shares of the Company prior to
the Recapitalization, and (ii) the Common Stock, after giving effect to the
Common Stock Offering, by (a) each person who is known by the Company to own
beneficially more than 5% of the outstanding (1) Class A and Class B common
shares as of September , 1997 or (2) shares of the Common Stock after giving
effect to the Common Stock Offering, (b) each director of the Company, (c) each
of the named executives officers and (d) all directors and executive officers of
the Company as a group.
COMMON STOCK
COMMON SHARES BENEFICIALLY OWNED
PRIOR TO THE RECAPITALIZATION BENEFICIALLY
--------------------------------------- OWNED AFTER THE
RECAPITALIZATION (A)
NUMBER ------------------------
------------------------ PERCENTAGE PERCENTAGE
NAME CLASS A (B) CLASS B (B) OF TOTAL (C) NUMBER OF TOTAL
- ---------------------------------------------------- ----------- ----------- ------------- --------- -------------
Lenders under Old Credit Facility as a
group (d)(e) -- 1,187,503 47.50% 701,036 9.35%
Donald N. Smith..................................... 456,355 -- 18.25 557,097 7.43
Harrah's............................................ 303,325 -- 12.13 179,067 2.39
Equitable........................................... 256,375 -- 10.26 151,349 2.02
Larry W. Browne..................................... -- *
Paul J. McDonald.................................... * *
Joseph A. O'Shaughnessy............................. * *
Gerald E. Sinsigalli................................ * *
Charles L. Atwood................................... * *
Steven L. Ezzes..................................... * *
Barry Krantz........................................ * *
Gregory L. Segall................................... * *
All directors and executive officers as a group (14
persons)..........................................
- ------------------------
* Represents less than 1% of the outstanding (i) Class A and Class B common
shares prior to the Recapitalization and (ii) Common Stock after the
Recapitalization.
(a) Gives effect to the Common Stock Offering, and the following, which will
occur in connection with the Recapitalization: (i) the return of 124,258,
105,026, 8,593, 486,467 and 51,398 shares of Common Stock to the Company by
Harrah's, Equitable, Mr. Browne, the lenders under the Old Credit Facility
as a group and the other existing non-management shareholders, respectively,
and the issuance of 100,742, 300,000 and 375,000 of such shares to Mr.
Smith, to certain members of management and under the Restricted Stock Plan,
respectively and (ii) the issuance of and shares of Common Stock under
the Company's Management Stock Plan to Mr. Browne and all directors and
executive officers as a group, respectively. Of the shares issued under the
Restricted Stock Plan, , , , , , and have been
allocated to Messrs. , , , , and and to all
directors and executive officers as a group, respectively. Does not reflect
400,000 shares reserved for issuance under the Company's Stock Option Plan.
See Note 17 of Notes to Consolidated Financial Statements.
(b) In connection with the Recapitalization, each outstanding share of Class A
and Class B common stock of the Company will be converted into one share of
the Common Stock.
(c) Gives effect to the issuance of 27,113 shares of Common Stock to be issued
under the Management Stock Plan upon consummation of the Common Stock
Offering. See Note 17 of Notes to Consolidated Financial Statements.
(d) Prior to the Recapitalization, the Bank of Boston, as agent for the lenders
under the Old Credit Facility, holds the Class B common shares for the
benefit of the lenders under the Old Credit Facility, having received Class
B common shares of the Company in 1996 in connection with the restructuring
of the Old Credit Facility. In connection with the Recapitalization, these
shares will automatically convert into shares of Common Stock and will be
distributed to the then existing lenders under the Old Credit Facility pro
rata according to the respective amounts of indebtedness thereunder held by
them. See Note 7 of Notes to Consolidated Financial Statements.
(e) , , , , , and , each of which is a
lender under the Old Credit Facility, have granted to the Underwriters a
30-day option to purchase the , , , , and
shares of Common Stock beneficially owned by such lenders,
respectively, as part of the Underwriters' over-allotment option in the
Common Stock Offering. If such over-allotment option in the Common Stock
Offering is exercised in full, the lenders under the Old Credit Facility as
a group would beneficially own % of the outstanding Common Stock after
the Recapitalization.
51
CERTAIN TRANSACTIONS
The Company's policy is to only enter into a transaction with an affiliate
in the ordinary course of, and pursuant to the reasonable requirements of, its
business and upon terms that are no less favorable to the Company than could be
obtained if the transaction was entered into with an unaffiliated third party.
Set forth below is a description of certain transactions between the Company and
its affiliates during 1994, 1995 and 1996 and ongoing transactions between the
Company and its affiliates. The Company believes that the terms of such
transactions were or are no less favorable to the Company than could have been
obtained if the transaction was entered into with an unaffiliated third party.
In March 1996, the Company's pension plan acquired three restaurant
properties from the Company. The land, buildings and improvements were purchased
by the plan at their appraised value of $2.0 million and are located in
Connecticut, Vermont and Virginia. Simultaneously with the purchase, the pension
plan leased back the three properties to the Company at an aggregate annual base
rent of $214,000 for the first five years and $236,000 for the following five
years. The pension plan was represented by independent legal and financial
advisors. The Company realized a net gain of approximately $675,000 on this
transaction which is being amortized into income over the initial ten-year term
of the lease.
In 1993, the Company subleased certain land, buildings, and equipment from
Perkins Restaurants Operating Company, L.P. ("Perkins"), a subsidiary of TRC.
During 1996, 1995 and 1994, rent expense related to the subleases was
approximately $278,000, $266,000 and $245,000, respectively.
During 1996 and 1995, an insurance subsidiary of TRC, Restaurant Insurance
Corporation ("RIC"), assumed from a third party insurance company reinsurance
premiums related to insurance liabilities of the Company of approximately $4.2
million and $6.4 million, respectively. In addition, RIC had reserves of
approximately $13.0 million and $12.8 million related to Company claims at
December 29, 1996 and December 31, 1995, respectively. On March 19, 1997, the
Company acquired all of the outstanding shares of common stock of RIC from TRC
for $1.3 million in cash and a $1.0 million promissory note payable to TRC
bearing interest at an annual rate of 8.25%. The promissory note and accrued
interest aggregating approximately $1.0 million was paid on June 30, 1997. RIC,
which was formed in 1993, reinsures certain of the Company's risks (i.e.
workers' compensation, employer's liability, general liability and product
liability) from a third party insurer.
In fiscal 1994, TRC Realty Co. (a subsidiary of TRC) entered into a 10-year
operating lease for an aircraft, for use by both the Company and Perkins. The
Company shares equally with Perkins in reimbursing TRC Realty Co. for leasing,
tax and insurance expenses. In addition, the Company also incurs actual usage
costs. Total expense for 1996, 1995 and 1994 was approximately $590,000,
$620,000 and $336,000, respectively.
The Company purchased certain food products used in the normal course of
business from a division of Perkins. For 1996, 1995 and 1994, purchases were
approximately $1.4 million, $1.9 million and $1.3 million, respectively.
The Company currently pays TRC an annual management fee pursuant to a
management fee letter agreement between the Company and TRC dated March 19, 1996
(the "TRC Management Contract"). The fee serves as compensation for (i) the
services performed by Mr. Smith for the benefit of the Company (ii) office and
secretarial services attributable to the Company and (iii) other related
expenses. TRC was paid $800,000, $785,000 and $773,000 for such management
services in 1996, 1995 and 1994, respectively. See "Management--Executive
Compensation."
During 1996, the Company incurred approximately $69,000 of expense related
to fees and other reimbursements to the two board of directors members who
represented the Company's lenders. In addition, for 1996, 1995 and 1994, the
Company expensed approximately $196,000, $763,000 and $200,000, respectively,
for fees paid to the lenders' agent bank.
52
The Company is a party to two agreements with TRC relating to taxes. In
connection with the distribution by TRC to its shareholders of the Common Stock
in the Company immediately prior to the 1996 bank restructuring, the Company
entered into a Tax Disaffiliation Agreement dated March 25, 1996. Under the Tax
Disaffiliation Agreement, TRC must indemnify the Company for all income taxes
during periods when the Company and its affiliates were includible in a
consolidated federal income tax return with TRC and for any income taxes due as
a result of the Company ceasing to be a member of the TRC consolidated group.
TRC does not retain any liability for periods when the Company and its
affiliates were not includible in the TRC consolidated federal income tax return
and the Company must indemnify TRC if any such income taxes are assessed against
TRC. TRC also does not indemnify the Company for a reduction of the Company's
existing NOLs or for NOLs previously utilized by TRC. The Tax Disaffiliation
Agreement terminates 90 days after the statute of limitations expires for each
tax covered by the agreement including unfiled returns as if such returns had
been filed by the appropriate due date.
The Company also entered into a Tax Responsibility Agreement dated as of
March 19, 1997 in connection with the sale of RIC to the Company. Under the Tax
Responsibility Agreement, the Company must indemnify TRC for any income taxes
that are assessed against TRC as a result of the operations of RIC. The Tax
Responsibility Agreement terminates 90 days after the statute of limitations
expires for each tax covered by the agreement.
53
DESCRIPTION OF NEW CREDIT FACILITY
The Company expects, contingent upon completion of the Offerings, to enter
into a senior secured credit facility with Societe Generale in an aggregate
principal amount of $140 million (the "New Credit Facility"). The following
description, which sets forth the material terms of the New Credit Facility,
does not purport to be complete and is qualified in its entirety by reference to
the agreements setting forth the principal terms of the New Credit Facility,
which will be filed as exhibits to the Registration Statement of which this
Prospectus is a part.
It is expected that the senior, secured New Credit Facility will consist of
(a) the $80 million Term Loan Facility, (b) the five-year Revolving Credit
Facility providing for revolving loans to the Company in a principal amount not
to exceed $45 million (including a $5 million sublimit for each of trade and
standby letters of credit) and (c) the $15 million Letter of Credit Facility
providing for standby letters of credit in the normal course of business and
having a maturity contemporaneous with that of the Revolving Credit Facility.
It is expected that the full amount of the Term Loan Facility will be drawn
on the closing date of the Recapitalization (the "Closing Date"). Amounts repaid
or prepaid under the Term Loan Facility may not be reborrowed. Loans under the
Revolving Credit Facility will be available at any time on and after the Closing
Date and prior to the date which is five years after the Closing Date. Letters
of credit shall expire annually, but shall have a final expiration date no later
than thirty days prior to final maturity, which for the Letter of Credit
Facility will also be five years from the Closing Date.
It is expected that the Term Loan Facility will require quarterly
amortization payments beginning on April 15, 1999. Annual amortization payments
will total $4.4 million, $10.4 million, $12.4 million, $14.4 million, $18.4
million and $20.0 million in 1999 through 2004, respectively. In addition to the
scheduled amortization, it is expected that the Term Loan Facility will be
permanently reduced by (i) specified percentages of each year's Excess Cash Flow
(as defined in the New Credit Facility) and (ii) 100% of the aggregate net
proceeds from asset sales not in the ordinary course of business and not
re-employed or committed to be re-employed within a specified period in the
Company's business, exclusive of up to $7.5 million of aggregate net proceeds
received from asset sales subsequent to the closing relating to the New Credit
Facility. Such applicable proceeds shall be applied to the Term Loan Facility in
inverse order of maturity. At the Company's option, loans may be prepaid at any
time with certain notice and breakage cost provisions.
It is expected that the obligations of the Company under the New Credit
Facility will be (i) secured by a first priority security interest in
substantially all material assets of the Company and all other assets owned or
hereafter acquired and (ii) guaranteed, on a senior secured basis, by the
Company's Friendly's Restaurants Franchise, Inc. subsidiary and may also be so
guaranteed by certain subsidiaries of the Company created or acquired after
consummation of the Recapitalization.
It is expected that, at the Company's option, the interest rates per annum
applicable to the New Credit Facility will be either LIBOR (as defined in the
New Credit Facility), plus a margin ranging from 2.375% to 2.75%, or the
Alternative Base Rate (as defined in the New Credit Facility), plus a margin
ranging from 0.875% to 1.25%. The Alternative Base Rate is the greater of (a)
Societe Generale's Prime Rate or (b) the Federal Funds Rate plus 0.50%. It is
expected that after the first twelve calendar months of the New Credit Facility,
pricing reductions will be available in certain circumstances.
It is expected that the New Credit Facility will contain a number of
significant covenants that among other things, will operate as limitations on
indebtedness; liens; guarantee obligations; mergers; consolidations, formation
of subsidiaries, liquidations and dissolutions; sales of assets; leases;
payments of dividends; capital expenditures; investments; optional payments and
modifications of subordinated and other debt instruments; transactions with
affiliates; sale and leaseback transactions; changes in fiscal year; negative
pledge clauses; changes in lines of business; and the ability to amend material
agreements. In addition, under the New Credit Facility, the Company will be
required to comply with specified minimum fixed charge coverage ratios, interest
expense coverage ratios, cash flow leverage ratios and minimum net worth
requirements.
54
DESCRIPTION OF SENIOR NOTES
GENERAL
The Senior Notes are to be issued under an Indenture, to be dated as of
, 1997 (the "Indenture"), between the Company, Friendly's Restaurants
Franchise, Inc. and The Bank of New York, as Trustee (the "Trustee"), a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
The following summary of certain provisions of the Indenture and the Senior
Notes does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part thereof by the
TIA. The summary provides an accurate description of all material terms of the
Senior Notes. Capitalized terms used herein and not otherwise defined have the
meanings set forth under "--Certain Definitions."
Principal of, premium, if any, and interest on the Senior Notes will be
payable, and the Senior Notes may be exchanged or transferred, at the office or
agency of the Company in the Borough of Manhattan, The City of New York (which
initially shall be the corporate trust office of the Trustee, at 101 Barclay
Street, New York, New York 10286), except that, at the option of the Company,
payment of interest may be made by check mailed to the registered holders of the
Senior Notes at their registered addresses.
The Senior Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple of $1,000. No
service charge will be made for any registration of transfer or exchange of
Senior Notes, but the Company may require payment of a sum sufficient to cover
any transfer tax or other similar governmental charge payable in connection
therewith.
The definition of "Restricted Subsidiary" in the Indenture will exclude any
"Unrestricted Subsidiary" and, as a result, Unrestricted Subsidiaries generally
will not be bound by the restrictive provisions of the Indenture and will not be
Subsidiary Guarantors. Each of Friendly's International, Inc. and its United
Kingdom subsidiaries will be an Unrestricted Subsidiary on the Issue Date.
TERMS OF THE SENIOR NOTES
The Senior Notes will be unsecured, senior obligations of the Company,
limited to $200 million aggregate principal amount, and will mature on
, 2007. Each Senior Note will bear interest at the rate per annum shown on
the front cover of this Prospectus from , 1997, or from the most recent
date to which interest has been paid or provided for, payable semiannually to
Holders of record at the close of business on the or immediately
preceding the interest payment date on and of each year, commencing
, 1998. Interest on the Senior Notes will be computed on the basis of a
360-day year of twelve 30-day months.
OPTIONAL REDEMPTION
The Senior Notes will be redeemable, at the Company's option, in whole or in
part, at any time on or after , 2002, and prior to maturity, upon not less
than 30 nor more than 60 days' prior notice mailed by first-class mail to each
Holder's registered address, at the following redemption prices (expressed as a
percentage of principal amount), plus accrued interest, if any, to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month period commencing on of the years set forth
below:
REDEMPTION
PERIOD PRICE
- --------------------------------------------------------------------------------- -----------
2002............................................................................. %
2003............................................................................. %
2004............................................................................. %
2005 and thereafter.............................................................. 100.000%
55
In addition, at any time and from time to time prior to , 2000, the
Company may redeem in the aggregate up to $70 million principal amount of the
Senior Notes with the proceeds of one or more Qualified Equity Offerings at a
redemption price (expressed as a percentage of principal amount thereof) of %
plus accrued interest, if any, to the redemption date (subject to the right of
Holders of record on the relevant record date to receive interest due on the
relevant interest payment date); provided, however, that at least $130 million
principal amount of the Senior Notes must remain outstanding after each such
redemption.
In the case of any partial redemption, selection of the Senior Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Senior Note of $1,000 in original principal amount will
be redeemed in part. If any Senior Note is to be redeemed in part only, the
notice of redemption relating to such Senior Note shall state the portion of the
principal amount thereof to be redeemed. A new Senior Note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Senior Note.
GUARANTEES
The obligations of the Company pursuant to the Senior Notes, including the
repurchase obligation resulting from a Change of Control, will be
unconditionally guaranteed, on an unsecured, senior basis, by Friendly's
Restaurant Franchise, Inc. and will also be guaranteed by each new Subsidiary
(other than Unrestricted Subsidiaries and Foreign Subsidiaries) created or
acquired after the Issue Date. Each Subsidiary Guaranty will be limited in
amount to an amount not to exceed the maximum amount that can be guaranteed by
the applicable Subsidiary Guarantor without rendering the Subsidiary Guaranty,
as it relates to such Subsidiary Guarantor, void or voidable under applicable
law relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally. If a Subsidiary Guaranty were to be
rendered void or voidable, it could be rendered unenforceable or subordinated by
a court to all other indebtedness (including guarantees and other contingent
liabilities) of the applicable Subsidiary Guarantor, and, depending on the
amount of such indebtedness, a Subsidiary Guarantor's liability on its
Subsidiary Guaranty could be reduced to zero. See "Risk Factors--Fraudulent
Conveyance."
The Indenture will provide that, subject to the following paragraph, the
Company will not permit any Subsidiary Guarantor to consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all of its assets to any Person unless (i)
the resulting, surviving or transferee Person (if not such Subsidiary Guarantor)
shall be a Person organized and existing under the laws of the jurisdiction
under which such Subsidiary Guarantor was organized or under the laws of the
United States of America, or any State thereof or the District of Columbia, and
such Person shall expressly assume, by a supplement to the Indenture, in a form
satisfactory to the Trustee, all the obligations of such Subsidiary Guarantor
under its Subsidiary Guaranty; (ii) immediately after giving effect to such
transaction or transactions on a pro forma basis (and treating any Indebtedness
which becomes an obligation of the resulting, surviving or transferee Person as
a result of such transaction as having been incurred by such Person at the time
of such transaction), no Default or Event of Default shall have occurred and be
continuing; and (iii) the Company delivers to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer, if any, complies with the Indenture.
However, the Indenture will also provide that upon the sale or other
disposition (including by way of consolidation or merger) of a Subsidiary
Guarantor or the sale or disposition of all or substantially all the assets of a
Subsidiary Guarantor (in each case other than to the Company or an Affiliate of
the Company), such Subsidiary Guarantor will be released and relieved from all
its obligations under its Subsidiary Guaranty; provided that such sale or
disposition shall constitute an Asset Sale under, and the Net Available Cash
from such sale or disposition shall be applied in accordance with, the covenant
described below under "Limitation on Sales of Assets and Subsidiary Stock."
56
RANKING
The indebtedness evidenced by the Senior Notes will be unsecured, Senior
Indebtedness of the Company, will rank PARI PASSU in right of payment with all
existing and future Senior Indebtedness of the Company and will rank senior in
right of payment to all existing and future Subordinated Obligations of the
Company. The Senior Notes will also be effectively subordinated to all existing
and future Secured Indebtedness of the Company to the extent of the value of the
assets securing such Secured Indebtedness and structurally subordinated to all
existing and future Indebtedness of any Subsidiary of the Company that is not a
Subsidiary Guarantor.
As of June 29, 1997, on a pro forma basis after giving effect to the
Recapitalization and the Related Transactions, the Company would have had a
total of $293.3 million of long-term debt and capital lease obligations
outstanding, $91.4 million of which would have been secured, and none of which
would have been subordinated. As of June 29, 1997, after giving effect to the
Recapitalization and the Related Transactions, Subsidiaries of the Company which
are not Subsidiary Guarantors would have had no long-term debt or capital lease
obligations outstanding. Although the Indenture contains limitations on the
amount of additional Indebtedness which the Company or any Restricted Subsidiary
may Incur, under certain circumstances the amount of such Indebtedness could be
substantial and, in any case, such Indebtedness may be Senior Indebtedness,
Secured Indebtedness or Indebtedness of Subsidiaries which are not Subsidiary
Guarantors. See "-- Certain Covenants -- Limitation on Indebtedness and
Preferred Stock."
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control") with respect to the Company, each Holder will have the right to
require the Company to repurchase all or any part of such Holder's Senior Notes
at a purchase price in cash equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of repurchase (subject to the
right of Holders of record on the relevant record date to receive interest due
on the related interest payment date):
(i) (A) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than one or more Permitted Holders, is or
becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, of more than 35% of the total voting
power of the Voting Stock of the Company and (B) the Permitted Holders
"beneficially own" (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of the Company than such other person
and do not have the right or ability by voting power, contract or otherwise
to elect or designate for election a majority of the Board of Directors of
the Company;
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the shareholders of the Company was
approved by a vote of a majority of the directors of the Company then still
in office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors of the Company
then in office;
(iii) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all, or substantially all, the assets
of the Company to any Person or group of Persons (other than to any Wholly
Owned Subsidiary of the Company);
(iv) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company and the
securities of the Company that are outstanding immediately prior to such
transaction and which represent 100% of the voting power of the Voting
57
Stock of the Company are changed into or exchanged for cash, securities or
property, unless pursuant to such transaction such securities are changed
into or exchanged for, in addition to any other consideration, securities of
the surviving corporation that represent immediately after such transaction,
at least a majority of the aggregate voting power of the Voting Stock of the
surviving Person or transferee; or
(v) the adoption of a plan of liquidation of the Company.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase any or all of such Holder's Senior Notes in denominations of $1,000
or any integral multiple thereof at a purchase price in cash equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
date of repurchase (subject to the right of Holders of record on a record date
to receive interest on the relevant interest payment date); (2) the
circumstances and relevant facts and pro forma financial information regarding
such Change of Control; (3) the repurchase date (which shall be no earlier than
30 days nor later than 60 days from the date such notice is mailed); and (4) the
instructions determined by the Company, consistent with this covenant, that a
Holder must follow in order to have its Senior Notes purchased by the Company.
Notwithstanding the occurrence of a Change of Control, the Company shall not be
obligated to repurchase the Senior Notes upon a Change of Control if the Company
has irrevocably elected to redeem all of the Senior Notes under the provisions
described under "-- Optional Redemption" above, provided that the Company does
not default in its redemption obligations pursuant to such election.
Neither the Trustee nor the Board of Directors of the Company may waive the
covenant relating to the Holders' right to have its Senior Notes repurchased
upon a Change of Control.
The phrase "all or substantially all," as used with respect to a sale of
assets in the definition in the Indenture of "Change of Control," varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under New York law (the law governing the Indenture)
and is subject to judicial interpretation. Accordingly, in certain
circumstances, there may be a degree of uncertainty in ascertaining whether a
particular transaction would involve a disposition of "all or substantially all"
of the assets of a Person and therefore it may be unclear whether a Change of
Control has occurred.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Senior Notes pursuant to this covenant. To
the extent that the provisions of any securities laws or regulations conflict
with provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this paragraph by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Underwriters. Management has no present intention to engage
in a transaction involving a Change of Control, although it is possible that the
Company could decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit rating.
