<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 20, 1997
REGISTRATION NO. 333-34633
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
FRIENDLY ICE CREAM CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MASSACHUSETTS 5812 04-2053130
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification
No.)
</TABLE>
1855 BOSTON ROAD
WILBRAHAM, MASSACHUSETTS 01095
(413) 543-2400
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
AARON B. PARKER
FRIENDLY ICE CREAM CORPORATION
1855 BOSTON ROAD
WILBRAHAM, MASSACHUSETTS 01095
(413) 543-2400
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
MICHAEL A. CAMPBELL JOHN B. TEHAN
MAYER, BROWN & PLATT SIMPSON THACHER & BARTLETT
190 SOUTH LASALLE STREET 425 LEXINGTON AVENUE
CHICAGO, ILLINOIS 60603-3441 NEW YORK, NEW YORK 10017
(312) 782-0600 (212) 455-2000
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
--------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462 (c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED (1) UNIT(2) OFFERING PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, 5,750,000 shares $ 21.00 $ 120,750,000 $ 36,600 (3)
$.01 par value (1)................
</TABLE>
(1) Includes 750,000 shares that may be purchased by the Underwriters to cover
over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 20, 1997
5,000,000 SHARES
[LOGO]
COMMON STOCK
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY (THE "COMMON STOCK
OFFERING") ARE BEING SOLD BY FRIENDLY ICE CREAM CORPORATION (THE "COMPANY").
CONCURRENTLY WITH THE COMMON STOCK OFFERING, THE COMPANY IS OFFERING TO THE
PUBLIC $175 MILLION AGGREGATE PRINCIPAL AMOUNT OF SENIOR NOTES DUE 2007 (THE
"SENIOR NOTE OFFERING" AND, TOGETHER WITH THE COMMON STOCK OFFERING, THE
"OFFERINGS") AND, CONTINGENT UPON THE OFFERINGS, WILL ENTER INTO THE NEW CREDIT
FACILITY (AS DEFINED HEREIN). CONSUMMATION OF EACH OF THE COMMON STOCK OFFERING,
THE SENIOR NOTE OFFERING AND THE NEW CREDIT FACILITY IS CONTINGENT UPON
CONSUMMATION OF THE OTHER. PRIOR TO THE COMMON STOCK OFFERING, THERE HAS BEEN NO
PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED
THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $19.00 AND $21.00 PER
SHARE. SEE "UNDERWRITING" FOR A DISCUSSION OF FACTORS TO BE CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE COMMON STOCK HAS BEEN
APPROVED FOR QUOTATION, SUBJECT TO NOTICE OF ISSUANCE, ON THE NASDAQ NATIONAL
MARKET UNDER THE SYMBOL "FRND."
AT THE COMPANY'S REQUEST, UP TO 250,000 SHARES OF COMMON STOCK OFFERED
HEREBY HAVE BEEN RESERVED FOR SALE TO CERTAIN INDIVIDUALS, INCLUDING DIRECTORS
AND EMPLOYEES OF THE COMPANY AND THEIR FAMILIES.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (A) COMPANY (B)
<S> <C> <C> <C>
PER SHARE............................. $ $ $
TOTAL (C)............................. $ $ $
</TABLE>
(A) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(B) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $427,000.
(C) THE COMPANY, CERTAIN LENDERS UNDER THE COMPANY'S OLD CREDIT FACILITY (AS
DEFINED HEREIN) THAT ARE STOCKHOLDERS AND CERTAIN OTHER STOCKHOLDERS OF THE
COMPANY HAVE GRANTED TO THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO
AN ADDITIONAL 750,000 SHARES OF COMMON STOCK, SOLELY TO COVER
OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL,
THE PRICE TO PUBLIC WILL TOTAL $ , THE UNDERWRITING DISCOUNT WILL
TOTAL $ , THE PROCEEDS TO COMPANY WILL TOTAL $ AND THE
PROCEEDS TO SUCH LENDERS AND OTHER STOCKHOLDERS WILL TOTAL $ AND
$ , RESPECTIVELY. SEE "OWNERSHIP OF COMMON STOCK" AND
"UNDERWRITING."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE UNDERWRITERS NAMED HEREIN
WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THE UNDERWRITERS AND SUBJECT TO
THEIR RIGHT TO REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT
DELIVERY OF CERTIFICATES REPRESENTING THE SHARES WILL BE MADE AGAINST PAYMENT
THEREFOR AT THE OFFICE OF NATIONSBANC MONTGOMERY SECURITIES, INC. ON OR ABOUT
, 1997.
---------------------
NATIONSBANC MONTGOMERY SECURITIES, INC.
PIPER JAFFRAY INC.
TUCKER ANTHONY INCORPORATED
, 1997
<PAGE>
[Inside Front Cover: the Company's "Friendly" logo, the words "Leave room for
the ice cream" and color pictures of three of the Company's products (a large
hamburger, a banana split and a Frozen dessert drink.)]
[Gatefold: the Company's "Friendly" logo and the words "Expanded Building,"
"Hand-Dipped Frozen Dessert Station," Revitalized Interior Decor," "Retail
Dessert Center," "Hearty Breakfasts," "Delicious Lunches," "Entree Salads,"
"Home Style Dinners," "Premium Half Gallons, "Great Temptations-TM- Low Fat Half
Gallons" and "Candy Shoppe Sundae Cup." Color picture of a Friendly's
restaurant, an ice cream dipping station, the interior of a revitalized
Friendly's restaurant, a grocery store ice cream freezer decorated with the
Company's logo, a truck with the Friendly's logo on its side, various frozen
dessert products (three half gallon packages, a sundae cup and two types of
sundaes), a "Kids meal" (including a sundae, drink, hamburger and fries) and
various other food presentations (chili, omelette, eggs, sandwich wraps, salad,
steak, shrimp and vegetables.)]
CERTAIN PERSONS PARTICIPATING IN THE COMMON STOCK OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE
IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNLESS THE CONTEXT INDICATES OTHERWISE, (I) REFERENCES TO "FRIENDLY'S" OR THE
"COMPANY" REFER TO FRIENDLY ICE CREAM CORPORATION, ITS PREDECESSORS AND ITS
CONSOLIDATED SUBSIDIARIES, (II) 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, (III)
THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION
IN THE COMMON STOCK OFFERING AND (IV) 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 662 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 September 28, 1997, Friendly's generated $667.0 million in total
revenues and $74.9 million in EBITDA (as defined herein) and incurred $44.0
million of interest expense. During the same period, management estimates that
over $230 million of total revenues were from the sale of approximately 21
million gallons of frozen desserts.
Friendly's restaurants target families with children and adults who desire a
reasonably-priced meal in a full-service setting. The Company's menu offers a
broad selection of freshly-prepared foods which appeal to customers throughout
all day-parts. Breakfast items include specialty omelettes and breakfast
combinations featuring eggs, pancakes and bacon or sausage. Lunch and dinner
items include a new line of wrap sandwiches, entree salads, soups, super-melts,
specialty burgers and new stir-fry, chicken, pot pie, tenderloin steak and
seafood entrees. Friendly's is also recognized for its extensive line of ice
cream shoppe treats, including proprietary products such as the
Fribble-Registered Trademark-, Candy Shoppe-Registered Trademark- Sundaes and
the Wattamelon Roll-Registered Trademark-.
The Company believes that one of its key strengths is the strong consumer
awareness of the Friendly's brand name, particularly as it relates to the
Company's signature frozen desserts. This strength and the Company's
vertically-integrated operations provide several competitive advantages,
including the ability to (i) utilize its broad, high-quality menu to attract
customer traffic across multiple day-parts, particularly the afternoon and
evening snack periods, (ii) generate incremental revenues through strong
restaurant and retail market penetration, (iii) promote menu enhancements and
extensions in combination with its unique frozen desserts and (iv) control
quality and maintain operational flexibility through all stages of the
production process.