The occurrence of certain of the events that would constitute a Change of
Control would constitute a default under the New Credit Facility. Future
Indebtedness of the Company may also contain prohibitions of certain events
which would constitute a Change of Control or require such Indebtedness to be
repurchased upon a Change of Control. Moreover, the exercise by the Holders of
their right to require the Company to repurchase the Senior Notes could cause a
default under such Indebtedness, even if the Change of Control itself does not,
due to the financial effect of such repurchase on the Company. Finally,
58
the Company's ability to pay cash to the Holders upon a repurchase may be
limited by the Company's then existing financial resources. There can be no
assurance that sufficient funds will be available when necessary to make any
required repurchases.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS AND PREFERRED STOCK. (a) (i) The Company will
not Incur, and will not permit any Restricted Subsidiary to Incur, any
Indebtedness (including Acquired Indebtedness) or issue Disqualified Stock and
(ii) the Company will not permit any of its Restricted Subsidiaries that are not
Subsidiary Guarantors to issue any shares of Preferred Stock; PROVIDED, HOWEVER,
that the Company and any Subsidiary Guarantor may Incur Indebtedness (including
Acquired Indebtedness) or issue Disqualified Stock if on the date thereof (and
after giving effect to the application of proceeds therefrom) the Consolidated
Coverage Ratio would be greater than 2.50:1 if such Incurrence shall occur prior
to , 1999 or greater than 2.75:1 if such Incurrence shall occur
thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and its
Restricted Subsidiaries may Incur the following Indebtedness: (i) Indebtedness
of the Company or any Restricted Subsidiary (including any Guarantees thereof)
under the New Credit Facility and any Refinancing Indebtedness with respect
thereto in an aggregate principal amount outstanding at any time not to exceed
$140 million, less the aggregate amount of all proceeds from all Asset
Dispositions that have been applied since the Issue Date to permanently reduce
the outstanding amount of such Indebtedness pursuant to the covenant "Limitation
on Sale of Assets and Subsidiary Stock" and less the aggregate amount of all
mandatory repayments of principal of term loans thereunder that have been made
since the Issue Date (other than repayments that are immediately re-borrowed);
(ii) Indebtedness of the Company owing to and held by any Wholly Owned
Subsidiary or Indebtedness of a Restricted Subsidiary owing to and held by the
Company or any Wholly Owned Subsidiary; PROVIDED, HOWEVER, that (a) any such
Indebtedness is made pursuant to an intercompany note and (other than any such
Indebtedness of the Company to RIC or of RIC to the Company) is expressly
subordinated to the Senior Notes or the applicable Subsidiary Guaranty, as the
case may be, and (b) any subsequent issuance or transfer of any Capital Stock or
any other event which results in any such Wholly Owned Subsidiary ceasing to be
a Wholly Owned Subsidiary or any subsequent transfer of any such Indebtedness
(except to the Company or a Wholly Owned Subsidiary) will be deemed, in each
case, to constitute the Incurrence of such Indebtedness by the issuer thereof;
(iii) Indebtedness represented by the Senior Notes (including Subsidiary
Guarantees), any Indebtedness of the Company or any Restricted Subsidiary (other
than the Indebtedness described in clauses (i)-(ii) above) outstanding on the
Issue Date and any Refinancing Indebtedness Incurred in respect of any
Indebtedness described in this clause (iii); (iv) (A) Indebtedness of a
Restricted Subsidiary outstanding on or prior to the date on which such
Restricted Subsidiary was acquired by the Company or a Restricted Subsidiary
(other than Indebtedness Incurred in connection with, or in contemplation of,
the transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Restricted Subsidiary or was otherwise acquired
by the Company or a Restricted Subsidiary); PROVIDED, HOWEVER, that at the time
such Restricted Subsidiary is acquired by the Company or a Restricted
Subsidiary, the Company would have been able to Incur $1.00 of additional
Indebtedness pursuant to paragraph (a) of this covenant after giving effect to
the Incurrence of such Indebtedness pursuant to this clause (iv) and such
transaction or series of related transactions and (B) Refinancing Indebtedness
Incurred by a Restricted Subsidiary in respect of Indebtedness Incurred by such
Restricted Subsidiary pursuant to this clause (iv); (v) Indebtedness (A)
represented by letters of credit (and reimbursement obligations with respect
thereto) to secure the purchase price of inventory and/or equipment in the
ordinary course of business or to secure Indebtedness (including Capitalized
Lease Obligations) otherwise permitted to be incurred under the Indenture, (B)
in respect of performance bonds (and letters of credit in respect thereof),
bankers' acceptances, letters of credit for workers' compensation claims, and
surety or appeal bonds (and letters of credit in respect thereof) provided by
the Company or
59
any Restricted Subsidiary in the ordinary course of its business and which do
not secure other Indebtedness and (C) under Currency Agreements, Interest Rate
Agreements and Commodity Agreements Incurred which, at the time of Incurrence,
is in the ordinary course of business; provided that such agreements are entered
into for bona fide hedging purposes, are not for speculation or trading purposes
and are designed to protect against fluctuations in interest rates, currency
exchange rates or commodity prices, as the case may be, and, in the case of
Interest Rate Agreements, any such Interest Rate Agreement has a notional amount
corresponding to the Indebtedness being hedged thereby; (vi) Indebtedness
represented by Guarantees by the Company of Indebtedness otherwise permitted to
be Incurred pursuant to this covenant and Indebtedness represented by Guarantees
by a Restricted Subsidiary of Indebtedness of the Company or of another
Restricted Subsidiary otherwise permitted to be Incurred pursuant to this
covenant; (vii) obligations with respect to customary provisions regarding
post-closing purchase price adjustments and indemnification in agreements for
the purchase or sale of a business or assets otherwise permitted by the
Indenture; (viii) Guarantees of Indebtedness of franchisees of the Company or a
Restricted Subsidiary in an aggregate principal amount at any one time
outstanding not to exceed $20 million, provided that any such Guarantees shall
be deemed to be Incurred by the Company or such Restricted Subsidiary at the
time any such franchisee ceases to be a franchisee of the Company or such
Restricted Subsidiary; (ix) Indebtedness Incurred by the Company or any
Restricted Subsidiary to finance the payment of property, casualty and specialty
insurance premiums in the ordinary course of the Company's business which is
repaid within 18 months of its Incurrence, provided that such Indebtedness does
not exceed $7.5 million in the aggregate at any one time outstanding; (x)
Indebtedness of the Company Incurred to finance the acquisition, construction or
improvement of fixed or capital assets, in an aggregate principal amount at any
one time outstanding not to exceed $15 million, provided that such Indebtedness
is incurred within 180 days after the date of such acquisition, construction or
improvement and does not exceed the fair market value of such acquired,
constructed or improved assets as determined in good faith by the Board of
Directors; (xi) Indebtedness represented by Capitalized Lease Obligations in
respect of Sale/Leaseback Transactions involving the sale of restaurants within
24 months of the purchase of the associated real property, in an aggregate
principal amount at any one time outstanding not to exceed $20 million; (xii)
Indebtedness represented by Guarantees of loans to employees of the Company or
its Subsidiaries for the purpose of paying withholding taxes incurred by such
employees in connection with the vesting of stock and/or stock options granted
by the Company, in an aggregate amount at any one time outstanding not to exceed
$3 million; and (xiii) other Indebtedness in an aggregate principal amount at
any one time outstanding not to exceed $20 million.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Obligations unless
such new Indebtedness shall be subordinated to the Senior Notes to at least the
same extent as such Subordinated Obligations being Refinanced. No Subsidiary
Guarantor shall incur any Indebtedness pursuant to the foregoing paragraph (b)
if the proceeds thereof are used, directly or indirectly, to Refinance any
subordinated obligation of such Subsidiary Guarantor unless such Indebtedness
shall be subordinated to the obligations of such Subsidiary Guarantor under the
Subsidiary Guaranty to at least the same extent as such Subordinated Obligation
of such Subsidiary Guarantor.
(d) The Company will not permit any Unrestricted Subsidiary to Incur any
Indebtedness other than Non-Recourse Debt, except that an Unrestricted
Subsidiary may incur Indebtedness Guaranteed by the Company or any of its
Restricted Subsidiaries to the extent such Guarantee is permitted by clause (iv)
of paragraph (b) under the covenant "Limitation on Restricted Payments;"
provided, however, if any such Indebtedness ceases to be Non-Recourse Debt, such
event shall be deemed to constitute an Incurrence of Indebtedness by the Company
or a Restricted Subsidiary.
(e) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company will classify, in its
sole discretion, such item of Indebtedness and only be required to include the
60
amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.
LIMITATION ON RESTRICTED PAYMENTS. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay
any dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
the Company) except dividends or distributions payable solely in its Capital
Stock (other than Disqualified Stock) or in options, warrants or other rights to
purchase such Capital Stock and except dividends or distributions payable to the
Company or another Restricted Subsidiary (and, if such Restricted Subsidiary
making such dividend or distribution is not wholly owned, to its other
shareholders on a pro rata basis), (ii) purchase, repurchase, redeem, retire or
otherwise acquire or retire for value any Capital Stock of the Company or any
Restricted Subsidiary held by Persons other than the Company or another
Restricted Subsidiary, (iii) purchase, repurchase, redeem, defease or otherwise
acquire or retire for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment any Subordinated Obligations (other than the
purchase, repurchase or other acquisition of Subordinated Obligations in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within one year of the date of such purchase,
repurchase or acquisition) or (iv) make any Investment (other than a Permitted
Investment) in any Person (any such dividend, distribution, purchase,
redemption, repurchase, defeasance, other acquisition, retirement, payment or
Investment being herein referred to as a "Restricted Payment") if at the time
the Company or such Restricted Subsidiary makes such Restricted Payment: (1) a
Default or Event of Default shall have occurred and be continuing (or would
result therefrom); (2) the Company and its Restricted Subsidiaries could not
Incur at least $1.00 of additional Indebtedness under paragraph (a) of the
covenant described under "--Limitation on Indebtedness and Preferred Stock;" or
(3) the aggregate amount of such Restricted Payment and all other Restricted
Payments (the amount so expended, if other than in cash, to be determined in
good faith by the Board of Directors of the Company, whose determination will be
evidenced by a resolution of such Board of Directors certified in an Officers'
Certificate to the Trustee) declared or made subsequent to the Issue Date would
exceed the sum of: (A) 50% of the Consolidated Net Income with respect to the
period (treated as one accounting period) from the Issue Date to the end of the
most recent fiscal quarter ending at least 45 days prior to the date of such
Restricted Payment (or, in case such Consolidated Net Income is a deficit, minus
100% of such deficit); (B) the aggregate Net Cash Proceeds received by the
Company from the issue or sale of Capital Stock (other than Disqualified Stock
and other than the Common Stock issued in the Common Stock Offering) subsequent
to the Issue Date (other than an issuance or sale to a Subsidiary); (C) the
amount by which Indebtedness of the Company is reduced on the Company's balance
sheet upon the conversion or exchange (other than by a Restricted Subsidiary)
subsequent to the Issue Date of any Indebtedness of the Company convertible or
exchangeable for Capital Stock (other than Disqualified Stock) of the Company
(less the amount of any cash or other property distributed by the Company upon
such conversion or exchange); and (D) the amount equal to the net reduction in
Investments in Unrestricted Subsidiaries resulting from (i) repayments of the
principal of loans or advances or other transfers of assets to the Company or
any Restricted Subsidiary from Unrestricted Subsidiaries or (ii) the
redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in
each case as provided in the definition of "Investment") not to exceed, in the
case of any Unrestricted Subsidiary, the amount of Investments previously made
by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary,
which amount was previously included in the calculation of the amount of
Restricted Payments.
(b) The provisions of the foregoing paragraph (a) will not prohibit: (i) any
purchase, redemption, defeasance or other acquisition of Capital Stock of the
Company or Subordinated Obligations made by exchange for, or out of the net
proceeds of the substantially concurrent sale of, Capital Stock of the Company
(other than Disqualified Stock and other than Capital Stock issued or sold to a
Subsidiary); PROVIDED, HOWEVER, that (A) such purchase, redemption, defeasance
or other acquisition will be excluded in the calculation of the amount of
Restricted Payments pursuant to clause (3) of paragraph (a) above and
61
(B) the Net Cash Proceeds from such sale will be excluded from clause (3)(B) of
paragraph (a) above; (ii) any purchase, redemption, defeasance or other
acquisition of Subordinated Obligations made by exchange for, or out of the net
proceeds of the substantially concurrent sale of, Subordinated Obligations of
the Company; PROVIDED, HOWEVER, that (A) the principal amount of such new
Indebtedness does not exceed the principal amount of the Subordinated
Obligations being so redeemed, repurchased, acquired or retired for value (plus
the amount of any premium required to be paid under the terms of the instrument
governing the Subordinated Obligations being so redeemed, repurchased, acquired
or retired and related expenses), (B) such new Indebtedness is subordinated to
the Senior Notes at least to the same extent as such Subordinated Obligations so
purchased, exchanged, redeemed, repurchased, acquired or retired for value, (C)
such new Indebtedness has a final scheduled maturity date later than the final
scheduled maturity date of the Senior Notes and (D) such new Indebtedness has an
Average Life equal to or greater than the Average Life of the Senior Notes;
provided further, however, that such purchase, redemption, defeasance or other
acquisition will be excluded in the calculation of the amount of Restricted
Payments pursuant to clause (3) of paragraph (a) above; (iii) dividends paid
within 60 days after the date of declaration thereof if at such date of
declaration such dividend would have complied with this covenant; PROVIDED,
HOWEVER, that the amount of such dividend will be included in the calculation of
the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above;
(iv) Investments in the form of Guarantees by the Company or any of its
Restricted Subsidiaries of Indebtedness of an Unrestricted Subsidiary solely to
the extent that the Company or any such Restricted Subsidiary would then be
permitted to make an Investment in such Unrestricted Subsidiary pursuant to
clause (3) of paragraph (a) above; provided that the amount of any such
Investment will be included in the calculation of the amount of Restricted
Payments pursuant to clause (3) of paragraph (a) above; (v) the repurchase,
redemption or other acquisition or retirement for value of any Capital Stock of
the Company held by any member of the Company's management pursuant to employee
benefit plans or agreements; provided that the aggregate price paid for all such
Capital Stock shall not exceed $2 million in any 12-month period and $5 million
in the aggregate; provided further that such amounts will be included in the
calculation of the amount of Restricted Payments pursuant to clause (3) of
paragraph (a) above; and (vi) other Restricted Payments in an aggregate amount
not to exceed $5 million; provided that such amounts will be included in the
calculation of the amount of Restricted Payments pursuant to clause (3) of
paragraph (a) above.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES. The Company will not, and will not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligation owed to the Company, (ii) make
any loans or advances to the Company or (iii) transfer any of its property or
assets to the Company or any Restricted Subsidiary, except: (1) any encumbrance
or restriction pursuant to an agreement in effect at or entered into on the
Issue Date (including pursuant to the New Credit Facility); (2) any encumbrance
or restriction with respect to a Restricted Subsidiary pursuant to an agreement
relating to any Indebtedness Incurred by such Restricted Subsidiary on or prior
to the date on which such Restricted Subsidiary was acquired by the Company or a
Restricted Subsidiary and outstanding on such date (other than Indebtedness
Incurred in connection with, or in contemplation of, the transaction or series
of related transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by the Company or a Restricted
Subsidiary); (3) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an agreement
referred to in clause (1) or (2) of this covenant or contained in any amendment
to an agreement referred to in clause (1) or (2) of this covenant; PROVIDED,
HOWEVER, that the encumbrances and restrictions contained in any such
refinancing agreement or amendment are not materially less favorable to the
Senior Noteholders than the encumbrances and restrictions contained in any such
agreement as determined in good faith by the Company and evidenced by an
Officers' Certificate; (4) in the case of clause (iii), any encumbrance or
restriction (A) that restricts in a customary manner the subletting, assignment
or transfer of any property or asset that is subject to a lease, license or
similar contract, (B) by virtue of any transfer of,
62
agreement to transfer, option or right with respect to, or Lien on, any property
or assets of the Company or any Restricted Subsidiary not otherwise prohibited
by the Indenture or (C) contained in security agreements securing Indebtedness
of a Restricted Subsidiary to the extent such encumbrance or restrictions
restrict the transfer of the property subject to such security agreements; (5)
any restriction with respect to a Restricted Subsidiary imposed pursuant to an
agreement entered into for the sale or disposition of all or substantially all
the Capital Stock or assets of such Restricted Subsidiary pending the closing of
such sale or disposition; (6) any encumbrance or restriction arising under or by
reason of applicable law; (7) any encumbrance or restriction contained in the
Indenture; (8) customary provisions in joint venture agreements relating solely
to the securities, assets and revenues of such joint venture or other business
venture; (9) any encumbrance or restriction applicable to secured Indebtedness
otherwise permitted to be Incurred under the Indenture that limits the right of
the debtor to dispose of the assets securing such Indebtedness; (10) customary
net worth provisions contained in leases and other agreements entered into by a
Restricted Subsidiary in the ordinary course of business; and (11) customary
restrictions with respect to a Restricted Subsidiary pursuant to an agreement
that has been entered into for the sale or other disposition of all of the
Capital Stock or assets of such Restricted Subsidiary.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) The Company will
not, and will not permit any Restricted Subsidiary to, make any Asset
Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration at the time of such Asset Disposition at least equal to the fair
market value, as determined in good faith by senior management for Asset
Dispositions of less than $5 million and by the Board of Directors of the
Company in good faith for Asset Dispositions of $5 million or more (including in
each case as to the value of all non cash consideration), of the shares and
assets subject to such Asset Disposition, (ii) at least 75% of the consideration
thereof received by the Company or such Restricted Subsidiary is in the form of
cash or Temporary Cash Investments and (iii) an amount equal to 100% of the Net
Available Cash from such Asset Disposition is applied by the Company or such
Restricted Subsidiary, as the case may be, (A) within 270 days from the receipt
of such Net Available Cash to the extent the Company or any Restricted
Subsidiary, as the case may be, elects (or is required by the terms of the New
Credit Facility or any Senior Indebtedness), to prepay, repay, purchase or
otherwise acquire Indebtedness under the New Credit Facility or other Senior
Indebtedness or Indebtedness (other than Disqualified Stock) of a Wholly Owned
Subsidiary (in each case other than Indebtedness owed to the Company or an
Affiliate of the Company); (B) to the extent of any remaining balance of Net
Available Cash after any election in accordance with clause (A), to the extent
the Company or such Restricted Subsidiary, as the case may be, elects, to the
investment by the Company or any Wholly Owned Subsidiary in Additional Assets
within 360 days from the receipt of such Net Available Cash (except that the
Company shall be deemed to have so invested such Net Available Cash within 360
days if, within such 360 days, it has entered into a binding commitment to
invest such Net Available Cash and such Net Available Cash is actually invested
within 90 days thereafter); (C) to the extent of any remaining balance of such
Net Available Cash after any election in accordance with clauses (A) and (B), to
make an Offer (as defined below) to purchase Senior Notes pursuant to and
subject to the conditions set forth in paragraph (b) of this covenant within 45
days from the application of Net Available Cash in accordance with clauses (A)
and (B); and (D) to the extent of any remaining balance of such Net Available
Cash after election or application in accordance with clauses (A), (B) and (C),
to (x) the acquisition by the Company or any Wholly Owned Subsidiary of
Additional Assets, (y) the prepayment, repayment, purchase or other acquisition
of Indebtedness of the Company (other than Indebtedness owed to an Affiliate of
the Company and other than Disqualified Stock of the Company) or Indebtedness of
any Restricted Subsidiary (other than Indebtedness owed to the Company or an
Affiliate of the Company) or (z) general corporate purposes; PROVIDED, HOWEVER
that in connection with any prepayment, repayment, purchase or other acquisition
of Indebtedness pursuant to clause (A), (C) or (D) above, the Company or such
Restricted Subsidiary will retire such Indebtedness and will cause any related
loan commitment or availability (if any) to be permanently reduced in an amount
equal to the principal amount so prepaid, repaid, purchased or acquired, except
that pending the final application of any such Net Available Cash, the Company
or such Restricted Subsidiary may temporarily
63
reduce Indebtedness under a revolving credit facility or otherwise invest such
Net Available Cash in Temporary Cash Investments.
Notwithstanding the foregoing provisions, the Company and its Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
herewith except to the extent that the aggregate Net Available Cash from all
Asset Dispositions which are not applied in accordance with this covenant
exceeds $5,000,000. The Company shall not be required to make an Offer for
Senior Notes pursuant to this covenant if the Net Available Cash available
therefor (after application of the proceeds as provided in clauses (A) and (B))
is less than $7,500,000 (which lesser amounts shall be carried forward for
purposes of determining whether an Offer is required with respect to the Net
Available Cash from subsequent Asset Dispositions).
For the purposes of this covenant, the following are deemed to be cash: (x)
the assumption by the transferee of Indebtedness of the Company or any
Restricted Subsidiary (other than Indebtedness that is subordinated to the
Senior Notes or the Subsidiary Guarantees) and the release of the Company or
such Restricted Subsidiary from all liability on such Indebtedness in connection
with such Asset Disposition, (y) securities received by the Company or any
Restricted Subsidiary from the transferee that are promptly converted by the
Company or such Restricted Subsidiary into cash and (z) Additional Assets
received in an exchange of assets transaction; provided that (i) in the event
such exchange of assets transaction or series of related exchange of assets
transactions (each an "Exchange Transaction") involves an aggregate value in
excess of $2,500,000, the terms of such Exchange Transaction shall have been
approved by a majority of the disinterested members of the Board of Directors,
(ii) in the event such Exchange Transaction involves an aggregate value in
excess of $5,000,000, the Company shall have received a written opinion from a
nationally recognized independent investment banking firm that the Company has
received consideration equal to the fair market value of the assets disposed of
and (iii) any assets to be received shall be comparable to those being exchanged
as determined in good faith by the Board of Directors, except that up to
$1,000,000 of consideration in any Exchange Transaction may consist of marketing
and similar credits in lieu of comparable assets.
(b) In the event of an Asset Disposition that requires the purchase of
Senior Notes pursuant to clause (a)(iii)(C) of this covenant, the Company will
be required to purchase Senior Notes tendered pursuant to an offer by the
Company for the Senior Notes (the "Offer") at a purchase price of 100% of their
principal amount plus accrued interest to the date of purchase in accordance
with the procedures (including prorating in the event of oversubscription) set
forth in the Indenture. If the aggregate purchase price of Senior Notes tendered
pursuant to the Offer is less than the Net Available Cash allotted to the
purchase of the Senior Notes, the Company will apply the remaining Net Available
Cash in accordance with clause (a)(iii)(D) above.