Friendly's, founded in 1935, was publicly held from 1968 until January 1979,
at which time it was acquired by Hershey Foods Corporation ("Hershey"). While
owned by Hershey, the Company increased the total number of restaurants from 601
to 849 yet devoted insufficient resources to product development and capital
improvements. In 1988, The Restaurant Company ("TRC"), an investor group led by
Donald Smith, the Company's current Chairman, Chief Executive Officer and
President, acquired Friendly's from Hershey (the "TRC Acquisition"). The high
leverage associated with the TRC Acquisition and the Old Credit Facility (as
defined herein) severely impacted the liquidity and profitability of the Company
and, therefore, limited the scope and implementation of certain of the Company's
business and growth strategies. The Company has reported net losses and had
earnings that were insufficient to cover fixed
3
<PAGE>
charges for each fiscal year since the TRC Acquisition except for the nine
months ended September 28, 1997. As a result of subsequent restructurings, and
upon completion of the Recapitalization and the Related Transactions (both as
defined herein), approximately 16.8% and 9.8% of the Common Stock will be owned
by the Company's employees and lenders under the Old Credit Facility,
respectively. See "Risk Factors," "Selected Consolidated Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Ownership of Common Stock."
Despite the Company's capital constraints, management 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 South Korea and the United
Kingdom 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 152
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 7.5% from $557.3 million in 1989 to $599.3 million in the
twelve-months ended September 28, 1997, while average revenue per restaurant has
increased 29.8% from $665,000 to $863,000 during the same period. Retail,
institutional and other revenues and franchise revenues have also increased from
$1.4 million in 1989 to $67.7 million in the twelve months ended September 28,
1997. In addition, EBITDA has increased 58.0% from $47.4 million in 1989 to
$74.9 million in the twelve-month period ended September 28, 1997, while
operating income has increased from $4.1 million to $42.0 million over the same
period.
Friendly's intends to utilize the increased liquidity and operating and
financial flexibility resulting from consummation of the Recapitalization, of
which the Offerings are a part, in order to continue to grow the Company's
revenues and earnings by implementing the following key business strategies: (i)
continuously upgrade the menu and introduce new products, (ii) revitalize and
re-image existing Friendly's restaurants, (iii) construct new restaurants, (iv)
enhance the Friendly's dining experience, (v) expand the restaurant base through
high-quality franchisees, (vi) increase market share through additional retail
accounts and restaurant locations, (vii) introduce modified formats of the
Friendly's concept into non-traditional locations and (viii) extend the
Friendly's brand into international markets.
The principal executive offices of the Company are located at 1855 Boston
Road, Wilbraham, Massachusetts 01095, and the telephone number is (413)
543-2400.
4
<PAGE>
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 receives (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."
5
<PAGE>
THE RECAPITALIZATION
The Offerings are part of a series of related transactions to refinance all
of the indebtedness under the Company's existing credit facilities (the "Old
Credit Facility") and thereby lengthen the average maturities of the Company's
outstanding indebtedness, reduce interest expense and increase liquidity and
operating and financial flexibility. Concurrent with, and contingent upon, the
consummation of the Offerings, the Company expects to enter into a new senior
secured credit facility consisting of (i) a $105 million term loan facility (the
"Term Loan Facility"), (ii) a $55 million revolving credit facility (the
"Revolving Credit Facility") and (iii) a $15 million letter of credit facility
(the "Letter of Credit Facility" and, together with the Term Loan Facility and
the Revolving Credit Facility, the "New Credit Facility"). The Offerings, the
New Credit Facility and the application of the estimated net proceeds therefrom
are hereinafter referred to as the "Recapitalization." In addition, subsequent
to September 28, 1997, the Company (i) has paid $9.6 million of interest on the
Old Credit Facility, (ii) will record $1.9 million of net income related to
deferred interest no longer payable under the Old Credit Facility, (iii) will
record $5.8 million of non-cash stock compensation expense, net of taxes,
arising out of the issuance of certain shares of Common Stock to management and
the vesting of certain shares of restricted stock previously issued to
management, (iv) will write-off $319,000 of deferred financing and debt
restructuring costs, net of taxes, related to the Old Credit Facility and (v)
will apply $10.0 million of previously restricted cash to be received from
Restaurant Insurance Corporation, its insurance subsidiary ("RIC"), in exchange
for a letter of credit, toward amounts outstanding under the Old Credit Facility
(collectively, the "Related Transactions").
Upon completion of the Recapitalization, Friendly's total available
borrowings under the New Credit Facility are expected to be $55.0 million,
excluding $2.1 million of letter of credit availability (compared to $27.0
million as of September 28, 1997 under the Old Credit Facility, excluding $2.1
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 $15.3
million for 1996 and $11.4 million for the nine-month period ended September 28,
1997. See "Selected Consolidated Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of New Credit
Facility."
The following table sets forth the estimated sources and uses of funds in
connection with the Recapitalization after giving effect to the Related
Transactions:
<TABLE>
<CAPTION>
AT CLOSING
---------------------
<S> <C>
(DOLLARS IN
THOUSANDS)
SOURCES OF FUNDS:
Term Loan Facility (a)................................................ $ 105,000
Senior Note Offering (b).............................................. 175,000
Common Stock Offering (c)............................................. 100,000
--------
Total Sources..................................................... $ 380,000
--------
--------
USES OF FUNDS:
Working capital....................................................... $ 4,732
Retirement of Old Credit Facility (d)................................. 348,042
Retirement of capital leases.......................................... 7,976
Estimated fees and expenses (e)....................................... 19,250
--------
Total Uses........................................................ $ 380,000
--------
--------
</TABLE>
- ----------------------------------
(a) Represents borrowing in full under the Term Loan Facility. As part of the
Recapitalization, the Company will have a $55,000 Revolving Credit Facility
which is expected to be undrawn at closing and $2,093 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 ($358,042 as of September 28, 1997) after giving effect
to the application of $10,000 of previously restricted cash and investments
of RIC which is expected to be released to the Company in exchange for a
$12,907 letter of credit, with the $2,907 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."
6
<PAGE>
THE COMMON STOCK OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company... 5,000,000 shares (a)
Common Stock to be outstanding after
the Common Stock Offering............. 7,125,000 shares (a) (b)
Concurrent Senior Note Offering ...... Concurrently with the Common Stock Offering, the
Company is offering to the public $175 million
aggregate principal amount of Senior Notes due 2007.
Consummation of each of the Common Stock Offering
and the Senior Note Offering is contingent upon
consummation of the other. See "Description of
Senior Notes."
Use of proceeds....................... The Company intends to use up to approximately
$356.0 million of 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."
Proposed Nasdaq National Market
symbol................................ FRND
Risk factors.......................... Prospective purchasers of the Common Stock 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 Common Stock. As set
forth more fully in "Risk Factors," the risk factors
associated with such an investment include, among
others, those relating to the Company's (i)
substantial leverage and stockholders' deficit; (ii)
history of losses; (iii) implementation of new
business concepts and strategies; (iv) development
of a franchising program; (v) expansion of its
international operations; (vi) geographic
concentration in the Northeast; and (vii) highly
competitive business environment, as well as those
relating to restrictions imposed under the New
Credit Facility, factors affecting the food service
industry generally and circumstances potentially
impacting the trading markets for, or value of, the
Common Stock offered hereby.
</TABLE>
- ------------------------
(a) Excludes up to an aggregate of 125,158 shares of Common Stock that the
Underwriters have the option to purchase from the Company to cover
over-allotments, if any. See "Underwriting."
(b) Excludes an aggregate of approximately 400,000 shares and 375,000 shares of
Common Stock reserved for issuance under the Stock Option Plan and the
Restricted Stock Plan, respectively. See "Management--Executive
Compensation--Stock Option Plan" and "--Restricted Stock Plan."