(c) The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Senior Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue thereof.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, enter into
or conduct any transaction or series of transactions (including the purchase,
sale, lease or exchange of any property, or rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless (i) the terms of
such transaction are no less favorable to the Company or such Restricted
Subsidiary, as the case may be, than those that could be obtained at the time of
such transaction in arm's-length dealings with a Person who is not such an
Affiliate; (ii) in the event such Affiliate Transaction involves an aggregate
amount in excess of $2,500,000, the terms of such transaction shall have been
approved by a majority of the disinterested members of the Board of Directors
(and such majority determines that such Affiliate Transaction satisfies the
criteria in clause
64
(i) above) and (iii) in the event such Affiliate Transaction involves an
aggregate amount in excess of $5,000,000, the Company has received a written
opinion from a nationally recognized independent investment banking firm that
such Affiliate Transaction is fair to the Company from a financial point of
view.
(b) The foregoing shall not apply to (i) any Restricted Payment permitted to
be made pursuant to "Limitation on Restricted Payments," (ii) any issuance of
securities, or other payments, awards or grants in cash, securities or otherwise
pursuant to, or the funding of, employment arrangements, stock options and stock
ownership plans approved by the Board of Directors, (iii) any fees, indemnities,
loans or advances to employees in the ordinary course of business, (iv) any
transaction between the Company and a Restricted Subsidiary or between
Restricted Subsidiaries, (v) transactions with suppliers or other purchasers of
goods and services (including, without limitation, pursuant to joint venture
agreements and franchise agreements) and (vi) any agreement in effect on the
Issue Date or any amendment thereto or transaction contemplated thereby (and any
replacement or amendment of any such agreement so long as any such amendment or
replacement thereof is not materially less favorable to the Holders than the
original agreement in effect on the Issue Date).
LIMITATION ON LIENS. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create or permit to exist any
Lien on any of its property or assets (including Capital Stock), whether owned
on the Issue Date or thereafter acquired, securing any obligation, other than
Permitted Liens, unless contemporaneously therewith effective provision is made
to secure the Senior Notes equally and ratably with (or on a senior basis to, in
the case of Subordinated Obligations) such obligation for so long as such
obligation is so secured by a Lien on property or assets of the Company or a
Restricted Subsidiary.
LIMITATION ON SALES OF SUBSIDIARY CAPITAL STOCK. The Company (i) will not,
and will not permit any Restricted Subsidiary of the Company to, transfer,
convey, sell, lease or otherwise dispose of any Capital Stock of any Restricted
Subsidiary to any Person (other than to the Company or a Wholly Owned
Subsidiary) and (ii) will not permit any Restricted Subsidiary to issue any of
its Capital Stock (other than, if necessary, shares of its Capital Stock
constituting directors' qualifying shares) to any Person other than to the
Company or a Wholly Owned Subsidiary, unless (a) after any such transfer,
conveyance, sale, lease, disposition or issuance, such Subsidiary constitutes a
Restricted Subsidiary and (b) the net cash proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance with the
covenant described above under "Limitation on Sales of Assets and Subsidiary
Stock."
SEC REPORTS. Notwithstanding that the Company may not be required to remain
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the SEC and provide the Trustee and Senior
Noteholders with the annual reports and such information, documents and other
reports which are specified in Sections 13 and 15(d) of the Exchange Act. The
Company also will comply with the other provisions of TIA Section 314(a).
FUTURE GUARANTORS. The Company shall cause each new Subsidiary (other than
(i) a new Subsidiary designated as an Unrestricted Subsidiary and (ii) Foreign
Subsidiaries) to become a Subsidiary Guarantor under the Indenture and thereby
Guarantee the Senior Notes on the terms and conditions set forth in the
Indenture.
MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company") will
be a corporation organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Company
(if not the Company)
65
will expressly assume, by supplemental indenture, executed and delivered to the
Trustee, in form satisfactory to the Trustee, all the obligations of the Company
under the Senior Notes and the Indenture; (ii) immediately after giving pro
forma effect to such transaction (and treating any Indebtedness which becomes an
obligation of the Successor Company or any Restricted Subsidiary as a result of
such transaction as having been Incurred by the Successor Company or such
Restricted Subsidiary at the time of such transaction), no Default or Event of
Default will have occurred and be continuing; (iii) immediately after giving pro
forma effect to such transaction, the Successor Company would be able to Incur
an additional $1.00 of Indebtedness under paragraph (a) of the covenant
described under "-- Limitation on Indebtedness and Preferred Stock;" (iv)
immediately after giving effect to such transaction, the Successor Company will
have a Consolidated Net Worth in an amount which is not less than the
Consolidated Net Worth of the Company immediately prior to such transaction; and
(v) the Company will have delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger or transfer
and such supplemental indenture (if any) comply with the Indenture, as set forth
in the Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but the
predecessor Company in the case of a lease of all its assets or a conveyance,
transfer or lease of substantially all its assets will not be released from the
obligation to pay the principal of and interest on the Senior Notes.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Senior Note when due, continued for 30 days, (ii) a
default in the payment of principal of any Senior Note when due at its Stated
Maturity, upon optional redemption, upon required repurchase, upon declaration
or otherwise, (iii) the failure by the Company to comply with its obligations
under "-- Merger and Consolidation," (iv) the failure by the Company to comply
for 30 days after notice with any of its obligations under the covenants
described under "-- Change of Control" or "--Certain Covenants" (in each case,
other than a failure to purchase Senior Notes), (v) the failure by the Company
to comply for 60 days after notice with its other agreements contained in the
Indenture, (vi) the failure by the Company or any Significant Subsidiary of the
Company to pay any Indebtedness within any applicable grace period after final
maturity or the acceleration of any such Indebtedness by the holders thereof
because of a default and the total amount of such Indebtedness unpaid or
accelerated exceeds $10 million or its foreign currency equivalent (the "cross
acceleration provision"), (vii) certain events of bankruptcy, insolvency or
reorganization of the Company or any Significant Subsidiary of the Company (the
"bankruptcy provisions"), (viii) any judgment or decree for the payment of money
in excess of $10 million is rendered against the Company or any Significant
Subsidiary of the Company and such judgment or decree remains outstanding for a
period of 60 day following such judgment and is not discharged, waived or stayed
(the "judgment default provision") or (ix) a Subsidiary Guaranty ceases to be in
full force and effect (other than in accordance with the terms thereof) or a
Subsidiary Guarantor denies or disaffirms its obligations under its Subsidiary
Guaranty.
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.
However, a default under clauses (iv) or (v) will not constitute an Event of
Default until the Trustee or the Holders of 25% in aggregate principal amount of
the outstanding Senior Notes notify the Company as provided in the Indenture of
the default and the Company does not cure such default within the time specified
in clauses (iv) and (v) hereof after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in aggregate principal amount of the outstanding Senior Notes by
notice to the Company may declare the
66
principal of and accrued but unpaid interest on all the Senior Notes to be due
and payable. Upon such a declaration, such principal and interest will be due
and payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and accrued interest on all the Senior Notes will
become immediately due and payable without any declaration or other act on the
part of the Trustee or any Holders. Under certain circumstances, the Holders of
a majority in aggregate principal amount of the outstanding Senior Notes may
rescind any such acceleration with respect to the Senior Notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
shall have offered to the Trustee reasonable indemnity or security against any
loss, liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Senior Notes unless (i) such Holder
shall have previously given the Trustee notice that an Event of Default is
continuing, (ii) Holders of at least 25% in aggregate principal amount of the
outstanding Senior Notes shall have requested the Trustee to pursue the remedy,
(iii) such Holders shall have offered the Trustee reasonable security or
indemnity against any loss, liability or expense, (iv) the Trustee shall not
have complied with such request within 60 days after the receipt of the request
and the offer of security or indemnity and (v) the Holders of a majority in
principal amount of the outstanding Senior Notes shall not have given the
Trustee a direction inconsistent with such request within such 60-day period.
Subject to certain restrictions, the Holders of a majority in principal amount
of the outstanding Senior Notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights of
any other Holder or that would involve the Trustee in personal liability. Prior
to taking any action under the Indenture, the Trustee will be entitled to
indemnification satisfactory to it in its sole discretion against all losses and
expenses caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each Holder notice of the Default
within the earlier of 90 days after it occurs or 30 days after it is known to a
Trust Officer or written notice of it is received by the Trustee. Except in the
case of a Default in the payment of principal of, premium (if any) or interest
on any Senior Note, the Trustee may withhold notice if and so long as a
committee of its Trust Officers in good faith determines that withholding notice
is in the interests of the Senior Noteholders. In addition, the Company is
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. The Company also is required to deliver
to the Trustee, within 30 days after the occurrence thereof, written notice of
any event which would constitute certain Defaults, their status and what action
the Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the Holders of a majority in principal amount of the Senior Notes then
outstanding and any past default or compliance with any provisions may be waived
with the consent of the Holders of a majority in principal amount of the Senior
Notes then outstanding. However, without the consent of each Holder of an
outstanding Senior Note affected, no amendment may, among other things, (i)
reduce the amount of Senior Notes whose Holders must consent to an amendment,
(ii) reduce the rate of or extend the time for payment of interest on any Senior
Note, (iii) reduce the principal of or extend the Stated Maturity of any Senior
Note, (iv) reduce the premium payable upon the redemption of any Senior Note or
change the time at which any Senior Note may be redeemed as described under "--
Optional Redemption," (v) make any Senior Note
67
payable in money other than that stated in the Senior Note, (vi) impair the
right of any Holder to receive payment of principal of and interest on such
Holder's Senior Notes on or after the due dates therefor or to institute suit
for the enforcement of any payment on or with respect to such Holder's Senior
Notes or (vii) make any change in the amendment provisions which require each
Holder's consent or in the waiver provisions.
Without the consent of any Holder, the Company and the Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations the Company
under the Indenture, to provide for uncertificated Senior Notes in addition to
or in place of certificated Senior Notes (provided that the uncertificated
Senior Notes are issued in registered form for purposes of Section 163(f) of the
Code, or in a manner such that the uncertificated Senior Notes are as described
in Section 163(f)(2)(B) of the Code), to add additional Guarantees with respect
to the Senior Notes, to secure the Senior Notes, to add to the covenants of the
Company for the benefit of the Senior Noteholders or to surrender any right or
power conferred upon the Company, to make any change that does not adversely
affect the rights of any Holder and to comply with any requirement of the SEC in
connection with the qualification of the Indenture under the TIA.
The consent of the Senior Noteholders is not necessary under the Indenture
to approve the particular form of any proposed amendment. It is sufficient if
such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Senior Noteholders a notice briefly describing such
amendment. However, the failure to give such notice to all Senior Noteholders,
or any defect therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A Senior Noteholder may transfer or exchange Senior Notes in accordance with
the Indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a Senior Noteholder, among other things, to furnish appropriate
endorsements and transfer documents and the Company may require a Senior
Noteholder to pay any taxes required by law or permitted by the Indenture,
including any transfer tax or other similar governmental charge payable in
connection therewith. The Company is not required to transfer or exchange any
Senior Note selected for redemption or to transfer or exchange any Senior Note
for a period of 15 days prior to a selection of Senior Notes to be redeemed. The
Senior Notes will be issued in registered form and the registered holder of a
Senior Note will be treated as the owner of such Senior Note for all purposes.
DEFEASANCE
The Company at any time may terminate all its obligations under the Senior
Notes and the Indenture ("legal defeasance"), except for certain obligations,
including those with respect to the defeasance trust and obligations to register
the transfer or exchange of the Senior Notes, to replace mutilated, destroyed,
lost or stolen Senior Notes and to maintain a registrar and paying agent in
respect of the Senior Notes. The Company at any time may terminate its
obligations under the covenants described under "Certain Covenants," the
operation of the cross acceleration provision, the bankruptcy provisions with
respect to Significant Subsidiaries and the judgment default provision described
under "-- Defaults" and the limitations contained in clauses (iii) and (iv)
under "-- Merger and Consolidation" ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Senior Notes may not be accelerated
because of an Event of Default with respect thereto. If the Company exercises
its covenant defeasance option, payment of the Senior Notes may not be
accelerated because of an Event of Default specified in clause (iv), (v), (vi),
(vii) (with respect only to Significant Subsidiaries) or
68
(viii) under "-- Defaults" above or because of the failure of the Company to
comply with clause (iii) or (iv) under "-- Merger and Consolidation."
In order to exercise either defeasance option, the Company must irrevocably
deposit or cause to be deposited in trust (the "defeasance trust") with the
Trustee money or U.S. Government Obligations which through the scheduled payment
of principal and interest in respect thereof in accordance with their terms will
provide cash at such times and in such amounts as will be sufficient to pay
principal and interest when due on all the Senior Notes (except lost, stolen or
destroyed Senior Notes which have been replaced or repaid) to maturity or
redemption, as the case may be, and must comply with certain other conditions,
including delivery to the Trustee of an Opinion of Counsel to the effect that
holders of the Senior Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such deposit and defeasance and will be
subject to federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit and defeasance had
not occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable federal income tax law).
CONCERNING THE TRUSTEE
The Bank of New York is to be the Trustee under the Indenture and has been
appointed by the Company as Registrar and Paying Agent with regard to the Senior
Notes.
GOVERNING LAW
The Indenture provides that it and the Senior Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Acquired Indebtedness" of any specified Person means Indebtedness of any
other Person existing at the time such other Person is merged with or into or
becomes a Restricted Subsidiary of such specified Person, including Indebtedness
Incurred in connection with, or in contemplation of, such other Person's
becoming a Restricted Subsidiary of such specified Person.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by the Company or another Restricted Subsidiary; or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; PROVIDED, HOWEVER, that, in the case of clauses (ii)
and (iii), such Restricted Subsidiary is primarily engaged in a Related
Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the covenants in the Indenture, "Affiliate" shall also mean any
beneficial owner of shares representing 10% or more of the total voting power of
the Voting Stock (on a fully diluted basis) of the Company or of rights or
warrants to purchase such Voting Stock (whether or not currently exercisable)
and any Person who would be an Affiliate of any such beneficial owner pursuant
to the first sentence hereof; provided that Donald N. Smith shall be deemed to
be an "Affiliate" so long as he is the beneficial owner of shares representing
5% or more of the total voting power of the Voting Stock (on a
69
fully diluted basis) of the Company or of rights or warrants to purchase such
Voting Stock (whether or not currently exercisable).
"Asset Disposition" means any sale, lease, transfer or other disposition (or
series of related sales, leases, transfers or dispositions) of shares of Capital
Stock of a Restricted Subsidiary (other than directors' qualifying shares),
property or other assets (including sales and other dispositions of tangible
assets to franchisees and licensees and tangible assets at underperforming
restaurants, but excluding sales, dispositions or licenses of trademarks,
service marks, tradenames and other intangibles), including by way of a
Sale/Leaseback Transaction (each referred to for the purposes of this definition
as a "disposition"), by the Company or any of its Restricted Subsidiaries
(including any disposition by means of a merger, consolidation or similar
transaction) other than (i) a disposition by a Restricted Subsidiary to the
Company or by the Company or a Restricted Subsidiary to a Wholly Owned
Subsidiary, (ii) a disposition of property or assets in the ordinary course of
business, (iii) dispositions of inventory in the ordinary course of business,
(iv) for purposes of the "Limitation on Sales of Assets and Subsidiary Stock"
covenant only, a disposition that constitutes a Restricted Payment permitted by
the "Limitation on Restricted Payments" covenant, (v) the sale, lease, transfer
or other disposition of all or substantially all the assets of the Company as
permitted under the covenant "Merger and Consolidation", (vi) the grant of Liens
permitted by the covenant "Limitation on Liens" and (vii) sales of obsolete or
worn-out equipment.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the product of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors or equivalent governing
body of a Person (or the general partner of such Person, as the case may be) or
any committee thereof duly authorized to act on behalf of such Board or
equivalent governing body.
"Business Day" means a day other than a Saturday, Sunday or other day on
which banking institutions in New York State are authorized or required by law
to close.
"Capitalized Lease Obligation" of a Person means an obligation of such
Person that is required to be classified and accounted for on the balance sheet
of such Person as a capitalized lease for financial reporting purposes in
accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participation or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock,
but excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commodity Agreement" means any commodity swap agreement, commodity future
agreement, commodity hedge agreement or other similar agreement relating to
commodities, in each case relating to those commodities used in the ordinary
course of business of the Company and its Subsidiaries.
"Common Stock Offering" means the offering to the public by the Company of
5,000,000 shares of its Common Stock concurrently with the offering of the
Senior Notes, including any offering of shares pursuant to over-allotment
options.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters for which internal financial information is
available ending at least 45 days prior to the date of such determination to
70
(ii) Consolidated Interest Expense for such four fiscal quarters; provided,
however, that (1) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains outstanding or if
the transaction giving rise to the need to calculate the Consolidated Coverage
Ratio is an Incurrence of Indebtedness, or both, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving effect on a
pro forma basis to such Indebtedness as if such Indebtedness had been Incurred
on the first day of such period and the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of such
new Indebtedness as if such discharge had occurred on the first day of such
period, (2) if since the beginning of such period the Company or any Restricted
Subsidiary shall have made any Asset Disposition or if the transaction giving
rise to the need to calculate the Consolidated Coverage Ratio is an Asset
Disposition, the EBITDA for such period shall be reduced by an amount equal to
the EBITDA (if positive) directly attributable to the assets which are the
subject of such Asset Disposition for such period, or increased by an amount
equal to the EBITDA (if negative) directly attributable thereto for such period
and Consolidated Interest Expense for such period shall be reduced by an amount
equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased,
defeased or otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for such
period (or, if the Capital Stock of any Restricted Subsidiary is sold, the
Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and its
continuing Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale), (3) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an Investment in
any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary)
or an acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit of a business, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence or retirement of any
Indebtedness) as if such Investment or acquisition occurred on the first day of
such period and (4) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period) shall
have made any Asset Disposition or any Investment that would have required an
adjustment pursuant to clause (2) or (3) above if made by the Company or a
Restricted Subsidiary during such period, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving pro forma effect
thereto as if such Asset Disposition or Investment occurred on the first day of
such period. For purposes of this definition, whenever pro forma effect is to be
given to an acquisition of assets, the amount of income or earnings relating
thereto and the amount of Consolidated Interest Expense associated with any
Indebtedness Incurred in connection therewith, the pro forma calculations shall
be determined in good faith by a responsible financial or accounting officer of
the Company. If any Indebtedness bears a floating rate of interest and is being
given pro forma effect, the interest expense on such Indebtedness shall be
calculated as if the rate in effect on the date of determination had been the
applicable rate for the entire period (taking into account any Interest Rate
Agreement applicable to such Indebtedness).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such interest expense, (i) interest expense
attributable to capital leases, (ii) amortization of debt discount and debt
issuance cost, (iii) capitalized interest, (iv) non-cash interest expense, (v)
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing, (vi) interest actually paid by the
Company or any such Restricted Subsidiary under any Guarantee of Indebtedness or
other obligation of any other Person, (vii) Preferred Stock dividends in respect
of all Preferred Stock of the Company and its Subsidiaries held by Persons other
than the Company or a Wholly Owned Subsidiary and (viii) the cash contributions
to any employee stock ownership plan or similar trust to the extent such
contributions are used by such plan or trust to pay interest or fees to any
Person (other than the Company)
71
in connection with Indebtedness Incurred by such plan or trust; PROVIDED,
HOWEVER, that there shall be excluded therefrom any such interest expense of any
Unrestricted Subsidiary to the extent the related Indebtedness is not Guaranteed
or paid by the Company or any Restricted Subsidiary.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries; PROVIDED, HOWEVER, that there
shall not be included in such Consolidated Net Income:
(i) any net income (loss) of any Person (other than the Company) if such
Person is not a Restricted Subsidiary, except that (A), subject to the
limitations contained in clause (iv) below, the Company's equity in the net
income of any such Person for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Person during such period to the Company or a Restricted
Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution paid to a Restricted Subsidiary, to the
limitations contained in clause (iii) below) and (B) the Company's equity in
a net loss of any such Person (other than an Unrestricted Subsidiary) for
such period shall be included in determining such Consolidated Net Income,
(ii) any net income (but not loss) of any Person acquired by the Company
or a Subsidiary in a pooling of interests transaction for any period prior
to the date of such acquisition,
(iii) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that (A), subject
to the exclusion contained in clause (iv) below, the Company's equity in the
net income of any such Restricted Subsidiary for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Restricted Subsidiary during such period to the
Company or another Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend paid to another Restricted Subsidiary,
to the limitation contained in this clause) and (B) the Company's equity in
a net loss of any such Restricted Subsidiary for such period shall be
included in determining such Consolidated Net Income,
(iv) any gain (but not loss) realized upon the sale or other disposition
of any property, plant or equipment of the Company or its consolidated
Subsidiaries (including pursuant to any Sale/Leaseback Transaction) which is
not sold or otherwise disposed of in the ordinary course of business and any
gain (but not loss) realized upon the sale or other disposition of any
Capital Stock of any Person,
(v) any extraordinary gain or loss,
(vi) the cumulative effect of a change in accounting principles,
(vii) foreign currency exchange gains and losses, and
(xiii) any income (loss) from discontinued operations.
Notwithstanding the foregoing, for the purpose of the covenant described
under "Certain Covenants--Limitation on Restricted Payments" only, there shall
be excluded from Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted Subsidiaries to the
Company or a Restricted Subsidiary to the extent such dividends, repayments or
transfers increase the amount of Restricted Payments permitted under such
covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and its Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as (i) the par
or stated value of all outstanding Capital Stock of the Company plus (ii)
paid-in capital or capital surplus relating to such
72
Capital Stock plus (iii) any retained earnings or earned surplus less (A) any
accumulated deficit and (B) any amounts attributable to Disqualified Stock.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or upon the happening of any event (i) matures
or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise,
(ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or
(iii) is redeemable at the option of the holder thereof, in whole or in part, in
each case on or prior to the Stated Maturity of the Senior Notes.
"EBITDA" for any period means the Consolidated Net Income for such period,
plus the following to the extent deducted in calculating such Consolidated Net
Income: (i) income tax expense, (ii) Consolidated Interest Expense, (iii)
depreciation expense, (iv) amortization expense and (v) non-cash charges, in
each case for such period. Notwithstanding the foregoing, the income tax
expense, depreciation expense and amortization expense of a Restricted
Subsidiary of the Company shall be included in EBITDA only to the extent (and in
the same proportion) that the net income of such Subsidiary was included in
calculating Consolidated Net Income and only if a corresponding amount would be
permitted at the date of determination to be distributable to the Company by
such Subsidiary as a dividend.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Foreign Subsidiary" means any Subsidiary which is incorporated or otherwise
organized under the laws of any jurisdiction other than the United States of
America, any state thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the date of the Indenture, including those set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations based on GAAP contained in
the Indenture shall be computed in conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such Person to
a counterparty (net of amounts receivable from such counterparty) pursuant to
any Interest Rate Agreement, or Currency Agreement or Commodity Agreement.