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR (A) ----------------------------
------------------------------------------------ SEPTEMBER 29, SEPTEMBER 28,
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF RESTAURANTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant................................. $542,859 $580,161 $589,383 $593,570 $596,675 $ 452,373 $ 455,026
Retail, institutional and other............ 20,346 30,472 41,631 55,579 54,132 39,446 49,173
Franchise.................................. -- -- -- -- -- -- 3,834
-------- -------- -------- -------- -------- ------------- -------------
Total revenues............................... 563,205 610,633 631,014 649,149 650,807 491,819 508,033
-------- -------- -------- -------- -------- ------------- -------------
Non-cash write-downs (b)..................... -- 25,552 -- 7,352 227 -- 607
Depreciation and amortization................ 35,734 35,535 32,069 33,343 32,979 25,127 24,226
Operating income............................. 25,509 8,116 36,870 16,670 30,501 22,848 34,299
Interest expense, net (c).................... 37,630 38,786 45,467 41,904 44,141 33,084 32,972
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) $ (5,794 ) $ 2,363
-------- -------- -------- -------- -------- ------------- -------------
-------- -------- -------- -------- -------- ------------- -------------
OTHER DATA:
EBITDA (e)................................... $ 61,243 $ 69,203 $ 68,939 $ 57,365 $ 63,707 $ 47,975 $ 59,132
Net cash provided by operating activities.... 34,047 42,877 38,381 27,790 26,163 23,637 29,224
Capital expenditures:
Cash....................................... 33,577 37,361 29,507 19,092 24,217 18,547 14,656
Non-cash (f)............................... 3,121 7,129 7,767 3,305 5,951 3,570 2,227
-------- -------- -------- -------- -------- ------------- -------------
Total capital expenditures................. $ 36,698 $ 44,490 $ 37,274 $ 22,397 $ 30,168 $ 22,117 $ 16,883
Ratio of earnings to fixed charges (g)....... -- -- -- -- -- -- 1.0 x
PRO FORMA DATA:
EBITDA (e)(h)................................ $ 64,653 $ 48,685 $ 59,132
Interest expense, net (c)(i)................. 28,804 21,580 21,617
Net income (j)............................... 1,835 1,412 9,062
Net income per share......................... $ 0.26 $ 0.20 $ 1.27
Weighted average shares outstanding (k)...... 7,125 7,125 7,125
Ratio of EBITDA to interest expense, net..... 2.2x 2.3 x 2.7 x
Ratio of earnings to fixed charges (g)....... 1.1x 1.1 x 1.4 x
Ratio of total long-term debt to EBITDA
(e)........................................ 3.8 x(l)
RESTAURANT OPERATING DATA:
Number of restaurants (end of period) (m).... 764 757 750 735 707 710 662
Average revenue per restaurant (n)........... $ 708 $ 750 $ 783 $ 797 $ 828 -- $ 863
Increase in comparable restaurant revenues
(o)........................................ 6.0% 5.4% 3.4% 0.9% 1.8% 0.3% 3.1%
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 28,
1997
--------------
<S> <C>
ACTUAL
--------------
<CAPTION>
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Working capital (deficit)...................................................................................... $ (17,895)
Total assets................................................................................................... 362,914
Total long-term debt and capital lease obligations, excluding current maturities............................... 371,296
Total stockholders' equity (deficit)........................................................................... $ (170,684)
<CAPTION>
<S> <C>
AS ADJUSTED
--------------
<S> <C>
BALANCE SHEET DATA:
Working capital (deficit)...................................................................................... $ (10,949)(p)
Total assets................................................................................................... 358,348(q)
Total long-term debt and capital lease obligations, excluding current maturities............................... 288,585(r)
Total stockholders' equity (deficit)........................................................................... $ (73,471)(s)
</TABLE>
- ------------------------------
(a) All fiscal years presented include 52 weeks of operations except 1993 which
includes 53 weeks of operations.
(b) Includes non-cash write-downs of approximately $16,337 in 1993 related to a
trademark license agreement as a result of new product development and the
replacement of certain trademarked menu items and $3,346 in 1995 related to
a postponed debt restructuring. All other non-cash write-downs relate to
property and equipment disposed of in the normal course of the Company's
operations. See Notes 3, 5 and 6 of Notes to Consolidated Financial
Statements.
(c) Interest expense, net is net of capitalized interest of $128, $156, $176,
$62, $49, $44 and $27 and interest income of $222, $240, $187, $390, $318,
$273 and $239 for 1992, 1993, 1994, 1995, 1996, the nine months ended
September 29, 1996 and the nine months ended September 28, 1997,
respectively.
8
<PAGE>
(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) Cumulative
effect of changes in accounting principles, net of income taxes, (ii)
(Provision for) benefit from income taxes, (iii) Equity in net loss of joint
venture, (iv) Interest expense, net, (v) Depreciation and amortization 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 expense, 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 and the nine months ended
September 29, 1996 earnings were insufficient to cover fixed charges by
$12,249, $30,826, $8,773, $25,296, $13,689 and $10,280, respectively.
(h) Represents historical EBITDA adjusted to give effect to the benefit from the
change in accounting for pensions related to determining the return-on-asset
component of annual pension expense of $946 in 1996 and $710 for the nine
months ended September 29, 1996. See Note 10 of Notes to Consolidated
Financial Statements.