"Holder" or "Senior Noteholder" means the Person in whose name a Senior Note
is registered on the Registrar's books.
73
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Disqualified Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be incurred by such
Subsidiary at the time it becomes a Subsidiary.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication),
(i) the principal of and premium (if any) in respect of indebtedness of
such Person for borrowed money,
(ii) the principal of and premium (if any) in respect of obligations of
such Person evidenced by bonds, debentures, Senior Notes or other similar
instruments,
(iii) all obligations of such Person in respect of unreimbursed drawings
under letters of credit or other similar instruments (including
reimbursement obligations with respect thereto),
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables and accrued
expenses), which purchase price is due more that six months after the date
of placing such property in service or taking delivery and title thereto or
the completion of such services,
(v) all Capitalized Lease Obligations of such Person,
(vi) the amount of all non-contingent obligations of such Person with
respect to the redemption, repayment or other repurchase of any Disqualified
Stock or, with respect to any Restricted Subsidiary that is not a Subsidiary
Guarantor, any Preferred Stock (but excluding, in each case, any accrued
dividends),
(vii) all Indebtedness of other Persons secured by a Lien on any asset of
such Person, whether or not such Indebtedness is assumed by such Person;
PROVIDED, HOWEVER, that the amount of such Indebtedness shall be the lesser
of (A) the fair market value of such asset at such date of determination and
(B) the amount of such Indebtedness of such other Person,
(viii) all Indebtedness of other Persons to the extent Guaranteed by such
Person,
(ix) to the extent not otherwise included in this definition, Hedging
Obligations and,
(x) Acquired Indebtedness.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of such Person) or other extension
of credit (including by way of Guarantee or similar arrangement) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, Indebtedness or other similar
instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant,
(i) "Investment" shall include the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the net assets
of any Subsidiary of the Company at the time that such Subsidiary is designated
an Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon a redesignation of such
Subsidiary as a Restricted
74
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to
(x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time that such Subsidiary is so re-designated a Restricted
Subsidiary; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors and
evidenced by a resolution of such Board of Directors certified in an Officers'
Certificate to the Trustee. For the purposes of calculating the amount of other
"Investments," including Permitted Investments, the amount of any Investment
shall be the original cost of such Investment plus the cost of all additional
Investments by the Company or any of its Restricted Subsidiaries, without any
adjustments for increases or decreases in value, or write-ups, write-downs or
write-offs with respect to such Investment, reduced by the payment of dividends
or distributions in connection with such Investment or any other amounts
received in respect of such Investment; provided that no such payment of
dividends or distributions or receipt of any such other amounts shall reduce the
amount of any Investment if such payment of dividends or distributions or
receipt of any such amounts would be included in Consolidated Net Income.
"Issue Date" means the date on which the Senior Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a Senior Note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other non cash form) therefrom,
in each case net of (i) all legal, accounting, investment banking, title and
recording tax expenses, commissions and other fees and expenses incurred, and
all Federal, state, provincial, foreign and local taxes required to be paid or
accrued as a liability under GAAP, as a consequence of such Asset Disposition,
(ii) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any Lien upon
such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law be repaid out of the
proceeds from such Asset Disposition, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition and (iv) the deduction of
appropriate amounts to be provided by the seller as a reserve, in accordance
with GAAP, against any liabilities associated with the assets disposed of in
such Asset Disposition and retained by the Company or any Restricted Subsidiary
after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"New Credit Facility" means that certain credit facility to be entered into
on the Issue Date among the Company, Societe Generale, and the lenders from time
to time party thereto, including any collateral documents, instruments and
agreements executed in connection therewith, and the term New Credit Facility
shall also include any amendments, supplements, modifications, extensions,
renewals, restatements or refundings thereof and any credit facilities that
replace, refund or refinance any part of the loans, other credit facilities or
commitments thereunder, including any such replacement, refunding or refinancing
facility that increases the amount borrowable thereunder or alters the maturity
thereof.
75
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any Restricted Subsidiary (a) provides any Guarantee or credit support of
any kind (including any undertaking, Guarantee, indemnity, agreement or
instrument that would constitute Indebtedness) or (b) is directly or indirectly
liable (as a guarantor or otherwise) and (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or any
Restricted Subsidiary to declare a default under such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity.
"Permitted Holders" means Donald N. Smith, Harrah's Operating Company, Inc.,
The Equitable Life Assurance Society of the U.S., the Company's existing senior
management and their respective Affiliates.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) the Company, or a Restricted Subsidiary or a Person which
will, upon the making of such Investment, become a Restricted Subsidiary;
PROVIDED, HOWEVER, that the primary business of such Restricted Subsidiary is a
Related Business; (ii) another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or transfers or conveys all
or substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) accounts and receivables owing to the
Company or any Restricted Subsidiary, if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; PROVIDED, HOWEVER, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances; (v) payroll, travel and similar advances to
cover matters that are expected at the time of such advances ultimately to be
treated as expenses for accounting purposes and that are made in the ordinary
course of business; (vi) loans or advances to employees made in the ordinary
course of business; (vii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments and which
are readily convertible into cash in U.S. dollars in an amount equal to the fair
market value thereof as determined in good faith by the Board of Directors;
(viii) franchisees of the Company in an amount at any one time outstanding not
to exceed $10 million; (ix) Unrestricted Subsidiaries in an aggregate amount at
any one time outstanding not to exceed $10 million; (x) Guarantees permitted to
be made pursuant to the covenant "Limitation on Indebtedness and Preferred
Stock"; (xi) Investments in securities of trade creditors received in settlement
of obligations or pursuant to any plan of reorganization or similar arrangement
upon the bankruptcy of insolvency of any trade creditors of customers, (xii)
Currency Agreements, Interest Rate Agreements and Commodity Agreements entered
into in the ordinary course of business; provided that such agreements are
entered into for bona fide hedging purposes, are not for speculation or trading
purposes and are designed to protect against fluctuations in interest rates,
currency exchange rates or commodity prices, as the case may be, and, in the
case of Interest Rate Agreements, any such Interest Rate Agreement has a
notional amount corresponding to the Indebtedness being hedged thereby, (xiii)
Investments in accounts and notes receivable from franchisees, customers,
suppliers and others in the ordinary course of business and (xiv) Investments
made by the Company or a Restricted Subsidiary in connection with an Asset
Disposition made in compliance with the covenant "Limitation on Sales of Assets
and Subsidiary Stock".
"Permitted Liens" means, with respect to any Person, (a) pledges or deposits
by such Person under workmen's compensation laws, unemployment insurance laws or
similar legislation, or good faith deposits in connection with bids, tenders,
contracts (other than for the payment of Indebtedness) or leases to which such
Person is a party, or deposits to secure public or statutory obligations of such
Person or deposits or cash or United States government bonds to secure surety or
appeal bonds to which such Person is a party, or deposits as security for
contested taxes or import duties or for the payment of rent, in each case
incurred in the ordinary course of business; (b) Liens imposed by law, such as
carriers', warehousemen's and mechanics' Liens, in each case for sums not yet
due or being contested in good faith by appropriate
76
proceedings or other Liens arising out of judgments or awards against such
Person with respect to which such Person shall then be proceeding with an appeal
or other proceedings for review; (c) Liens for taxes, assessments, governmental
charges or claims not yet subject to penalties for non-payment or which are
being contested in good faith by appropriate proceedings; (d) Liens in favor of
issuers of surety bonds or letters of credit issued pursuant to the request of
and for the account of such Person, and Liens to secure bankers' acceptances, in
each case in the ordinary course of its business; (e) survey exceptions,
encumbrances, easements or reservations of, or rights of others for, licenses,
rights of way, sewers, electric lines, telegraph and telephone lines and other
similar purposes, or zoning or other restrictions as to the use of real
properties or Liens incidental to the conduct of the business of such Person or
to the ownership of its properties which were not incurred in connection with
Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of the
business of such Person; (f) Liens (A) securing obligations under Interest Rate
Agreements so long as the related Indebtedness is, and is permitted to be under
the Indenture, secured by a Lien on the same property securing such obligations
and (B) securing obligations under Currency Agreements and Commodity Agreements,
provided that such Liens shall not encumber any assets or property of the
Company other than the underlying contracts and the rights thereunder; (g) Liens
existing as of the date on which the Senior Notes are originally issued and
Liens created by the Indenture; (h) Liens created solely for the purpose of
securing the payment of all or a part of the purchase price of assets or
property acquired or constructed in the ordinary course of business after the
date on which the Senior Notes are originally issued; PROVIDED, HOWEVER, that
(A) the aggregate principal amount of Indebtedness secured by such Liens shall
not exceed the cost of the assets or property so acquired or constructed, (B)
the Indebtedness secured by such Liens shall have otherwise been permitted to be
issued under the Indenture and (C) such Liens shall not encumber any other
assets or property of the Company or any of its Restricted Subsidiaries and
shall attach to such assets or property within 90 days of the construction or
acquisition of such assets or property; (i) Liens on the assets or property of a
Restricted Subsidiary of the Company existing at the time such Restricted
Subsidiary became a Subsidiary of the Company and not incurred as a result of
(or in connection with or in anticipation of) such Restricted Subsidiary
becoming a Subsidiary of the Company; PROVIDED, HOWEVER, that (A) any such Lien
does not by its terms cover any categories of property or assets after the time
such Restricted Subsidiary becomes a Subsidiary which were not covered
immediately prior to such transaction, (B) the incurrence of the Indebtedness
secured by such Lien shall have otherwise been permitted to be issued under the
Indenture, and (C) such Liens do not extend to or cover any other categories of
property or assets of the Company or any of its Restricted Subsidiaries; (j)
Liens to secure Capitalized Lease Obligations permitted to be Incurred under the
Indenture; (k) Liens securing Indebtedness outstanding under the New Credit
Facility (including, without limitation, any Refinancing Indebtedness in respect
thereof to the extent permitted under the covenant "Limitation on Indebtedness
and Preferred Stock"); (l) any interest or title of a lessor under any lease,
whether or not characterized as an operating or capital lease; (m) Liens
encumbering deposits made to secure obligations arising from statutory,
regulatory, contractual or warranty requirements of the Company or any
Restricted Subsidiary, including rights of set-off; (n) leases or subleases
granted in the ordinary course of business; (o) Liens arising out of consignment
or similar arrangements for the sale of goods; (p) rights of set-off arising
under law by banks; (q) Liens in addition to the foregoing incurred in the
ordinary course of business which are not incurred in connection with the
borrowing of money or the obtaining of advances of credit; provided that the
amount of the obligations of the Company and its Restricted Subsidiaries secured
by such Liens does not exceed in the aggregate $2 million at any one time
outstanding; and (r) Liens extending, renewing or replacing in whole or in part
a Lien permitted by the Indenture; provided, however, that (A) such Liens do not
extend beyond the property subject to the existing Lien and improvements and
construction on such property and (B) the Indebtedness secured by the Lien may
not exceed the Indebtedness secured at the time by the existing Lien.
77
"Person" means any individual, corporation, partnership joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"Qualified Equity Offering" means (i) an underwritten primary public
offering (other than the Common Stock Offering) of common stock of the Company
pursuant to an effective registration statement under the Securities Act or (ii)
a private offering of common stock other than issuances of common stock pursuant
to employee benefit plans or as compensation to employees.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have a
correlative meaning) any Indebtedness existing on the date of the Indenture or
Incurred in compliance with the Indenture (including Indebtedness of the Company
that refinances Indebtedness of any Restricted Subsidiary and Indebtedness of
any Restricted Subsidiary that refinances Indebtedness of another Restricted
Subsidiary) including Indebtedness that refinances other Refinancing
Indebtedness; provided, however, that (i) the Refinancing Indebtedness has a
Stated Maturity no earlier than the Stated Maturity of the Indebtedness being
refinanced, (ii) the Refinancing Indebtedness has an Average Life at the time
such Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being refinanced and (iii) such Refinancing
Indebtedness is Incurred in an aggregate principal amount (or if issued with
original issue discount, an aggregate issue price) that is equal to or less than
the sum of the aggregate principal amount (or if issued with original issue
discount, the aggregate accreted value) then outstanding of the Indebtedness
being refinanced; provided further, however, that Refinancing Indebtedness shall
not include (x) Indebtedness of a Restricted Subsidiary that refinances
Indebtedness of the Company or (y) Indebtedness of the Company or a Restricted
Subsidiary that refinances Indebtedness of an Unrestricted Subsidiary (unless
such Unrestricted Subsidiary is concurrently redesignated a Restricted
Subsidiary).
"Related Business" means the businesses of the Company and the Restricted
Subsidiaries on the date of the Indenture and any business related, ancillary or
complementary thereto, in each case as determined by the Company in good faith.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"RIC" means Restaurant Insurance Corporation, the Company's insurance
Subsidiary, and its successors.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the U.S. Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Indebtedness" means all Indebtedness of the Company including
interest thereon, whether outstanding on the Issue Date or thereafter Incurred,
unless in the instrument creating or evidencing the same or pursuant to which
the same is outstanding it is provided that such obligations are subordinated in
right of payment to the Senior Notes; PROVIDED, HOWEVER, that Senior
Indebtedness shall not include (1) any obligation of the Company to any
Subsidiary, (2) any liability for Federal, state, local or other taxes owed or
owing by the Company, (3) any accounts payable or other liability to trade
creditors arising in the ordinary course of business (including Guarantees
thereof or instruments evidencing such liabilities),
78
(4) any Indebtedness, Guarantee or obligation of the Company which is
subordinate or junior in any respect to any other Indebtedness, Guarantee or
obligation of the Company, including any Subordinated Obligations, (5) any
obligations with respect to any Capital Stock, (6) Indebtedness which, when
Incurred and without respect to any election under Section 1111(b) of Title II,
United States Code, is without recourse to the Company, or (7) any Indebtedness
Incurred in violation of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Senior Notes pursuant to a written agreement.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person.
"Subsidiary Guarantor" means Friendly's Restaurants Franchise, Inc. and each
new Subsidiary (other than Foreign Subsidiaries and Unrestricted Subsidiaries)
that guarantees the Company's obligations with respect to the Senior Notes.
"Subsidiary Guaranty" means the Guaranty by a Subsidiary Guarantor of the
Company's obligations with respect to the Senior Notes.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 360 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America having capital, surplus and undivided profits
aggregating in excess of $250,000,000 (or the foreign currency equivalent
thereof) and whose long-term debt is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act), (iii) repurchase
obligations with a term of not more than 60 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) investments in commercial
paper, maturing not more than 270 days after the date of acquisition, issued by
a corporation (other than an Affiliate of the Company) organized and in
existence under the laws of the United States of America or any foreign country
recognized by the United States of America with a rating at the time as of which
any investment therein is made of "P-1" (or higher) according to Moody's
Investors Service, Inc. or "A-1" (or higher) according to Standard & Poor's
Ratings Group, (v) investments in securities with maturities of 12 months or
less from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by Standard &
Poor's Ratings Group or "A" by Moody's Investors Service, Inc. and (vi)
investments in shares of money market funds registered under the Investment
Company Act of 1940, as amended.
79
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. SectionSection
77aaa-77bbbb) as in effect on the date of the Indenture.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a Subsidiary of the Subsidiary to be so designated; PROVIDED, HOWEVER,
that either (A) the Subsidiary to be so designated has total consolidated assets
of $1,000 or less or (B) if such Subsidiary has consolidated assets greater than
$1,000, then such designation would be permitted under "Limitation on Restricted
Payments." The Board of Directors may designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; PROVIDED, HOWEVER, that immediately after giving
effect to such designation (x) the Company could Incur $1.00 of additional
Indebtedness under clause (a) of "Limitation on Indebtedness and Preferred
Stock" and (y) no Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares and, in the
case of Foreign Subsidiaries, shares required to be held by foreign nationals
representing not more than 2% of such Capital Stock) is owned by the Company or
another Wholly Owned Subsidiary.
BOOK-ENTRY SYSTEM
The Senior Notes will initially be issued in the form of one or more Global
Securities (as defined in the Indenture) held in book-entry form. Accordingly,
DTC or its nominee will initially be the sole registered holder of the Senior
Notes for all purposes under the Indenture.
Upon the issuance of a Global Security, DTC or its nominee will credit the
accounts of persons holding through it with the respective principal amounts of
the Senior Notes represented by such Global Security purchased by such persons
in the Offering. Such accounts shall be designated by the Underwriters with
respect to Senior Notes placed by the Underwriters for the Company. Ownership of
beneficial interests in a Global Security will be limited to persons that have
accounts with DTC ("participants") or persons that may hold interests through
participants. Ownership of beneficial interests by participants in a Global
Security will be shown on, and the transfer of that ownership interest will be
effected only through, records maintained by DTC for such Global Security.
Ownership of beneficial interests in such Global Security by persons that hold
through participants will be shown on, and the transfer of that ownership
interest within such participant will be effected only through, records
maintained by such participant. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of such
80
securities in definitive form. Such limits and such laws may impair the ability
to transfer beneficial interests in a Global Security.
Payment of principal and interest on Senior Notes represented by any such
Global Security will be made to DTC or its nominee, as the case may be, as the
sole registered owner and the sold holder of the Senior Notes represented
thereby for all purposes under the Indenture. None of the Company, the Trustee,
any agent of the Company, or the Underwriters will have any responsibility or
liability for any aspect of DTC's records relating to or payments made on
account of beneficial ownership interests in a Global Security representing any
Senior Notes or for maintaining, supervising, or reviewing any of DTC's records
relating to such beneficial ownership interests.
The Company has been advised by DTC that upon receipt of any payment of
principal of, or interest on, any Global Security, DTC will immediately credit,
on its book-entry registration and transfer system, the accounts of participants
with payments in amounts proportionate to their respective beneficial interests
in the principal or face amount of such Global Security as shown on the records
of DTC. Payments by participants to owners of beneficial interests in a Global
Security held through such participants will be governed by standing
instructions and customary practices as is now the case with securities held for
customer accounts registered in "street name" and will be the sole
responsibility of such participants.
A Global Security may not be transferred except as a whole by DTC to a
nominee of DTC or by a nominee of DTC to DTC. A Global Security is exchangeable
for certificated Senior Notes only if (i) DTC notifies the Issuers that it is
unwilling or unable to continue as a Depositary (as defined in the Indenture)
for such Global Security or if at any time DTC ceases to be a clearing agency
registered under the Exchange Act, (ii) the Company executes and delivers to the
Trustee a notice that such Global Security shall be so transferable,
registrable, and exchangeable, and such transfers shall be registrable, or (iii)
there shall have occurred and be continuing an Event of Default or an event
which, with the giving of notice or lapse of time or both, would constitute an
Event of Default with respect to the Senior Notes represented by such Global
Security. Any Global Security that is exchangeable for certificated Senior Notes
pursuant to the preceding sentence will be transferred to, and registered and
exchanged for, certificated Senior Notes in authorized denominations and
registered in such names as the Depositary holding such Global Security may
direct. Subject to the foregoing, a Global Security is not exchangeable, except
for a Global Security of like denomination to be registered in the name of the
Depositary or its nominee. In the event that a Global Security becomes
exchangeable for certificated Senior Notes, (i) certificated Senior Notes will
be issued only in fully registered form in denominations of $1,000 or integral
multiples thereof, (ii) payment of principal, any repurchase price, and interest
on the certificated Senior Notes will be payable, and the transfer of the
certificated Senior Notes will be registerable, at the office or agency of the
Company maintained for such purposes, and (iii) no service charge will be made
for any registration of transfer or exchange of the certificated Senior Notes,
although the Company may require payment of a sum sufficient to cover any tax or
governmental charge imposed in connection therewith.
So long as the Depositary for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the Senior Notes
represented by such Global Security for the purposes of receiving payment on the
Senior Notes, receiving notices, and for all other purposes under the Indenture
and the Senior Notes. Beneficial interests in Senior Notes will be evidenced
only by, and transfers thereof will be effected only through, records maintained
by the Depositary and its participants. Cede & Co. has been appointed as the
nominee of DTC. Except as provided above, owners of beneficial interests in a
Global Security will not be entitled to and will not be considered the holders
thereon for any purposes under the Indenture. Accordingly, each person owning a
beneficial interest in a Global Security must rely on the procedures of the
Depositary, and, if such person is not a participant, on the procedures of the
participant through which such person owns its interest, to exercise any rights
of a holder under the Indenture. The Company understands that under existing
industry practices, in the event that the Company requests any action of holders
or that an owner of a beneficial interest in a Global Security desires to give
or take any action
81
which a holder is entitled to give or take under the Indenture, the Depositary
would authorize the participants holding the relevant beneficial interest to
give or take such action and such participants would authorize beneficial owners
owning through such participants to give or take such action or would otherwise
act upon the instructions of beneficial owners owning through them.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered under the
Exchange Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (including the Underwriters), banks, trust companies, clearing
corporations, and certain other organizations some of whom (and/or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers, and trust companies that clear through
or maintain a custodial relationship with a participant, either direct or
indirectly.
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Senior Notes will be made in immediately available funds.
All payments of principal and interest will be made by the Company in
immediately available funds. The Senior Notes will trade in the Same-Day Funds
Settlement System of DTC until maturity, and secondary market trading activity
for the Senior Notes will therefore settle in immediately available funds.
82
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among the Company and Societe Generale Securities
Corporation, Donaldson, Lufkin & Jenrette Securities Corporation and Montgomery
Securities (the "Underwriters"), the Company has agreed to sell to the
Underwriters, and the Underwriters have severally agreed to purchase from the
Company, the following respective amounts of the Senior Notes:
PRINCIPAL
AMOUNT OF
UNDERWRITER SENIOR NOTES
- ---------------------------------------------------------------------------------------- --------------
Societe Generale Securities Corporation................................................. $
Donaldson, Lufkin & Jenrette Securities Corporation.....................................
Montgomery Securities...................................................................
--------------
Total............................................................................. $ 200,000,000
--------------
--------------
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Senior Notes
offered hereby if any of the Senior Notes are purchased. The Company has been
advised by the Underwriters that the Underwriters propose to offer the Senior
Notes to the public initially at the public offering price set forth on the
cover page of this Prospectus, and to certain dealers initially at such price
less a discount not in excess of % of the principal amount of the Senior
Notes. The Underwriters may allow, and such dealers may reallow, a concession to
certain other dealers not in excess of % of the principal amount of the
Senior Notes. After the initial offering of the Senior Notes to the public, the
Underwriters may change the public offering price, the discount and the
concession.
The Senior Notes are a new issue of securities with no established trading
market. The Company has been advised by the Underwriters that the Underwriters
intend to make a market in the Senior Notes, as permitted by applicable laws and
regulations. No assurance can be given, however, that the Underwriters will make
a market in the Senior Notes, or as to the liquidity of, or the trading market
for, the Senior Notes.
The Company and the initial Subsidiary Guarantor have agreed to indemnify
the Underwriters against certain civil liabilities, including liabilities under
the Securities Act, and to contribute to payments which the Underwriters might
be required to make in respect thereof.
In connection with the offering, Societe Generale Securities Corporation, on
behalf of the Underwriters, may engage in overallotment, stabilizing and
syndicate covering transactions. Overallotment involves sales in excess of the
offering size, which create a short position for the Underwriters. Stabilizing
transactions involve bids to purchase the Senior Notes in the open market for
the purpose of pegging, fixing or maintaining the price of the Senior Notes.
Syndicate covering transactions involve purchases of the Senior Notes in the
open market after the distribution has been completed in order to cover short
positions. Such stabilizing transactions and syndicate covering transactions may
cause the price of the Senior Notes to be higher than it would otherwise be in
the absence of such transactions. Such activities, if commenced, may be
discontinued at any time.
Societe Generale, an affiliate of Societe Generale Securities Corporation,
is expected to be a lender under the New Credit Facility and to act as arranger
and administrative agent thereunder. Societe Generale Securities Corporation is
providing certain advisory services in connection with the Recapitalization, for
which it is receiving a fee. See "Description of New Credit Facility."
83
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Mayer, Brown & Platt, Chicago, Illinois. Certain legal matters with
respect to the securities offered hereby will be passed upon for the
Underwriters by Simpson Thacher & Bartlett (a partnership which includes
professional corporations), New York, New York.
EXPERTS
The financial statements included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendment
thereto) on Form S-1 under the Securities Act, for the registration of the
securities offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are omitted as permitted by the
rules and regulations of the Commission. For further information with respect to
the Company and the Senior Notes, reference is hereby made to the Registration
Statement and the exhibits and schedules filed as a part thereof. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document are not necessarily complete and, in each instance, reference is made
to the copy of such document, filed as an exhibit to the Registration Statement,
for a more complete description of the matter involved and each such statement
shall be deemed qualified in its entirety by such reference. The Registration
Statement and the exhibits and schedules thereto filed by the Company with the
Commission may be inspected, without charge, at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, and at the following regional offices of the
Commission: Seven World Trade Center, New York, New York 10048 and 500 West
Madison Street, Chicago, Illinois 60661-2511. Copies of all or any portion of
the Registration Statement may be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of prescribed fees.
The Company is not currently subject to the informational requirements of
the Exchange Act. As a result of the Offerings, the Company will become subject
to the informational requirements of the Exchange Act.
84
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
---------
Report of Independent Public Accountants................................................................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1995, December 29, 1996 and June 29, 1997
(unaudited)......................................................................................... F-3
Consolidated Statements of Operations for the Years Ended January 1, 1995, December 31, 1995 and
December 29, 1996 and for the Six Months Ended June 30, 1996 (unaudited) and June 29, 1997
(unaudited)......................................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended January 1,
1995, December 31, 1995 and December 29, 1996 and for the Six Months Ended June 29, 1997
(unaudited)......................................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended January 1, 1995, December 31, 1995 and
December 29, 1996 and for the Six Months Ended June 30, 1996 (unaudited) and June 29, 1997
(unaudited)......................................................................................... F-6
Notes to Consolidated Financial Statements........................................................... F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Friendly Ice Cream Corporation:
We have audited the accompanying consolidated balance sheets of Friendly Ice
Cream Corporation and subsidiaries as of December 31, 1995 and December 29,
1996, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 29, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Friendly Ice Cream
Corporation and subsidiaries as of December 31, 1995 and December 29, 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 29, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 14, 1997 (except with respect to the matter
discussed in Note 16, as to which
the date is July 14, 1997)
F-2
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
PRO FORMA
(NOTE 17)
DECEMBER 31, DECEMBER 29, JUNE 29, JUNE 29,
1995 1996 1997 1997
------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 23,690 $ 18,626 $ 16,899 $ 7,466
Restricted cash and investments.......................................... -- -- 4,000 --
Trade accounts receivable................................................ 5,233 4,992 7,056 7,056
Inventories.............................................................. 15,079 15,145 17,490 17,490
Deferred income taxes.................................................... 9,885 12,375 12,381 12,381
Prepaid expenses and other current assets................................ 3,985 1,658 7,308 7,308
------------ ------------ ----------- -----------
TOTAL CURRENT ASSETS....................................................... 57,872 52,796 65,134 51,701
RESTRICTED CASH AND INVESTMENTS............................................ -- -- 7,889 --
INVESTMENT IN JOINT VENTURE................................................ -- 4,500 3,757 3,757
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization... 295,448 286,161 279,265 275,767
INTANGIBLES AND DEFERRED COSTS, net of accumulated amortization of $3,419,
$4,790 and $5,510 (unaudited) at December 31, 1995, December 29, 1996 and
June 29, 1997, respectively.............................................. 16,607 16,019 15,375 25,427
OTHER ASSETS............................................................... 365 650 1,722 1,722
------------ ------------ ----------- -----------
TOTAL ASSETS............................................................... $ 370,292 $ 360,126 $ 373,142 $ 358,374
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt..................................... $ 3,204 $ 1,289 $ 2,953 $ 2,953
Current maturities of capital lease obligations.......................... 6,466 6,353 5,003 1,248
Accounts payable......................................................... 20,972 20,773 26,272 26,272
Accrued salaries and benefits............................................ 13,525 13,855 15,971 15,971
Accrued interest payable................................................. 5,940 9,838 10,007 24
Insurance reserves....................................................... 6,605 3,973 6,927 6,927
Other accrued expenses................................................... 15,838 17,415 17,436 17,436
------------ ------------ ----------- -----------
TOTAL CURRENT LIABILITIES.................................................. 72,550 73,496 84,569 70,831
------------ ------------ ----------- -----------
DEFERRED INCOME TAXES...................................................... 51,908 48,472 46,802 44,997
CAPITAL LEASE OBLIGATIONS, less current maturities......................... 15,375 14,182 14,193 8,948
LONG-TERM DEBT, less current maturities.................................... 373,769 371,795 371,429 280,102
OTHER LONG-TERM LIABILITIES................................................ 22,224 25,337 31,683 30,271
COMMITMENTS AND CONTINGENCIES (Notes 2, 6, 7, 8, 12, 15, 16 and 17)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value -
Class A, authorized 150,000, 150,000 and 4,000 shares at December 31,
1995, December 29, 1996 and June 29, 1997, respectively; 1,090,969,
1,285,384 and 1,285,384 (unaudited) shares issued and outstanding at
December 31, 1995, December 29, 1996 and June 29, 1997, respectively,
and 7,500,000 (unaudited) shares pro forma at June 29, 1997.......... 11 13 13 75
Class B, authorized -0-, 2,000 and 2,000 shares at December 31, 1995,
December 29, 1996 and June 29, 1997, respectively; -0-, 1,187,503 and
1,187,503 (unaudited) shares issued and outstanding at December 31,
1995, December 29, 1996 and June 29, 1997, respectively, and -0-
shares pro forma at June 29, 1997.................................... -- 12 12 --
Class C, authorized -0-, 2,000 and 2,000 shares at December 31, 1995,
December 29, 1996 and June 29, 1997, respectively; -0- shares issued
and outstanding at December 31, 1995, December 29, 1996, June 29,
1997 and pro forma June 29, 1997..................................... -- -- -- --
Additional paid-in capital............................................... 46,842 46,905 46,905 148,210
Unrealized gain on investment securities, net of taxes................... -- -- 28 28
Accumulated deficit...................................................... (212,387) (220,159) (222,563) (225,159)
Cumulative translation adjustment........................................ -- 73 71 71
------------ ------------ ----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)....................................... (165,534) (173,156) (175,534) (76,775)
------------ ------------ ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)....................... $ 370,292 $ 360,126 $ 373,142 $ 358,374
------------ ------------ ----------- -----------
------------ ------------ ----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
FOR THE SIX
MONTHS
FOR THE YEARS ENDED ENDED
----------------------------------------- -----------
JANUARY 1, DECEMBER 31, DECEMBER 29, JUNE 30,
1995 1995 1996 1996
----------- ------------- ------------- -----------
(UNAUDITED)
REVENUES:
Restaurant.................................................... $ 589,383 $ 593,570 $ 596,675 $ 284,025
Retail, institutional and other............................... 41,631 55,579 54,132 24,759
----------- ------------- ------------- -----------
TOTAL REVENUES.................................................. 631,014 649,149 650,807 308,784
COSTS AND EXPENSES:
Cost of sales................................................. 179,793 192,600 191,956 89,696
Labor and benefits............................................ 211,838 214,625 209,260 102,674
Operating expenses............................................ 132,010 143,854 143,163 70,620
General and administrative expenses........................... 38,434 40,705 42,721 21,230
Debt restructuring expenses (Note 5).......................... -- 3,346 -- --
Write-down of property and equipment (Note 6)................. -- 4,006 227 --
Depreciation and amortization................................. 32,069 33,343 32,979 16,606
----------- ------------- ------------- -----------
OPERATING INCOME.................................................. 36,870 16,670 30,501 7,958
Interest expense, net of capitalized interest of $176, $62, $49,
$35 (unaudited) and $17 (unaudited) and interest income of $187,
$390, $318, $215 (unaudited) and $146 (unaudited) for the years
ended January 1, 1995, December 31, 1995 and December 29, 1996
and the six months ended June 30, 1996 and June 29, 1997,
respectively.................................................... 45,467 41,904 44,141 22,138
Equity in net loss of joint venture............................... -- -- -- --
----------- ------------- ------------- -----------
LOSS BEFORE BENEFIT FROM (PROVISION FOR) INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............. (8,597) (25,234) (13,640) (14,180)
Benefit from (provision for) income taxes......................... 4,661 (33,419) 5,868 6,154
----------- ------------- ------------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE... (3,936) (58,653) (7,772) (8,026)
Cumulative effect of change in accounting principle, net of income
tax expense of $1,554 (Note 10)................................. -- -- -- --
----------- ------------- ------------- -----------
NET LOSS.......................................................... $ (3,936) $ (58,653) $ (7,772) $ (8,026)
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
PRO FORMA NET LOSS PER SHARE (NOTE 17) (UNAUDITED):
Loss before cumulative effect of change in accounting
principle................................................... $ (1.04) $ (1.07)
Cumulative effect of change in accounting principle, net of
income tax expense.......................................... -- --
------------- -----------
Net loss...................................................... $ (1.04) $ (1.07)
------------- -----------
------------- -----------
PRO FORMA AMOUNTS ASSUMING NEW PENSION METHOD IS RETROACTIVELY:
Net loss (Note 10)............................................ $ (3,506) $ (58,134) $ (7,214) $ (7,747)
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
Net loss per share (unaudited)................................ $ (0.96) $ (1.03)
------------- -----------
------------- -----------
PRO FORMA SHARES USED IN NET LOSS PER SHARE CALCULATION (NOTE 17)
(UNAUDITED)..................................................... 7,500 7,500
------------- -----------
------------- -----------
JUNE 29,
1997
-----------
(UNAUDITED)
REVENUES:
Restaurant.................................................... $ 294,518
Retail, institutional and other............................... 28,310
-----------
TOTAL REVENUES.................................................. 322,828
COSTS AND EXPENSES:
Cost of sales................................................. 92,186
Labor and benefits............................................ 104,898
Operating expenses............................................ 71,284
General and administrative expenses........................... 22,595
Debt restructuring expenses (Note 5).......................... --
Write-down of property and equipment (Note 6)................. 347
Depreciation and amortization................................. 16,401
-----------
OPERATING INCOME.................................................. 15,117
Interest expense, net of capitalized interest of $176, $62, $49,
$35 (unaudited) and $17 (unaudited) and interest income of $187,
$390, $318, $215 (unaudited) and $146 (unaudited) for the years
ended January 1, 1995, December 31, 1995 and December 29, 1996
and the six months ended June 30, 1996 and June 29, 1997,
respectively.................................................... 22,238
Equity in net loss of joint venture............................... 743
-----------
LOSS BEFORE BENEFIT FROM (PROVISION FOR) INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............. (7,864)
Benefit from (provision for) income taxes......................... 3,224
-----------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE... (4,640)
Cumulative effect of change in accounting principle, net of income
tax expense of $1,554 (Note 10)................................. 2,236
-----------
NET LOSS.......................................................... $ (2,404)
-----------
-----------
PRO FORMA NET LOSS PER SHARE (NOTE 17) (UNAUDITED):
Loss before cumulative effect of change in accounting
principle................................................... $ (0.62)
Cumulative effect of change in accounting principle, net of
income tax expense.......................................... 0.30
-----------
Net loss...................................................... $ (0.32)
-----------
-----------
PRO FORMA AMOUNTS ASSUMING NEW PENSION METHOD IS RETROACTIVELY:
Net loss (Note 10)............................................ $ (4,640)
-----------
-----------
Net loss per share (unaudited)................................ $ (0.62)
-----------
-----------
PRO FORMA SHARES USED IN NET LOSS PER SHARE CALCULATION (NOTE 17)
(UNAUDITED)..................................................... 7,500
-----------
-----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(Dollar amounts in thousands)
COMMON STOCK
--------------------------------------------------------------------------
CLASS A CLASS B CLASS C ADDITIONAL
---------------------- ---------------------- -------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- --------- ----------- ------------- ----------- ---------------
BALANCE, JANUARY 2, 1994...... 1,090,969 $ 11 -- $ -- -- $ -- $ 46,822
Net loss.................... -- -- -- -- -- -- --
--
--------- --- --------- --- --- -------
BALANCE, JANUARY 1, 1995...... 1,090,969 11 -- -- -- -- 46,822
Net loss.................... -- -- -- -- -- -- --
Contribution of capital..... -- -- -- -- -- -- 20
--
--------- --- --------- --- --- -------
BALANCE, DECEMBER 31, 1995.... 1,090,969 11 -- -- -- -- 46,842
Net loss.................... -- -- -- -- -- -- --
Issuance of common stock to
lenders................... -- -- 1,187,503 12 -- -- 38
Proceeds from exercise of
warrants.................. 71,527 1 -- -- -- -- 21
Compensation expense
associated with management
stock plan................ 122,888 1 -- -- -- -- 4
Translation adjustment...... -- -- -- -- -- -- --
--
--------- --- --------- --- --- -------
BALANCE, DECEMBER 29, 1996.... 1,285,384 13 1,187,503 12 -- -- 46,905
Net loss (unaudited)........ -- -- -- -- -- -- --
Change in unrealized gain on
investment securities, net
of tax (unaudited)........ -- -- -- -- -- -- --
Translation adjustment
(unaudited)............... -- -- -- -- -- -- --
--
--------- --- --------- --- --- -------
BALANCE, JUNE 29, 1997
(unaudited)................. 1,285,384 $ 13 1,187,503 $ 12 -- $ -- $ 46,905
--
--
--------- --- --------- --- --- -------
--------- --- --------- --- --- -------
UNREALIZED
GAIN ON
INVESTMENT CUMULATIVE
SECURITIES, ACCUMULATED TRANSLATION
NET OF TAXES DEFICIT ADJUSTMENT TOTAL
------------------- ----------------- ------------------- ---------
BALANCE, JANUARY 2, 1994...... $ -- $ (149,798) $ -- $(102,965)
Net loss.................... -- (3,936) -- (3,936)
--- ----------------- --- ---------
BALANCE, JANUARY 1, 1995...... -- (153,734) -- (106,901)
Net loss.................... -- (58,653) -- (58,653)
Contribution of capital..... -- -- -- 20
--- ----------------- --- ---------
BALANCE, DECEMBER 31, 1995.... -- (212,387) -- (165,534)
Net loss.................... -- (7,772) -- (7,772)
Issuance of common stock to
lenders................... -- -- -- 50
Proceeds from exercise of
warrants.................. -- -- -- 22
Compensation expense
associated with management
stock plan................ -- -- -- 5
Translation adjustment...... -- -- 73 73
--- ----------------- --- ---------
BALANCE, DECEMBER 29, 1996.... -- (220,159) 73 (173,156)
Net loss (unaudited)........ -- (2,404) -- (2,404)
Change in unrealized gain on
investment securities, net
of tax (unaudited)........ 28 -- -- 28
Translation adjustment
(unaudited)............... -- -- (2) (2)
--- ----------------- --- ---------
BALANCE, JUNE 29, 1997
(unaudited)................. $ 28 $ (222,563) $ 71 $(175,534)
--- ----------------- --- ---------
--- ----------------- --- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
FOR THE SIX
MONTHS
FOR THE YEARS ENDED ENDED
----------------------------------------- -----------
JANUARY 1, DECEMBER 31, DECEMBER 29, JUNE 30,
1995 1995 1996 1996
----------- ------------- ------------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss........................................................ $ (3,936) $ (58,653) $ (7,772) $ (8,026)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Cumulative effect of change in accounting principle........... -- -- -- --
Depreciation and amortization................................. 32,069 33,343 32,979 16,606
Write-down of property and equipment.......................... -- 4,006 227 --
Deferred income tax (benefit) expense......................... (4,207) 33,419 (5,926) (6,154)
(Gain) loss on asset retirements.............................. (259) 595 (916) (264)
Equity in net loss of joint venture........................... -- -- -- --
Changes in operating assets and liabilities:
Receivables................................................. (2,071) 679 241 (960)
Inventories................................................. 1,635 (1,044) (66) (2,302)
Other assets................................................ (1,603) 587 1,309 373
Accounts payable............................................ 2,333 (1,714) (199) 8,166
Accrued expenses and other long-term liabilities............ 14,420 16,572 6,286 7,457
----------- ------------- ------------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................... 38,381 27,790 26,163 14,896
----------- ------------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................. (29,507) (19,092) (24,217) (10,912)
Proceeds from sales of property and equipment................... 1,475 926 8,409 3,481
Proceeds from sales and maturities of investment securities..... -- -- -- --
Cash acquired from Restaurant Insurance Corporation, net of cash
paid.......................................................... -- -- -- --
Advances to or investments in joint venture..................... -- -- (4,500) (4,500)
----------- ------------- ------------- -----------
NET CASH USED IN INVESTING ACTIVITIES........................... (28,032) (18,166) (20,308) (11,931)
----------- ------------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution of capital......................................... -- 20 -- --
Proceeds from exercise of stock purchase warrants............... -- -- 22 22
Proceeds from borrowings........................................ 67,629 80,162 48,196 19,674
Repayments of debt.............................................. (69,338) (72,713) (52,084) (18,799)
Repayments of capital lease obligations......................... (6,190) (7,293) (7,131) (3,797)
----------- ------------- ------------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES............. (7,899) 176 (10,997) (2,900)
----------- ------------- ------------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH........................... -- -- 78 --
----------- ------------- ------------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. 2,450 9,800 (5,064) 65
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................... 11,440 13,890 23,690 23,690
----------- ------------- ------------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................... $ 13,890 $ 23,690 $ 18,626 $ 23,755
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
SUPPLEMENTAL DISCLOSURES
Interest paid................................................... $ 29,430 $ 25,881 $ 36,000 $ 16,029
Capital lease obligations incurred.............................. 7,767 3,305 5,951 2,811
Capital lease obligations terminated............................ 391 288 128 126
Conversion of accrued interest payable to debt.................. 11,217 14,503 -- --
Issuance of common stock to lenders............................. -- -- 50 --
Issuance of note payable in connection with the acquisition of
Restaurant Insurance Corporation.............................. -- -- -- --
JUNE 29,
1997
-----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss........................................................ $ (2,404)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Cumulative effect of change in accounting principle........... (2,236)
Depreciation and amortization................................. 16,401
Write-down of property and equipment.......................... 347
Deferred income tax (benefit) expense......................... (3,224)
(Gain) loss on asset retirements.............................. 778
Equity in net loss of joint venture........................... 743
Changes in operating assets and liabilities:
Receivables................................................. (1,015)
Inventories................................................. (2,345)
Other assets................................................ (3,199)
Accounts payable............................................ 5,499
Accrued expenses and other long-term liabilities............ 280
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................... 9,625
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................. (8,810)
Proceeds from sales of property and equipment................... 919
Proceeds from sales and maturities of investment securities..... 73
Cash acquired from Restaurant Insurance Corporation, net of cash
paid.......................................................... 965
Advances to or investments in joint venture..................... (1,400)
-----------
NET CASH USED IN INVESTING ACTIVITIES........................... (8,253)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution of capital......................................... --
Proceeds from exercise of stock purchase warrants............... --
Proceeds from borrowings........................................ 29,191
Repayments of debt.............................................. (28,893)
Repayments of capital lease obligations......................... (3,395)
-----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES............. (3,097)
-----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH........................... (2)
-----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. (1,727)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................... 18,626
-----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................... $ 16,899
-----------
-----------
SUPPLEMENTAL DISCLOSURES
Interest paid................................................... $ 20,063
Capital lease obligations incurred.............................. 2,057
Capital lease obligations terminated............................ --
Conversion of accrued interest payable to debt.................. --
Issuance of common stock to lenders............................. --
Issuance of note payable in connection with the acquisition of
Restaurant Insurance Corporation.............................. 1,000
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 29, 1997
IS UNAUDITED)
1. ORGANIZATION
In September 1988, The Restaurant Company ("TRC") and another investor
acquired Friendly Ice Cream Corporation ("FICC") for $297,500,000. Subsequent to
the acquisition, Friendly Holding Corporation ("FHC") was organized to hold the
outstanding common stock of FICC and in March 1996, FHC was merged into FICC.
The accompanying consolidated financial statements include the accounts of FICC
and its wholly-owned subsidiaries (collectively, "FICC").
Under the terms of the TRC acquisition financing agreements, warrants to
purchase shares of FICC's common stock were issued to the lenders. These
warrants were exercisable on or before September 2, 1998. In connection with
FICC's debt restructuring in 1991 (see Note 7), these warrants were cancelled
and one of the lenders was issued new warrants for 13,836 shares of FICC's
(formerly FHC's) Class A Common Stock, subject to dilution, at an exercise price
of $445,000 or $32.16 per share. These warrants expire on September 2, 1998. As
of December 29, 1996 and June 29, 1997, none of these warrants had been
exercised.
As of December 29, 1996 and June 29, 1997, three classes of common stock
were authorized: Class A ("voting"), Class B ("limited voting") and Class C
("non-voting"). Prior to the occurrence of a Special Rights Default (see Note
7), lenders with limited voting common stock have voting rights only for certain
transactions as defined in the loan documents. Common stock held by the lenders
will automatically convert to voting common stock upon an underwritten public
offering by FICC of at least $30,000,000 (see Note 17).
As of December 31, 1995, TRC owned 913,632 shares or 83.75% of FICC's voting
common stock. In March 1996, TRC distributed its shares of FICC's voting common
stock to TRC's shareholders and FICC deconsolidated from TRC. As of December 29,
1996 and June 29, 1997, TRC's shareholders and FICC's lenders (see Note 7) owned
36.95% and 48.03%, respectively, of FICC's outstanding common stock.
As part of the debt restructuring in 1991 (see Note 7), certain officers of
FICC purchased 97,906 shares of Class A Common Stock and warrants convertible
into an additional 71,527 shares of voting common stock for an aggregate
purchase price of $55,550. These warrants were exercised on April 19, 1996 at an
aggregate exercise price of $22,000.
2. NATURE OF OPERATIONS
FICC owns and operates full-service restaurants in fifteen states. The
restaurants offer a wide variety of reasonably priced breakfast, lunch and
dinner menu items as well as frozen dessert products. FICC manufactures
substantially all of the frozen dessert products it sells, which are also
distributed to supermarkets and other retail locations. For the years ended
January 1, 1995, December 31, 1995 and December 29, 1996 and the six months
ended June 30, 1996 and June 29, 1997, restaurant sales were approximately 93%,
91%, 92%, 92% and 91%, respectively, of FICC's revenues. As of January 1, 1995,
December 31, 1995, December 29, 1996 and June 29, 1997, approximately 80% of
FICC's restaurants were located in the Northeast United States. As a result, a
severe or prolonged economic recession in this geographic area may adversely
affect FICC more than certain of its competitors which are more geographically
diverse. Commencing in 1997, FICC has franchised restaurants (see Note 16).
F-7
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION --
The consolidated financial statements include the accounts of FICC and its
subsidiaries after elimination of intercompany accounts and transactions.
FISCAL YEAR --
FICC's fiscal year ends on the last Sunday in December, unless that day is
earlier than December 27 in which case the fiscal year ends on the following
Sunday.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS --
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Future facts
and circumstances could alter management's estimates with respect to the
carrying value of long-lived assets and the adequacy of insurance reserves.
CASH AND CASH EQUIVALENTS --
FICC considers all investments with an original maturity of three months or
less when purchased to be cash equivalents.
INVENTORIES --
Inventories are stated at the lower of first-in, first-out cost or market.
Inventories at December 31, 1995, December 29, 1996 and June 29, 1997 were (in
thousands):
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ ---------
Raw Materials......................................... $ 2,129 $ 1,436 $ 2,135
Goods In Process...................................... 114 58 324
Finished Goods........................................ 12,836 13,651 15,031
------------ ------------ ---------
Total........................................... $ 15,079 $ 15,145 $ 17,490
------------ ------------ ---------
------------ ------------ ---------
INVESTMENT IN JOINT VENTURE --
In February 1996, FICC and another entity entered into a joint venture,
Shanghai Friendly Food Co., Ltd., a Chinese corporation. FICC has a 50%
ownership interest in the venture. Operations commenced in April 1997. FICC
accounts for the investment using the equity method. As of June 29, 1997, FICC
had a receivable for approximately $1.4 million from the joint venture related
to advances made to the venture in 1997 and net accounts receivable of
approximately $650,000.
INVESTMENTS --
FICC, through its wholly-owned subsidiary Restaurant Insurance Corporation
("RIC") (see Note 4), has invested in a diversified fixed income portfolio of
federal agency issues and United States Treasury
F-8
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
issues ($11,461,000 fair market value at June 29, 1997). FICC classifies all of
these investments as available for sale. Accordingly, these investments are
reported at estimated fair market value with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders'
equity, net of related income taxes.
RESTRICTED CASH AND INVESTMENTS --
RIC is required by the third party insurer of FICC to hold assets in trust
whose value is at least equal to certain of RIC's outstanding estimated
insurance claim liabilities. As of June 29, 1997, cash of $428,000 and
investments of $11,461,000 were restricted.
PROPERTY AND EQUIPMENT --
Property and equipment are carried at cost except for impaired assets which
are carried at fair value less cost to sell (see Note 6). Depreciation of
property and equipment is computed using the straight-line method over the
following estimated useful lives:
Buildings--30 years
Building improvements and leasehold improvements--20 years
Equipment--3 to 10 years
At December 31, 1995, December 29, 1996 and June 29, 1997, property and
equipment included (in thousands):
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ -----------
Land................................................ $ 77,765 $ 75,004 $ 74,446
Buildings and Improvements.......................... 110,231 112,359 112,966
Leasehold Improvements.............................. 37,703 39,120 38,964
Assets Under Capital Leases......................... 37,307 42,893 42,728
Equipment........................................... 206,266 216,536 217,106
Construction In Progress............................ 6,147 6,424 11,224
------------ ------------ -----------
Property and Equipment.............................. 475,419 492,336 497,434
Less: Accumulated Depreciation and Amortization..... (179,971) (206,175) (218,169)
------------ ------------ -----------
Property and Equipment--Net......................... $ 295,448 $ 286,161 $ 279,265
------------ ------------ -----------
Major renewals and betterments are capitalized. Replacements and maintenance
and repairs which do not extend the lives of the assets are charged to
operations as incurred.
LONG-LIVED ASSETS --
FICC reviews the license agreement for the right to use various trademarks
and tradenames (see Note 5) for impairment on a quarterly basis. FICC recognizes
an impairment has occurred when the carrying value of the license agreement
exceeds the estimated future cash flows of the trademarked products.
F-9
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FICC reviews each restaurant property quarterly to determine which
properties should be disposed of. This determination is made based on poor
operating results, deteriorating property values and other factors. FICC
recognizes an impairment has occurred when the carrying value of property
exceeds its estimated fair value less costs to sell (see Note 6).
INSURANCE RESERVES --
Insurance reserves include reserves for reported and unreported incurred
claims together with loss adjustment expense.
INCOME TAXES --
FICC accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. A valuation allowance is recorded for deferred tax assets whose
realization is not likely.
ADVERTISING --
FICC expenses production and other advertising costs the first time the
advertising takes place. For the years ended January 1, 1995, December 31, 1995
and December 29, 1996 and the six months ended June 30, 1996 and June 29, 1997,
advertising expense was approximately $15,430,000, $17,459,000, $18,231,000,
$9,168,000 and $9,008,000, respectively.
NEW ACCOUNTING PRONOUNCEMENTS --
Effective December 30, 1996, FICC adopted Statement of Financial Accounting
Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", which had no effect. This statement
requires that after a transfer of financial assets, an entity should recognize
all financial assets and servicing assets it controls and liabilities it has
incurred, derecognize financial assets when control has been surrendered, and
derecognize liabilities when extinguished. This statement also provides
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings and is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share", which establishes new standards for
computing and presenting earnings per share. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997 and
earlier application is not permitted. Upon adoption, all prior period earnings
per share data presented will be restated.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income (net income (loss) together with other non-owner changes in equity) and
its components in a full set of general purpose financial statements. SFAS No.
130 is effective for financial statements issued for periods ending after
December 15, 1997 and earlier application is permitted. Comprehensive income is
not materially different than net income (loss) for all periods presented.
F-10
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which requires disclosures for each
segment of an enterprise that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. SFAS No. 131 is effective for financial
statements issued for periods ending after December 15, 1997 and earlier
application is encouraged. Under the terms of the new standard, FICC will report
segment information for restaurant and retail operations when material.
RECLASSIFICATIONS --
Certain prior year amounts have been reclassified to conform with current
year presentation.
INTERIM FINANCIAL INFORMATION --
The accompanying financial statements as of June 29, 1997 and for the six
months ended June 30, 1996 and June 29, 1997 are unaudited, but, in the opinion
of management, include all adjustments which are necessary for a fair
presentation of the financial position and the results of operations and cash
flows of FICC. Such adjustments consist solely of normal recurring accruals.
Operating results for the six months ended June 30, 1996 and June 29, 1997 are
not necessarily indicative of the results that may be expected for the entire
year due to the seasonality of the business. Historically, higher revenues and
profits are experienced during the second and third fiscal quarters.
4. ACQUISITION OF RESTAURANT INSURANCE CORPORATION
On March 19, 1997, FICC acquired all of the outstanding shares of common
stock of Restaurant Insurance Corporation ("RIC"), a Vermont corporation, from
TRC for cash of $1,300,000 and a $1,000,000 promissory note payable to TRC
bearing interest at an annual rate of 8.25%. The promissory note and accrued
interest of approximately $1,024,000 was paid on June 30, 1997. RIC, which was
formed in 1993, reinsures certain FICC risks (i.e. workers' compensation,
employer's liability, general liability and product liability) from a third
party insurer (see Note 12).
The acquisition was accounted for as a purchase. Accordingly, the results of
operations for RIC for the period subsequent to March 20, 1997 are included in
the accompanying consolidated financial statements. No pro forma information is
included since the effect of the acquisition is not material. The purchase price
was allocated to net assets acquired based on the estimated fair market values
at the date of acquisition. The purchase price was allocated as follows (in
thousands):
Cash and Cash Equivalents......................................... $ 2,265
Restricted Cash and Investments................................... 12,061
Receivables and Other Assets...................................... 3,090
Loss Reserves..................................................... (13,231)
Other Liabilities................................................. (1,885)
---------
$ 2,300
---------
---------
F-11
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INTANGIBLE ASSETS AND DEFERRED COSTS
Intangible assets and deferred costs net of accumulated amortization as of
December 31, 1995, December 29, 1996 and June 29, 1997 were (in thousands):
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ ---------
License agreement for the right to use
various trademarks and tradenames................... $ 15,231 $ 14,764 $ 14,531
Deferred financing costs amortized over
the terms of the loans on an effective yield
basis............................................... 1,376 1,255 771
Deferred financing costs related to pending
registration statement (see Note 17)................ -- -- 73
------------ ------------ ---------
$ 16,607 $ 16,019 $ 15,375
------------ ------------ ---------
------------ ------------ ---------
In November 1994, FHC filed a Form S-1 Registration Statement and in 1995
elected not to proceed with the registration. Accordingly, previously deferred
costs totaling $3,346,000 related to this registration were expensed during the
year ended December 31, 1995.
6. WRITE-DOWN OF PROPERTY AND EQUIPMENT
At December 31, 1995, December 29, 1996 and June 29, 1997, there were 81, 50
and 49 properties held for disposition, respectively. FICC determined that the
carrying values of certain of these properties exceeded their estimated fair
values less costs to sell. Accordingly, during the year ended December 31, 1995,
the carrying values of 51 properties were reduced by an aggregate of $4,006,000;
during the year ended December 29, 1996, the carrying values of 6 properties
were reduced by an aggregate of $227,000 and during the six months ended June
29, 1997, the carrying values of 6 properties were reduced by an aggregate of
$347,000. FICC plans to dispose of the 49 properties by December 31, 1998. The
carrying value of the properties held for disposition at December 31, 1995,
December 29, 1996 and June 29, 1997 was approximately $7,491,000, $4,642,000 and
$3,876,000, respectively.
7. DEBT
Effective January 1, 1991, FICC and its lenders entered into an Amended and
Restated Revolving Credit and Term Loan Agreement (the "Credit Agreement"), and
effective January 1, 1996, the Credit Agreement was again amended and restated.
In connection with the January 1, 1996 amendment (the "Amendment"), revolving
credit loans and term loans totaling $373,622,000 at December 31, 1995 were
converted to revolving credit loans of $38,549,000 and term loans of
$335,073,000. For the year ended December 29, 1996 and the six months ended June
29, 1997, interest was accrued on the revolving credit and term loans at an
annual rate of 11%, with .5% of the accrued interest not currently payable. The
deferred interest will be waived if the revolving credit and term loans are
repaid in full in cash on or before the due date. The deferred interest as of
June 29, 1997 was approximately $2,842,000.
Under the terms of the Amendment, as of December 29, 1996, principal of
$371,678,000 is due on May 1, 1998. FICC may extend the due date to May 1, 1999
by paying a fee equal to 1% of the aggregate of the revolver commitment of
$50,000,000, the letters of credit commitment (see below) and the principal
amount of the term loan. FICC does not expect to generate sufficient cash flow
to make all of the principal
F-12
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
payments required by May 1, 1998; therefore, FICC will exercise its option to
extend the due date to May 1, 1999 if the pending recapitalization is not
consummated (see Note 17). Accordingly, these loans are classified as long-term
in the accompanying consolidated financial statements.
In connection with the Amendment, in March 1996 the lenders received
1,090,972 shares of FICC's Class B Common Stock, which represented 50% of the
issued and outstanding equity of FICC. As a result of the issuance of stock
under the Management Stock Plan (see Note 13) and the exercise of certain
warrants (see Note 1), additional shares of FICC's Class B Common Stock were
issued to the lenders in 1996 to maintain their minimum equity interest in FICC
of 47.50% on a fully diluted basis in accordance with the Amendment. Total
shares issued to the lenders as of December 29, 1996 were 1,187,503. The
estimated fair market value of the shares issued of $50,000 was recorded as a
deferred financing cost during the year ended December 29, 1996. Prior to the
occurrence of a Special Rights Default (see below), lenders with limited voting
stock may elect two of the five members to FICC's board of directors. In the
event of a Special Rights Default, lenders with limited voting stock may appoint
two additional directors to FICC's board. Additionally, in the event of a
Special Rights Default, the lenders are entitled to receive additional shares of
FICC's limited voting common stock thereby increasing their equity interest in
FICC by 5% initially, with additional shares of limited voting common stock
issued quarterly thereafter for a maximum of eight quarters. Each quarterly
issuance of limited voting common stock would increase the lenders' equity
interest in FICC by 2.5%. A Special Rights Default occurs if (i) FICC files for
bankruptcy or enters into any insolvency proceeding, (ii) FICC fails to pay
principal or interest on the revolving credit and term loans when due, (iii)
FICC fails to comply with financial covenants for two consecutive quarters, or
(iv) certain other conditions relating to ownership of FICC's subsidiaries and
ownership of FICC are not met. As of June 29, 1997, a Special Rights Default had
not occurred.
Covenant violations prior to December 31, 1995 were waived by the lenders.
The Amendment provided for new covenant requirements effective December 31, 1995
(see below). Under the terms of the Amendment, covenants require attainment of
minimum earnings, as defined, debt service coverage ratios, as defined, and
minimum net worth, as defined. Restrictions also have been placed on capital
expenditures, asset dispositions, proceeds from asset dispositions, investments,
pledging of assets, sale and leasebacks and the incurrence of additional
indebtedness. The covenant requirements, as defined under the Amendment, and
actual ratios/amounts as of and for the twelve months ended December 31, 1995
and December 29, 1996 and as of and for the twelve months ended June 29, 1997
were:
DECEMBER 31, 1995 DECEMBER 29, 1996 JUNE 29, 1997
-------------------------- -------------------------- ---------------------------
REQUIREMENT ACTUAL REQUIREMENT ACTUAL REQUIREMENT ACTUAL
------------ ------------ ------------ ------------ ------------ -------------
Consolidated Earnings Before
Interest, Taxes, Depreciation
and Amortization, as defined.... $ 55,000,000 $ 58,094,000 $ 58,000,000 $ 64,001,000 $ 58,000,000 $ 71,921,000
Ratio of Consolidated Adjusted
EBITDA to Consolidated Debt
Service Payments................ .95 to 1 1.11 to 1 .73 to 1 .99 to 1 .72 to 1 1.12 to 1
Consolidated Net Worth............ $(168,000,000) $(165,534,000) $(181,000,000) $(173,156,000) $(196,000,000) $(175,534,000)
FICC has a commitment from a bank to issue letters of credit totaling
$5,815,000 through May 1, 1998, or through May 1, 1999 if the Credit Agreement
is extended. As of December 31, 1995, December 29, 1996 and June 29, 1997, total
letters of credit issued were $5,815,000, $4,390,000 and $3,445,000,
respectively. An annual fee of 2% is charged on the maximum drawing amount of
each letter of credit
F-13
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
issued. During the years ended January 1, 1995, December 31, 1995 and December
29, 1996 and the six months ended June 30, 1996 and June 29, 1997, there were no
drawings against the letters of credit. Under the terms of the Amendment,
interest will be charged at 13.5%, compounded monthly, on drawings against
letters of credit issued.
Debt at December 31, 1995, December 29, 1996 and June 29, 1997 consisted of
the following (in thousands):
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ ----------
Revolving Credit Loan, 12% through December 31, 1995
and 11% thereafter; due May 1, 1998 unless FICC
extends to May 1, 1999............................ $ 210,984 $ 36,605 $ 36,254
Term Loan, 8.5% compounded monthly through December
31, 1995 and 11% thereafter; due May 1, 1998
unless FICC extends to May 1, 1999................ 162,638 335,073 335,073
Insurance Premium Finance Loans, 5.55%-8.35%; due
August 15, 1997-July 10, 1998..................... 3,177 1,259 1,923
Other............................................... 174 147 1,132
------------ ------------ ----------
376,973 373,084 374,382
Less: Current Portion............................... 3,204 1,289 2,953
------------ ------------ ----------
Total Long-Term Debt................................ $ 373,769 $ 371,795 $ 371,429
------------ ------------ ----------
------------ ------------ ----------
The revolving credit and term loans are collateralized by a lien on
substantially all of FICC's assets and by a pledge of FICC's shares of its
subsidiaries' stock.
At December 29, 1996, aggregate future annual principal payments of debt,
exclusive of capitalized leases (see Note 8), were: 1997, $1,289,000; 1998,
$33,000; 1999, $371,715,000; and 2000, $47,000. The payments for the revolving
credit and term loans are reflected in 1999, since, as discussed above, FICC
will not repay the loans in 1998.
At December 31, 1995, December 29, 1996 and June 29, 1997, the unused
portion of the revolving credit loan was $11,451,000, $13,395,000 and
$13,746,000, respectively. A 0.5% annual commitment fee was charged on the
unused portions of the revolver and letters of credit commitments. The total
average unused portions of the revolver and letters of credit commitments was
$10,685,000, $12,796,000 and $8,471,000 for the years ended December 31, 1995
and December 29, 1996 and the six months ended June 29, 1997, respectively.
In October 1994, FICC paid a fee of approximately $3,582,000 to the lenders
to facilitate a refinancing of the obligations under the Credit Agreement. This
amount was included in interest expense for the year ended January 1, 1995.
FICC's revolving credit and term loans are not publicly traded and prices
and terms of the few transactions which were completed are not available to
FICC. Since no information is available on prices
F-14
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
of completed transactions, the terms of the loans are complex and the relative
risk involved is difficult to evaluate, management believes it is not
practicable to estimate the fair value of the revolving credit and term loans
without incurring excessive costs. Additionally, since the letters of credit are
associated with the revolving credit and term loan agreement, management
believes it is also not practicable to estimate the fair value of the letters of
credit without incurring excessive costs.
8. LEASES
As of December 31, 1995, December 29, 1996 and June 29, 1997, FICC operated
735, 707 and 700 restaurants, respectively. These operations were conducted in
premises owned or leased as follows:
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
----------------- ----------------- -----------
Land and Building Owned................................ 313 296 294
Land Leased and Building Owned......................... 164 161 161
Land Leased and Building Leased........................ 258 250 245
--- --- ---
735 707 700
--- --- ---
--- --- ---
Restaurants in shopping centers are generally leased for a term of 10 to 20
years. Leases of freestanding restaurants generally are for a 15 or 20 year
lease term and provide for renewal options for three or four five-year renewals.
Most leases provide for minimum payments plus a percentage of sales in excess of
stipulated amounts. Additionally, FICC leases certain restaurant equipment over
lease terms from three to seven years.
Future minimum lease payments under non-cancellable leases with an original
term in excess of one year as of December 29, 1996 were (in thousands):
OPERATING CAPITAL
YEAR LEASES LEASES
- ------------------------------------------------------------------------ ----------- ---------
1997.................................................................... $ 13,366 $ 8,446
1998.................................................................... 12,524 6,445
1999.................................................................... 11,635 3,429
2000.................................................................... 10,277 2,354
2001.................................................................... 8,401 1,815
2002 and thereafter..................................................... 26,096 7,163
----------- ---------
Total Minimum Lease Payments............................................ $ 82,299 29,652
-----------
Less: Amounts Representing Interest..................................... 9,117
---------
Present Value of Minimum Lease Payments................................. $ 20,535
---------
---------
F-15
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LEASES (CONTINUED)
Capital lease obligations reflected in the accompanying consolidated balance
sheets have effective rates ranging from 8% to 12% and are payable in monthly
installments through 2016. Maturities of such obligations at December 29, 1996
were (in thousands):
YEAR AMOUNT
- --------------------------------------------------------------- ---------
1997........................................................... $ 6,353
1998........................................................... 4,967
1999........................................................... 2,371
2000........................................................... 1,539
2001........................................................... 1,187
2002 and thereafter............................................ 4,118
---------
Total.................................................... $ 20,535
---------
---------
Rent expense included in the accompanying consolidated financial statements
for operating leases was (in thousands):
JANUARY 1, DECEMBER 31, DECEMBER 29, JUNE 30, JUNE 29,
1995 1995 1996 1996 1997
----------- ------------ ------------ ----------- -----------
Minimum Rentals................. $ 14,767 $ 15,175 $ 16,051 $ 8,037 $ 8,102
Contingent Rentals.............. 2,003 2,012 1,918 735 710
----------- ------------ ------------ ----------- -----------
Total..................... $ 16,770 $ 17,187 $ 17,969 $ 8,772 $ 8,812
----------- ------------ ------------ ----------- -----------
----------- ------------ ------------ ----------- -----------
9. INCOME TAXES
Prior to March 23, 1996 (see below), FICC and its subsidiaries were included
in the consolidated Federal income tax return of TRC. Under a tax sharing
agreement between TRC and FICC (formerly FHC) (the "TRC/FICC Agreement"), FICC
and its subsidiaries (the "FICC Group") were obligated to pay TRC its allocable
share of the TRC group tax liability, determined as if the FICC Group were
filing a separate consolidated income tax return.
On March 23, 1996, TRC distributed its shares of FICC's voting common stock
to TRC's shareholders (see Note 1), the FICC Group deconsolidated from the TRC
group and the TRC/FICC Agreement expired. In addition, on March 26, 1996, shares
of Class B Common Stock were issued to FICC's lenders which resulted in an
ownership change pursuant to Internal Revenue Code Section 382.
As a result of the deconsolidation from TRC, the FICC Group is required to
file two short year Federal income tax returns for 1996. For the period from
January 1, 1996 through March 23, 1996, the FICC Group was included in the
consolidated Federal income tax return of TRC and for the period from March 24,
1996 through December 29, 1996, the FICC Group will file a consolidated return
for its group only.
Under the TRC/FICC Agreement, NOLs generated by the FICC Group and utilized
or allocated to TRC were available to the FICC Group on a separate company basis
to carryforward. Pursuant to the TRC/FICC Agreement, as of March 23, 1996,
$99,321,000 of carryforwards would have been available to the FICC Group to
offset future taxable income of the FICC Group. However, as a result of the
deconsolidation from TRC, the deferred tax asset related to the $65,034,000 of
NOLs utilized by TRC was
F-16
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
written off. Additionally, as a result of the change in ownership and Section
382 limitation, a valuation allowance has been placed on $29,686,000 of the
$34,287,000 remaining Federal NOL carryforwards generated for the period prior
to March 23, 1996. The amount of pre-change NOLs not reserved for represents the
amount of NOLs which have become available as a result of FICC realizing gains
which were unrealized as of the date of the ownership change. FICC expects to
continue to reduce the valuation allowance on pre-change NOLs as they become
available to FICC via realization of additional unrealized gains. For the period
from March 23, 1996 to December 29, 1996, FICC generated a net operating loss
carryforward of $5,765,000. Due to restrictions similar to Section 382 in most
of the states FICC operates in and short carryforward periods, FICC has fully
reserved for all state NOL carryforwards generated through March 26, 1996 as of
December 29, 1996.
The benefit from (provision for) income taxes for the years ended January 1,
1995, December 31, 1995 and December 29, 1996 and the six months ended June 30,
1996 and June 29, 1997 was as follows (in thousands):
JANUARY 1, DECEMBER 31, DECEMBER 29, JUNE 30, JUNE 29,
1995 1995 1996 1996 1997
----------- ------------ ------------- ----------- -----------
Current Benefit (Provision)
Federal................................. $ 454 $ -- $ -- $ -- $ --
State................................... -- -- -- -- --
Foreign................................. -- -- (58) -- --
----------- ------------ ------ ----------- -----------
Total Current Benefit (Provision)......... 454 -- (58) -- --
----------- ------------ ------ ----------- -----------
Deferred Benefit (Provision)
Federal................................. 3,608 (27,465) 5,126 5,332 3,224
State................................... 599 (5,954) 800 822 --
Foreign................................. -- -- -- -- --
----------- ------------ ------ ----------- -----------
Total Deferred Benefit (Provision)........ 4,207 (33,419) 5,926 6,154 3,224
----------- ------------ ------ ----------- -----------
Total Benefit From (Provision
For) Income Taxes....................... $ 4,661 $ (33,419) $ 5,868 $ 6,154 $ 3,224
----------- ------------ ------ ----------- -----------
----------- ------------ ------ ----------- -----------
F-17
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
A reconciliation of the differences between the statutory Federal income tax
rate and the effective income tax rates follows:
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
------------- --------------- -----------------
Statutory Federal Income Tax Rate.................... 35% 35 % 35 %
State Income Taxes Net of Federal Benefit............ 17 11 14
Write-off of Intercompany NOL Carryforwards.......... -- (85 ) (13 )
Increase (Decrease) in Federal NOL Valuation
Allowance.......................................... -- (57 ) 10
Increase in State NOL Valuation Allowance............ (4 ) (30 ) (8 )
Tax Credits.......................................... 8 3 3
Nondeductible Expenses............................... (2 ) (1 ) (1 )
Other................................................ -- (8 ) 3
-- --
---
Effective Tax Rate................................... 54 % (132 )% 43%
-- --
-- --
---
---
Deferred tax assets and liabilities are determined as the difference between
the financial statement and tax bases of the assets and liabilities multiplied
by the enacted tax rates in effect for the year in which the differences are
expected to reverse. Significant deferred tax assets (liabilities) at December
31, 1995 and December 29, 1996 were as follows (in thousands):
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
Property and Equipment........................................... $ (51,903) $ (50,866)
Federal and State NOL Carryforwards (net of valuation allowance
of $23,026 and $21,220 at December 31, 1995 and December 29,
1996, respectively)............................................ -- 4,355
Insurance Reserves............................................... 6,311 5,788
Inventories...................................................... 2,450 1,862
Accrued Pension.................................................. 3,272 4,388
Intangible Assets................................................ (3,600) (6,037)
Tax Credit Carryforwards......................................... -- 1,001
Other............................................................ 1,447 3,412
------------ ------------
Net Deferred Tax Liability....................................... $ (42,023) $ (36,097)
------------ ------------
------------ ------------
At December 31, 1995, December 29, 1996 and June 29, 1997, the
classification of deferred taxes was as follows (in thousands):
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ ----------
Current Asset........................................ $ 9,885 $ 12,375 $ 12,381
Long-term Liability.................................. (51,908) (48,472) (44,997)
------------ ------------ ----------
$ (42,023) $ (36,097) $ (32,616)
------------ ------------ ----------
------------ ------------ ----------
F-18
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS
Substantially all of the employees of FICC are covered by a non-contributory
defined benefit pension plan. Effective January 1, 1992, the plan was changed to
a defined benefit cash balance plan. Plan benefits are based on years of service
and participant compensation during their years of employment. FICC accrues the
cost of its pension plan over its employees' service lives.
Under the cash balance plan, a nominal account for each participant is
established. The plan administrator makes an annual contribution to each account
based on current wages and years of service. Each account earns a specified rate
of interest which is adjusted annually.
FICC's policy is to make contributions to the plan which provide for
benefits and pay plan expenses. Contributions are intended to provide not only
for benefits attributable to service to date, but also for those benefits
expected to be earned in the future.
For the years ended January 1, 1995, December 31, 1995 and December 29,
1996, net pension expense was (in thousands):
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
----------- ------------ ------------
Service Cost......................................... $ 4,011 $ 3,877 $ 4,202
Interest Cost........................................ 5,106 5,420 5,781
Actual Loss (Gain) on Plan Assets.................... 5,180 (17,438) (9,428)
Deferral of Asset (Loss) Gain........................ (11,725) 10,850 2,377
Net Amortization of Deferral of Asset Gain........... (548) (770) (651)
----------- ------------ ------------
Net Pension Expense.................................. $ 2,024 $ 1,939 $ 2,281
----------- ------------ ------------
----------- ------------ ------------
The funded status of the plan as of December 31, 1995 and December 29, 1996
was (in thousands):
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
Actuarial Present Value of Benefit Obligations:
Vested......................................................... $ 49,581 $ 56,752
Non-vested..................................................... 1,081 1,316
------------ ------------
Accumulated Benefit Obligations.................................. $ 50,662 $ 58,068
------------ ------------
------------ ------------
Projected Benefit Obligations.................................... $ 69,188 $ 76,768
Plan Assets at Market Value...................................... 86,477 90,626
------------ ------------
Plan Assets in Excess of Projected Benefit Obligation............ 17,289 13,858
Unrecognized Prior Service Costs................................. (3,486) (3,077)
Unrecognized Net Gain............................................ (21,785) (21,044)
------------ ------------
Accrued Pension Liability........................................ $ (7,982) $ (10,263)
------------ ------------
------------ ------------
For the years ended January 1, 1995, December 31, 1995 and December 29,
1996, the weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 8.50%, 8.00% and 7.75%,
respectively. The rate of annual increase in future compensation levels used
ranged from 5.0% to 6.5% for the year ended January 1, 1995, from 4.5% to 6.0%
for the year ended
F-19
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
December 31, 1995 and 4.0% to 5.5% for the year ended December 29, 1996,
depending on the employee group. The expected long-term rate of return on plan
assets was 9.5% for each of the three years.
Effective December 30, 1996, FICC changed its method of calculating the
market-related value of plan assets used in determining the return-on-asset
component of annual pension expense and the cumulative net unrecognized gain or
loss subject to amortization. Under the previous accounting method, the
calculation of the market-related value of assets reflected amortization of the
actual realized and unrealized capital return on assets on a straight-line basis
over a five-year period. Under the new method, the calculation of the
market-related value of assets reflects the long-term rate of return expected by
FICC and amortization of the difference between the actual return (including
capital, dividends and interest) and the expected return over a five-year
period. FICC believes the new method is widely used in practice and preferable
because it results in calculated plan asset values that more closely approximate
fair value, while still mitigating the effect of annual market-value
fluctuations. Under both methods, only the cumulative net unrecognized gain or
loss which exceeds 10% of the greater of the projected benefit obligation or the
market-related value of plan assets is subject to amortization. This change
resulted in a noncash benefit for the six months ended June 29, 1997 of
$2,236,000 (net of taxes of $1,554,000) which represents the cumulative effect
of the change related to years prior to fiscal 1997 and $303,000 (net of taxes
of $211,000) in lower pension expense related to the six months ended June 29,
1997 as compared to the previous accounting method. Had this change been applied
retroactively, pension expense would have been reduced by $729,000, $879,000 and
$946,000 for the years ended January 1, 1995, December 31, 1995 and December 29,
1996, respectively.
FICC's Employee Savings and Investment Plan (the "Plan") covers all eligible
employees and is qualified under Section 401(k) of the Internal Revenue Code.
For the years ended January 1, 1995, December 31, 1995 and December 29, 1996,
FICC made discretionary matching contributions at the rate of 75% of a
participant's first 2% of his/her contributions and 50% of a participant's next
2% of his/her contributions. All employee contributions are fully vested.
Employer contributions are vested at the completion of five years of service or
at retirement, death, disability or termination at age 65 or over, as defined by
the Plan. Contribution and administrative expenses for the Plan were
approximately $1,032,000, $1,086,000 and $1,002,000 for the years ended January
1, 1995, December 31, 1995 and December 29, 1996, respectively.
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
FICC provides health care and life insurance benefits to certain groups of
employees upon retirement. Eligible employees may continue their coverages if
they are receiving a pension benefit, are 55 years of age, and have completed 10
years of service. The plan requires contributions for health care coverage from
participants who retired after September 1, 1989. Life insurance benefits are
non-contributory. The plan is not funded.
F-20
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
FICC accrues the cost of postretirement benefits over the years employees
provide services to the date of their full eligibility for such benefits. The
components of the net postretirement benefit cost for the years ended January 1,
1995, December 31, 1995 and December 29, 1996 were (in thousands):
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
------------- --------------- ---------------
Service Cost of Benefits Earned...................... $ 108 $ 105 $ 125
Interest Cost on Accumulated Postretirement Benefit
Obligation, net of Amortization.................... 405 478 374
----- ----- -----
Net Postretirement Benefit Expense................... $ 513 $ 583 $ 499
----- ----- -----
----- ----- -----
The postretirement benefit liability as of December 31, 1995 and December
29, 1996 included the following components (in thousands):
DECEMBER 31, DECEMBER 29,
1995 1996
------------- -------------
Actuarial Present Value of Postretirement Benefit Obligation:
Retirees..................................................... $ 4,267 $ 3,837
Other fully eligible plan participants....................... 428 358
Other active plan participants............................... 1,480 1,514
------ ------
Accumulated Postretirement Benefit Obligation.................... 6,175 5,709
Plan Changes..................................................... 1,175 1,113
Unrecognized Net (Loss) Gain..................................... (293) 328
------ ------
Postretirement Benefit Liability................................. $ 7,057 $ 7,150
------ ------
------ ------
The discount rate used to determine the accumulated postretirement benefit
obligation was 8.50%, 8.00% and 7.75% for the years ended January 1, 1995,
December 31, 1995 and December 29, 1996, respectively. The assumed health care
cost trend rate used to measure the accumulated postretirement benefit
obligation was 14% gradually declining to 6% in 2000 and thereafter for the year
ended January 1, 1995, 11.5% gradually declining to 5.5% in 2000 and thereafter
for the year ended December 31, 1995 and 9.25% gradually declining to 5.25% in
2000 and thereafter for the year ended December 29, 1996. A one-percentage-point
increase in the assumed health care cost trend rate would have increased the
postretirement benefit expense by approximately $56,000, $55,000 and $49,000,
and would have increased the accumulated postretirement benefit obligation by
approximately $484,000, $478,000 and $411,000 for the years ended January 1,
1995, December 31, 1995 and December 29, 1996, respectively.
FICC increased the required contributions from participants who retired
after July 31, 1994, for health coverage. This and other plan changes are being
amortized over the expected remaining employee service period of active plan
participants.
12. INSURANCE RESERVES
FICC is self-insured through retentions or deductibles for the majority of
its workers' compensation, automobile, general liability and group health
insurance programs. Self-insurance amounts vary up to
F-21
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INSURANCE RESERVES (CONTINUED)
$500,000 per occurrence. Insurance with third parties, some of which is then
reinsured through RIC (see Note 4), is in place for claims in excess of these
self-insured amounts. At December 31, 1995, December 29, 1996 and June 29, 1997,
insurance reserves of approximately $20,847,000, $16,940,000 and $28,937,000,
respectively, had been recorded. Insurance reserves at June 29, 1997 included
RIC's reserve for unpaid losses of approximately $13,044,000. Reserves at
December 31, 1995, December 29, 1996 and June 29, 1997 also included accruals
related to postemployment benefits and postretirement benefits other than
pensions. While management believes these reserves are adequate, it is
reasonably possible that the ultimate liabilities will exceed such estimates.
Classification of the reserves was as follows (in thousands):
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ ---------
Current............................................... $ 6,605 $ 3,973 $ 6,927
Long-term............................................. 14,242 12,967 22,010
------------ ------------ ---------
Total............................................. $ 20,847 $ 16,940 $ 28,937
------------ ------------ ---------
------------ ------------ ---------
13. STOCK PLANS
A Stock Rights Plan ("SRP") was adopted by FICC in 1991. Under the SRP,
certain eligible individuals were granted rights to purchase shares of voting
common stock of FICC for $.01 per share, subject to certain vesting,
anti-dilution and exercise requirements. As of December 31, 1995, the aggregate
number of shares which could have been issued under the SRP was 88,801 of which
41,316 rights were issued and vested. The estimated fair value of the rights
vested was not material and no compensation expense was recorded. On March 25,
1996, FICC established the Management Stock Plan ("MSP"). The MSP provided for
persons with rights granted under the SRP to waive their rights under such plan
and receive shares of FICC's Class A Common Stock. Accordingly, in April 1996,
all of the participants in the SRP made this election and the SRP rights then
outstanding were cancelled and 122,888 shares of Class A Common Stock were
issued, of which 61,650 were vested as of December 29, 1996. The estimated fair
value of the 20,334 additional shares vested in 1996 of $5,000 was recorded as
compensation expense in the year ended December 29, 1996. The remaining issued,
non-vested shares of 61,238 will vest based on the Company achieving certain
performance measurements. As of June 29, 1997, 27,113 additional shares are
available for grant under the MSP (see Note 17).
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation". SFAS No. 123 requires the measurement of the fair
value of stock options or warrants granted to be included in the statement of
operations or that pro forma information related to the fair value be disclosed
in the notes to financial statements. FICC has determined that it will continue
to account for stock-based compensation for employees under Accounting
Principles Board Opinion No. 25 and elect the disclosure-only alternative under
SFAS No. 123. Since no options have been granted since the adoption of SFAS No.
123, no pro forma disclosures are required.
F-22
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS
In March 1996, the FICC pension plan acquired three restaurant properties
from FICC. The land, buildings and improvements were purchased by the plan at
their appraised value of $2,043,000 and are located in Connecticut, Vermont and
Virginia. Simultaneous with the purchase, the pension plan leased back the three
properties to FICC at an aggregate annual base rent of $214,000 for the first
five years and $236,000 for the following five years. The pension plan was
represented by independent legal and financial advisors. FICC realized a net
gain of approximately $675,000 on this transaction which is being amortized into
income over the initial ten year term of the lease.
FICC entered into subleases for certain land, buildings, and equipment with
Perkins Restaurants Operating Company, L.P. (Perkins), a subsidiary of TRC.
During the years ended January 1, 1995, December 31, 1995 and December 29, 1996
and the six months ended June 30, 1996 and June 29, 1997, rent expense related
to the subleases was approximately $245,000, $266,000, $278,000, $138,000 and
$139,000, respectively. Additionally, during the year ended January 1, 1995,
FICC purchased leasehold improvements and personal property at one of the
locations for approximately $303,000 from Perkins.
On March 19, 1997, FICC acquired all of the outstanding shares of common
stock of Restaurant Insurance Corporation ("RIC") from TRC (see Note 4). Prior
to the acquisition, RIC assumed, from a third party insurance company,
reinsurance premiums related to insurance liabilities of FICC of approximately
$7,046,000, $6,409,000 and $4,198,000 during the years ended January 1, 1995,
December 31, 1995 and December 29, 1996, respectively. In addition, RIC had
reserves of approximately $10,456,000, $12,830,000 and $13,038,000 related to
FICC claims at January 1, 1995, December 31, 1995 and December 29, 1996,
respectively.
In fiscal 1994, TRC Realty Co. (a subsidiary of TRC) entered into a ten year
operating lease for an aircraft, for use by both FICC and Perkins. FICC shares
equally with Perkins in reimbursing TRC Realty Co. for leasing, tax and
insurance expenses. In addition, FICC also incurs actual usage costs. Total
expense for the years ended January 1, 1995, December 31, 1995 and December 29,
1996 and the six months ended June 30, 1996 and June 29, 1997 was approximately
$336,000, $620,000, $590,000, $276,000 and $316,000, respectively.
FICC purchased certain food products used in the normal course of business
from a division of Perkins. For the years ended January 1, 1995, December 31,
1995 and December 29, 1996 and the six months ended June 30, 1996 and June 29,
1997, purchases were approximately $1,335,000, $1,909,000, $1,425,000, $719,000
and $475,000, respectively.
TRC provided FHC and FICC with certain management services for which TRC was
reimbursed approximately $773,000, $785,000, $800,000, $400,000 and $412,000 for
the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the
six months ended June 30, 1996 and June 29, 1997, respectively.
During the year ended December 29, 1996 and the six months ended June 30,
1996 and June 29, 1997, FICC paid approximately $69,000, $25,000 and $93,000,
respectively, for fees and other reimbursements to four of FICC's board of
directors members, two of whom represented FICC's lenders.
For the years ended January 1, 1995, December 31, 1995 and December 29, 1996
and the six months ended June 30, 1996 and June 29, 1997, FICC expensed
approximately $200,000, $763,000, $196,000, $96,000 and $100,000, respectively,
for fees paid to the lenders' agent bank. The expense for the year
F-23
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
ended December 31, 1995 included approximately $563,000 related to the filing of
a Form S-1 Registration Statement (see Note 5).
15. COMMITMENTS AND CONTINGENCIES
FICC is a party to various legal proceedings arising in the ordinary course
of business which management believes, after consultation with legal counsel,
will not have a material adverse effect on FICC's financial position or future
operating results.
As of December 29, 1996, FICC had commitments to purchase approximately
$50,587,000 of raw materials, food products and supplies used in the normal
course of business that cover periods of one to twelve months. Most of these
commitments are non-cancellable.
16. FRANCHISE AGREEMENT
On July 14, 1997, FICC entered into an agreement which granted a franchisee
exclusive rights to operate, manage and develop Friendly's full-service
restaurants in the franchising region of Maryland, Delaware, the District of
Columbia and northern Virginia (the "Agreement"). Pursuant to the Agreement, the
franchisee purchased certain assets and rights in 34 existing Friendly's
restaurants in this franchising region, has committed to open an additional 74
restaurants over the next six years and, subject to the fulfillment of certain
conditions, has further agreed to open 26 additional restaurants, for a total of
100 new restaurants in this franchising region over the next ten years. Proceeds
from the sale were approximately $8,238,000 of which $3,310,000 was recorded as
income in July 1997 and $1,430,000 million relates to development rights and
fees which will be amortized into income over the initial ten-year term of the
Agreement. As part of the Agreement, the franchisee will also manage 14 other
Friendly's restaurants located in the same area with an option to acquire these
restaurants in the future. The franchisee is required by the terms of the
Agreement to purchase from FICC all of the frozen dessert products it sells in
the franchised restaurants.
17. PROPOSED INITIAL PUBLIC OFFERING AND PRO FORMA INFORMATION (UNAUDITED)
The Company has filed Registration Statements with the Securities and
Exchange Commission related to an initial public offering of 5,000,000 shares of
the Company's Common Stock (the "Common Stock Offering") and $200 million of
Senior Notes due 2007 (the "Senior Note Offering") and will, contingent upon
consummation of the offerings, enter into a new credit facility consisting of a
$80 million term loan facility, a $45 million revolving credit facility and a
$15 million letter of credit facility (the "New Credit Facility").
The Company will amend its articles of organization in connection with the
Common Stock Offering to give effect to a 923.6442-for-1 split of Class A and
Class B Common Stock and increase the number of authorized shares. The
accompanying consolidated financial statements have been restated to reflect the
anticipated share split.
The accompanying pro forma balance sheet as of June 29, 1997 reflects (i)
proceeds from the Common Stock Offering of $100 million, net of expenses of
$8,427,000, (ii) proceeds from the Senior Note Offering and New Credit Facility
of $280 million, net of expenses of $10,823,000, (iii) use of $1,339,000 of cash
in connection with the offerings, (iv) use of $9 million of proceeds from the
offerings to repay amounts outstanding on capital lease obligations, of which
$3,755,000 relates to current portion of capital
F-24
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. PROPOSED INITIAL PUBLIC OFFERING AND PRO FORMA INFORMATION (UNAUDITED)
(CONTINUED)
lease obligations, (v) payment of $9,983,000 of interest on July 1, 1997 due
under the Old Credit Facility, (vi) application of the $8,238,000 received from
a franchisor (see Note 16) to the amount outstanding on the Old Credit Facility,
(vii) issuance of a $11,889,000 letter of credit to RIC releasing $11,889,000 of
previously restricted cash and investments and application of $10 million of the
released cash and investments to the amount outstanding on the Old Credit
Facility, (viii) application of proceeds from the offerings to eliminate the
remaining balance outstanding on the Old Credit Facility of $353,089,000, (ix)
the benefit of $3,310,000 of income associated with the franchise agreement,
before income taxes of $1,357,000, related to the disposition of certain assets
with a carrying value of $3,498,000, (x) deferred revenue of $1,430,000 related
to the franchise agreement, (xi) the write-off of $771,000 of deferred financing
costs related to the Old Credit Facility, before a $316,000 tax benefit, (xii)
the benefit from the deferred interest of $2,842,000 no longer payable under the
Old Credit Facility, before a $1,165,000 tax provision and (xiii) stock
compensation expense of $9,782,000, before a tax benefit of $4,011,000, as
described below.
In connection with the offerings, the 27,113 shares in the MSP not
previously allocated will be allocated and immediately vested and the 61,238
shares previously issued but not vested will become vested (see Note 13).
Additionally, 775,742 shares of Class A Common Stock will be returned to the
Company from certain shareholders. Of such shares, 100,742 shares will be issued
to the Company's Chief Executive Officer and vest immediately, 375,000 shares
will be issued under a restricted stock option plan (the "Restricted Stock
Plan") to be adopted by the Company in connection with the offerings and 300,000
shares will be issued to certain employees. The shares issued under the
Restricted Stock Plan will vest over 8 years, with earlier vesting permitted in
the event the Company achieves certain performance measurements and the shares
issued to certain employees will vest immediately. The accompanying pro forma
balance sheet reflects the effect of a compensation charge of $9,782,000 which
represents the sum of (i) 27,113 vested shares to be issued under the MSP, (ii)
61,238 shares previously issued under the MSP which will vest in connection with
the offerings, (iii) 100,742 vested shares to be issued to the Company's Chief
Executive Officer in connection with the offerings and (iv) 300,000 vested
shares to be issued to certain employees, times the estimated initial public
offering price of $20. In connection with the offerings, the Company also plans
to adopt a stock option plan.
Pro forma net loss per share amounts assume the issuance of 5,000,000
additional shares of Common Stock in connection with the Common Stock Offering.
In addition, pursuant to the requirements of the Securities and Exchange
Commission, common stock to be issued at prices below the anticipated public
offering price during the twelve months immediately preceding the initial public
offering are to be included in the calculation of weighted average number of
common shares outstanding. Therefore, the 27,113 incremental shares issued to
management in connection with the offerings have been included in the pro forma
shares used in computing net loss per share. Historical net loss per share is
not presented in the accompanying consolidated financial statements, as such
amounts are not meaningful.
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
FICC's obligation related to the $200,000,000 of Senior Notes (see Note 17)
are guaranteed by one of FICC's subsidiaries. The following supplemental
financial information sets forth, on a condensed consolidating basis, statements
of operations, balance sheets and statements of cash flows for Friendly Ice
Cream Corporation ("the Parent Company"), Friendly's Restaurants Franchise, Inc.
("the Guarantor Subsidiary")
F-25
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
and Friendly's International, Inc. (FII), Friendly Holding (UK) Limited,
Friendly Ice Cream (UK) Limited and Restaurant Insurance Corporation
(collectively "the Non-guarantor Subsidiaries"). Prior to the consummation of
the offerings (see Note 17), the investment in joint venture will be transferred
to FII, therefore, the equity in net loss of joint venture and investment in
joint venture are included in Non-guarantor Subsidiaries in the accompanying
consolidating financial statements. Stockholders' equity (deficit), total assets
and net income (loss) of the Non-guarantor Subsidiaries are insignificant to
consolidated amounts for prior periods. Accordingly, supplemental condensed
consolidating financial information is not presented for prior periods. Separate
complete financial statements of the respective Guarantor Subsidiary as of
December 29, 1996 and June 29, 1997 and for the year and six months then ended
would not provide additional information which would be useful in assessing the
financial condition of the Guarantor Subsidiary and are accordingly omitted.
Investments in subsidiaries are accounted for by the Parent Company on the
equity method for purposes of the supplemental consolidating presentation.
Earnings of the subsidiaries are, therefore, reflected in the Parent Company's
investment accounts and earnings. The principal elimination entries eliminate
the Parent Company's investments in subsidiaries and intercompany balances and
transactions.
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 29, 1996
(In thousands)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------- ------------
Revenues.................................... $ 650,024 $ 145 $ 638 $ -- $ 650,807
Costs and expenses:
Cost of sales............................. 191,578 51 327 -- 191,956
Labor and benefits........................ 209,145 115 -- -- 209,260
Operating expenses and write-down of
property and equipment.................. 143,046 -- 344 -- 143,390
General and administrative expenses....... 41,061 106 1,554 -- 42,721
Depreciation and amortization............. 32,953 6 20 -- 32,979
Interest expense.......................... 44,141 -- -- -- 44,141
---------- ----------- ------------- ------ ------------
Loss before benefit from (provision for)
income taxes and equity in net loss of
consolidated subsidiaries................. (11,900) (133) (1,607) -- (13,640)
Benefit from (provision for) income taxes... 5,594 (2) 276 -- 5,868
---------- ----------- ------------- ------ ------------
Loss before equity in net loss of
consolidated subsidiaries................. (6,306) (135) (1,331) -- (7,772)
Equity in net loss of consolidated
subsidiaries.............................. (1,466) -- -- 1,466 --
---------- ----------- ------------- ------ ------------
Net loss.................................... $ (7,772) $ (135) $ (1,331) $ 1,466 $ (7,772)
---------- ----------- ------------- ------ ------------
---------- ----------- ------------- ------ ------------
F-26
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 29, 1996
(In thousands)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------- --------------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents.................. $ 17,754 $ 268 $ 604 $ -- $ 18,626
Trade accounts receivable.................. 4,765 -- 227 -- 4,992
Inventories................................ 14,796 24 325 -- 15,145
Deferred income taxes...................... 12,366 9 -- -- 12,375
Prepaid expenses and other current
assets................................... 4,805 -- 517 (3,664) 1,658
---------- ----- ------ ------------ ------------
Total current assets......................... 54,486 301 1,673 (3,664) 52,796
Investment in joint venture.................. -- -- 4,500 -- 4,500
Property and equipment, net.................. 285,460 522 179 -- 286,161
Intangibles and deferred costs, net.......... 16,019 -- -- -- 16,019
Investments in subsidiaries.................. 3,531 -- -- (3,531) --
Other assets................................. 650 -- -- -- 650
---------- ----- ------ ------------ ------------
Total assets................................. $ 360,146 $ 823 $ 6,352 $ (7,195) $ 360,126
---------- ----- ------ ------------ ------------
---------- ----- ------ ------------ ------------
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Current maturities of long-term
obligations.............................. $ 7,642 $ -- $ -- $ -- $ 7,642
Accounts payable........................... 20,773 -- -- -- 20,773
Accrued expenses........................... 44,780 141 3,824 (3,664) 45,081
---------- ----- ------ ------------ ------------
Total current liabilities.................... 73,195 141 3,824 (3,664) 73,496
Deferred income taxes........................ 48,793 11 (332) -- 48,472
Long-term obligations, less current
maturities................................. 385,977 -- -- -- 385,977
Other liabilities............................ 25,337 -- -- -- 25,337
Stockholders' equity (deficit)............... (173,156) 671 2,860 (3,531) (173,156)
---------- ----- ------ ------------ ------------
Total liabilities and stockholders' equity
(deficit).................................. $ 360,146 $ 823 $ 6,352 $ (7,195) $ 360,126
---------- ----- ------ ------------ ------------
---------- ----- ------ ------------ ------------
F-27
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 29, 1996
(In thousands)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- --------------- ------------ ------------
Net cash provided by (used in) operating
activities.................................. $ 25,519 $ (38) $ 682 $ -- $ 26,163
---------- ----------- ------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment......... (24,043) -- (174) -- (24,217)
Proceeds from sales of property and
equipment................................. 8,409 -- -- -- 8,409
Investments in joint venture................ (4,500) -- -- -- (4,500)
Investments in consolidated subsidiaries.... (306) -- -- 306 --
---------- ----------- ------ ------------ ------------
Net cash used in investing activities......... (20,440) -- (174) 306 (20,308)
---------- ----------- ------ ------------ ------------
Cash flows from financing activities:
Contribution of capital..................... -- 306 -- (306) --
Proceeds from exercise of stock purchase
warrants.................................. 22 -- -- -- 22
Proceeds from borrowings.................... 48,196 -- -- -- 48,196
Repayments of long-term obligations......... (59,215) -- -- -- (59,215)
---------- ----------- ------ ------------ ------------
Net cash (used in) provided by financing
activities.................................. (10,997) 306 -- (306) (10,997)
---------- ----------- ------ ------------ ------------
Effect of exchange rate changes on cash....... 5 -- 73 -- 78
---------- ----------- ------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents................................. (5,913) 268 581 -- (5,064)
Cash and cash equivalents, beginning of
period...................................... 23,667 -- 23 -- 23,690
---------- ----------- ------ ------------ ------------
Cash and cash equivalents, end of period...... $ 17,754 $ 268 $ 604 $ -- $ 18,626
---------- ----------- ------ ------------ ------------
---------- ----------- ------ ------------ ------------
Supplemental disclosures:
Interest paid............................... $ 36,000 $ -- $ -- $ -- $ 36,000
Capital lease obligations incurred.......... 5,923 28 -- -- 5,951
Capital lease obligations terminated........ 128 -- -- -- 128
Issuance of common stock to lenders......... 50 -- -- -- 50
F-28
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 29, 1997
(In thousands)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------ ------------
Revenues..................................... $ 322,530 $ -- $ 298 $ -- $ 322,828
Costs and expenses:
Cost of sales.............................. 91,971 -- 215 -- 92,186
Labor and benefits......................... 104,898 -- -- -- 104,898
Operating expenses and write-down of
property and equipment................... 71,863 -- (232) -- 71,631
General and administrative expenses........ 21,961 142 492 -- 22,595
Depreciation and amortization.............. 16,401 -- -- -- 16,401
Interest expense (income).................. 22,268 -- (30) -- 22,238
Equity in net loss of joint venture........ -- -- 743 -- 743
---------- ----- ------------- ------------ ------------
(Loss) income before benefit from (provision
for) income taxes, cumulative effect of
change in accounting principle and equity
in net loss of consolidated subsidiaries... (6,832) (142) (890) -- (7,864)
Benefit from (provision for) income taxes.... 3,343 -- (119) -- 3,224
---------- ----- ------------- ------------ ------------
(Loss) income before cumulative
effect of change in accounting
principle and equity in net loss of
consolidated subsidiaries.................. (3,489) (142) (1,009) -- (4,640)
Cumulative effect of change in accounting
principle.................................. 2,236 -- -- -- 2,236
---------- ----- ------------- ------------ ------------
Loss before equity in net loss of
consolidated subsidiaries.................. (1,253) (142) (1,009) -- (2,404)
Equity in net loss of consolidated
subsidiaries............................... (1,151) -- -- 1,151 --
---------- ----- ------------- ------------ ------------
Net loss..................................... $ (2,404) $ (142) $ (1,009) $ 1,151 $ (2,404)
---------- ----- ------------- ------------ ------------
---------- ----- ------------- ------------ ------------
F-29
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 29, 1997
(In thousands)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents................. $ 15,550 $ 202 $ 1,147 $ -- $ 16,899
Restricted cash and investments........... -- -- 4,000 -- 4,000
Trade accounts receivable................. 6,659 -- 397 -- 7,056
Inventories............................... 16,996 -- 494 -- 17,490
Deferred income taxes..................... 12,375 -- 6 -- 12,381
Prepaid expenses and other current
assets.................................. 10,053 -- 1,311 (4,056) 7,308
----------- ----------- ------------- ------------ ------------
Total current assets........................ 61,633 202 7,355 (4,056) 65,134
Restricted cash and investments............. -- -- 7,889 -- 7,889
Investment in joint venture................. -- -- 3,757 -- 3,757
Property and equipment, net................. 279,043 -- 222 -- 279,265
Intangibles and deferred costs, net......... 15,375 -- -- -- 15,375
Investments in subsidiaries................. 4,275 -- -- (4,275) --
Other assets................................ 475 -- 2,147 (900) 1,722
----------- ----------- ------------- ------------ ------------
Total assets................................ $ 360,801 $ 202 $ 21,370 $ (9,231) $ 373,142
----------- ----------- ------------- ------------ ------------
----------- ----------- ------------- ------------ ------------
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Current maturities of long-term
obligations............................. $ 8,356 $ -- $ -- $ (400) $ 7,956
Accounts payable.......................... 26,272 -- -- -- 26,272
Accrued expenses.......................... 45,531 2 8,464 (3,656) 50,341
----------- ----------- ------------- ------------ ------------
Total current liabilities................... 80,159 2 8,464 (4,056) 84,569
Deferred income taxes....................... 47,015 -- (213) -- 46,802
Long-term obligations, less current
maturities................................ 386,522 -- -- (900) 385,622
Other liabilities........................... 22,639 -- 9,044 -- 31,683
Stockholders' equity (deficit).............. (175,534) 200 4,075 (4,275) (175,534)
----------- ----------- ------------- ------------ ------------
Total liabilities and stockholders' equity
(deficit)................................. $ 360,801 $ 202 $ 21,370 $ (9,231) $ 373,142
----------- ----------- ------------- ------------ ------------
----------- ----------- ------------- ------------ ------------
F-30
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 29, 1997
(In thousands)
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------- ------------
Net cash provided by (used in) operating
activities.................................. $ 10,283 $ (208) $ (450) $ -- $ 9,625
---------- ----------- ------------- ----- ------------
Cash flows from investing activities:
Purchases of property and equipment......... (8,767) -- (43) -- (8,810)
Proceeds from sales of property and
equipment................................. 919 -- -- -- 919
Proceeds from sales and maturities of
investment securities..................... -- -- 73 -- 73
Cash (paid) received in acquisition of
Restaurant Insurance Corporation.......... (1,300) -- 2,265 -- 965
Advances to joint venture................... (1,400) -- -- -- (1,400)
Investments in consolidated subsidiaries.... (142) -- -- 142 --
---------- ----------- ------------- ----- ------------
Net cash used in investing activities......... (10,690) -- 2,295 142 (8,253)
---------- ----------- ------------- ----- ------------
Cash flows from financing activities:
Contribution of capital..................... -- 142 -- (142) --
Proceeds from borrowings (advances to
parent)................................... 30,491 -- (1,300) -- 29,191
Repayments of long-term obligations......... (32,288) -- -- -- (32,288)
---------- ----------- ------------- ----- ------------
Net cash used in financing activities......... (1,797) 142 (1,300) (142) (3,097)
---------- ----------- ------------- ----- ------------
Effect of exchange rate changes on cash....... -- -- (2) -- (2)
---------- ----------- ------------- ----- ------------
Net (decrease) increase in cash and cash
equivalents................................. (2,204) (66) 543 -- (1,727)
Cash and cash equivalents, beginning of
period...................................... 17,754 268 604 -- 18,626
---------- ----------- ------------- ----- ------------
Cash and cash equivalents, end of period...... $ 15,550 $ 202 $ 1,147 $ -- $ 16,899
---------- ----------- ------------- ----- ------------
---------- ----------- ------------- ----- ------------
Supplemental disclosures:
Interest paid............................... $ 20,063 $ -- $ -- $ -- $ 20,063
Capital lease obligations incurred.......... 2,057 -- -- -- 2,057
Issuance of note payable in connection with
the acquisition of Restaurant Insurance
Corporation............................... 1,000 -- -- -- 1,000
F-31
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THIS OFFERING AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN
SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
---------------------
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary............................. 3
Risk Factors................................... 13
Use of Proceeds................................ 18
Capitalization................................. 19
Selected Consolidated Financial Information.... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 22
Business....................................... 31
Management..................................... 44
Ownership of Common Stock...................... 51
Certain Transactions........................... 52
Description of New Credit Facility............. 54
Description of Senior Notes.................... 55
Underwriting................................... 83
Legal Matters.................................. 84
Experts........................................ 84
Available Information.......................... 84
Index to Consolidated Financial Statements..... F-1
---------------------
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THE OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE SENIOR NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-------------------
PROSPECTUS
-------------------
$200,000,000
FRIENDLY ICE CREAM
CORPORATION
% SENIOR NOTES DUE 2007
[LOGO]
SOCIETE GENERALE
SECURITIES CORPORATION
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MONTGOMERY SECURITIES
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of the expenses payable by the Company in
connection with issuance and distribution of the securities being registered
hereby. All amounts shown are estimates, except the SEC registration fee and the
NASD filing fee.
SEC registration fee............................................ $ 60,607
NASD filing fee................................................. 20,500
Printing and engraving.......................................... 110,500
Legal fees and expenses......................................... 552,600
Accounting fees and expenses.................................... 110,500
Trustee fees and expenses....................................... 15,000
Blue sky fees and expenses...................................... 7,500
Miscellaneous................................................... 520,793
---------
Total....................................................... $1,398,000
---------
---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 67 of Chapter 156B of the Massachusetts General Laws provides that a
corporation may indemnify its directors and officers to the extent specified in
or authorized by (i) the articles of organization, (ii) a by-law adopted by the
stockholders, or (iii) a vote adopted by the holders of a majority of the shares
of stock entitled to vote on the election of directors. In all instances, the
extent to which a corporation provides indemnification to its directors and
officers under Section 67 is optional. In its Restated Articles of Organization,
the Registrant has elected to commit to provide indemnification to its directors
and officers in specified circumstances. Generally, the Restated Articles of
Organization provide that the Registrant shall indemnify directors, officers,
employee or agents of the Registrant against liabilities and expenses arising
out of legal proceedings brought against them by reason of their status as
directors, officers, employees or agents of the Registrant or by reason of their
agreeing to serve, at the request of the Registrant, as a director, officer,
employee or agent of another organization. Under this provision, a director,
officer, employee or agent of the Registrant shall be indemnified by the
Registrant for all costs and expenses (including attorneys' fees), judgments,
liabilities and amounts paid in settlement of such proceedings, if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Registrant, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was unlawful.
Any indemnification shall be made by the Registrant only upon a determination
that indemnification is proper in the specific case as made (i) by the Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, (ii) if such quorum is not
obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by the
stockholders. The Board of Directors may authorize advancing litigation expenses
to a director, officer, employee or agent at his request upon receipt of an
undertaking by any such director, officer, employee or agent to repay such
expenses if it is ultimately determined that he is not entitled to
indemnification for such expenses.
Article VI of the Registrant's Restated Articles of Organization eliminates
the personal liability of the Registrant's directors to the Registrant or its
stockholders for monetary damages for breach of a director's fiduciary duty,
except that such Article VI does not eliminate or limit any liability of a
director (i) for any breach of a director's duty of loyalty to the Registrant or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 61 or
II-1
62 of Chapter 156B of the Massachusetts General Laws, or (iv) with respect to
any transaction from which the directors derived an improper personal benefit.
Section 10 of the Underwriting Agreement provides that the Underwriters are
obligated, under certain circumstances, to indemnify the Company, directors,
officers and controlling persons of the Company against certain liabilities,
including liabilities under the Securities Act. Reference is made to the form of
Underwriting Agreement filed as Exhibit 1.1 hereto.
The Company maintains directors and officers liability insurance for the
benefit of its directors and certain of its officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since the beginning of 1994, the Company sold the following securities
without registration under the Securities Act of 1933, as amended (the "Act").
No underwriter was involved in such sales and no underwriting commissions or
discounts were paid with respect to any of such sales.
1. In connection with a restructuring of the Company's old credit agreement
in March 1996, the Company issued 1,187,503 shares of its Class B Common Stock
to the Bank of Boston, as agent for the other lenders under such credit
agreement, in reliance upon the exemption from the registration requirements of
the Securities Act contained in Section 4(2) of the Securities Act.
2. In April 1996, two officers of the Company exercised warrants held by
them for an aggregate of 71,527 shares of the Company's Class A Common Shares
for an aggregate consideration of approximately $21,000. Such shares were issued
in reliance upon the exemption from the registration requirements of the
Securities Act contained in Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
*1.1 Form of Underwriting Agreement
*3.1 Restated Articles of Organization of Friendly Ice Cream Corporation (the
"Company").
*3.2 Amended and Restated By-laws of the Company.
*4.1 Form of Senior Note Indenture between Friendly Ice Cream Corporation,
Friendly's Restaurants Franchise, Inc. and The Bank of New York, as
Trustee.
*4.2 Stockholder and Registration Rights Agreement of the Company, as amended.
*5.1 Opinion and consent of Mayer, Brown & Platt, counsel for the Company
regarding the validity of the offered securities.
*10.1 Form of Credit Agreement to be entered into among the Company, Societe
Generale, New York Branch, and certain other banks and financial
institutions.
*10.2 The Company's Stock Option Plan.
*10.3 The Company's Restricted Stock Plan.
12.1 Schedule of Computation of Ratios of Earnings to Fixed Charges.
*21.1 Subsidiaries of the Company.
*23.1 Consent of Mayer, Brown & Platt (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
24.1 Power of attorney (included on Registration Statement signature page).
*25.1 Form T-1 Statement of Eligibility of The Bank of New York, as Trustee for the
Senior Notes.
------------------------------
* To be filed by amendment.
II-2
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable, or not required,
or because the required information is included in the financial statements or
notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrants hereby undertake that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrants pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) At the closing specified in the underwriting agreement, it will
provide to the underwriter certificates in such denominations and registered
in such names as required by the underwriter to permit prompt delivery to
each purchaser.
(4) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the Registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrants of expenses incurred
or paid by a director, officer or controlling person of the Registrants in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement, or amendment thereto, to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Wilbraham, State of Massachusetts, on the 28th day of August, 1997.
FRIENDLY ICE CREAM CORPORATION
By: /s/ PAUL J. MCDONALD
-----------------------------------------
Name: Paul J. McDonald
Title: Senior Executive Vice President,
Chief Administrative Officer and Assistant
Secretary
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Paul J. McDonald, George G. Roller and Allan Okscin, and each of them, the true
and lawful attorneys-in-fact and agents of the undersigned, with full power of
substitution and resubstitution, for and in the name, place and stead of the
undersigned, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, including
any filings pursuant to rule 462(b) under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, and hereby
grants to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute, or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement, or amendment thereto, has been signed by the following
persons in the capacities and on the date indicated.
SIGNATURES TITLE (CAPACITY) DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board,
/s/ DONALD N. SMITH Chief Executive Officer
- ------------------------------ and President (Principal August 28, 1997
Donald N. Smith Executive Officer and
Director)
Vice President, Finance,
/s/ GEORGE G. ROLLER Chief Financial Officer
- ------------------------------ and Treasurer August 28, 1997
George G. Roller (Principal Financial and
Accounting Officer)
/s/ CHARLES L. ATWOOD
- ------------------------------ Director August 28, 1997
Charles L. Atwood
II-4
SIGNATURES TITLE (CAPACITY) DATE
- ------------------------------ -------------------------- -------------------
/s/ STEVEN L. EZZES
- ------------------------------ Director August 28, 1997
Steven L. Ezzes
- ------------------------------ Director , 1997
Barry Krantz
- ------------------------------ Director , 1997
Gregory L. Segall
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement, or amendment thereto, to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Wilbraham, State of Massachusetts, on the 28th day of August, 1997.
FRIENDLY'S RESTAURANTS FRANCHISE, INC.
By: /s/ PAUL J. MCDONALD
-----------------------------------------
Name: Paul J. McDonald
Title: Vice President, Finance
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Paul J. McDonald, George G. Roller and Allan Okscin, and each of them, the true
and lawful attorneys-in-fact and agents of the undersigned, with full power of
substitution and resubstitution, for and in the name, place and stead of the
undersigned, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, including
any filings pursuant to rule 462(b) under the Securities Act of 1933, as
amended, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, and hereby
grants to such attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as the undersigned might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute, or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement, or amendment thereto, has been signed by the following
persons in the capacities and on the date indicated.
SIGNATURES TITLE (CAPACITY) DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board and
/s/ DONALD N. SMITH Chief Executive Officer
- ------------------------------ (Principal Executive August 28, 1997
Donald N. Smith Officer and Director)
Vice President, Chief
/s/ GEORGE G. ROLLER Financial Officer and
- ------------------------------ Treasurer (Principal August 28, 1997
George G. Roller Financial and Accounting
Officer)
/s/ JOSEPH A. O'SHAUGHNESSY
- ------------------------------ Director August 28, 1997
Joseph A. O'Shaughnessy
II-6