(i) Represents historical interest expense adjusted to give effect to the
Recapitalization. Borrowings under the New Credit Facility will bear
interest at a floating rate equal to LIBOR plus 2.25% or the Alternative
Base Rate (as defined in the New Credit Facility) plus 0.75% per annum for
drawings under the Revolving Credit Facility and the Letter of Credit
Facility, 0.50% per annum for amounts undrawn under the Revolving Credit
Facility, 2.25% per annum for amounts issued but undrawn under the Letter of
Credit Facility and a weighted average floating rate equal to LIBOR plus
2.46% or the Alternative Base Rate plus 0.96% for the Term Loan Facility.
The following table represents changes to Interest expense, net on a pro
forma basis, resulting from the Recapitalization and the Related
Transactions:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ------------------
1996 SEPTEMBER 29, 1996
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Elimination of interest on Old Credit Facility............................ $ (41,827) $ (31,337)
Reduction of interest on capital lease obligations........................ (774) (580)
Interest on Revolving Credit Facility..................................... 779 624
Interest on Letter of Credit Facility..................................... 268 134
Interest on Term Loan Facility............................................ 8,279 6,202
Interest on Senior Notes.................................................. 17,938 13,453
-------- --------
Decrease in Interest expense, net....................................... $ (15,337) $ (11,504)
-------- --------
-------- --------
<CAPTION>
SEPTEMBER 28, 1997
------------------
<S> <C>
Elimination of interest on Old Credit Facility............................ $ (31,434)
Reduction of interest on capital lease obligations........................ (580)
Interest on Revolving Credit Facility..................................... 732
Interest on Letter of Credit Facility..................................... 134
Interest on Term Loan Facility............................................ 6,340
Interest on Senior Notes.................................................. 13,453
--------
Decrease in Interest expense, net....................................... $ (11,355)
--------
--------
</TABLE>
In calculating pro forma Interest expense, net, the assumed rates on the
Revolving Credit Facility, Letter of Credit Facility, Term Loan Facility and
Senior Notes were 7.67%, 2.25%, 7.88%, and 10.25% for 1996, respectively,
7.66%, 2.25%, 7.87% and 10.25% for the nine months ended September 29, 1996,
respectively and 7.84%, 2.25%, 8.09% and 10.25% for the nine months ended
September 28, 1997, respectively.
(j) Represents historical net income adjusted to give effect to (i) the
reduction in interest expense, net of income taxes, of $9,049, $6,788 and
$6,699 for 1996, the nine months ended September 29, 1996 and the nine
months ended September 28, 1997, respectively, as a result of the
Recapitalization and the Related Transactions and (ii) the benefit, net of
income taxes, related to the change in accounting for pensions described in
(h) above of $558, $418 and $0 for 1996, the nine months ended September 29,
1996 and the nine months ended September 28, 1997, respectively.
(k) Represents historical weighted average shares outstanding adjusted to give
effect to the issuance of 27 shares upon consummation of the
Recapitalization under the Management Stock Plan (as defined herein), and
the return of 375 net shares to the Company in connection with the
Recapitalization. Actual weighted average shares outstanding were 2,414,
2,394 and 2,473 for 1996, the nine months ended September 29, 1996 and the
nine months ended September 28, 1997, respectively. See "Ownership of Common
Stock" and Note 17 of Notes to Consolidated Financial Statements.
(l) For purposes of this ratio, EBITDA represents historical EBITDA for the
twelve months ended September 28, 1997 adjusted by $236 to give effect to
the benefit related to the change in accounting for pensions described in
(h) above.
(m) The number at September 28, 1997 reflects the acquisition by DavCo of 34
restaurants pursuant to the DavCo Agreement. See "Recent Developments."
(n) 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 number at September 28, 1997 represents data
for the twelve months then ended.
(o) When computing comparable restaurant revenues, restaurants open for at least
twelve months are compared from period to period.
(p) As adjusted for (i) $3,307 reduction in current portion of capital lease
obligations in connection with the Recapitalization, (ii) $4,732 of working
capital provided in the Recapitalization, (iii) $2,907 cash provided in
connection with the letter of credit issued to RIC and (iv) the use of
$4,000 of current restricted cash to reduce the amount outstanding on the
Old Credit Facility.
(q) As adjusted for (i) $10,000 of previously restricted cash applied to the Old
Credit Facility, (ii) payment of $9,581 of interest on the Old Credit
Facility, (iii) write-off of $540 of deferred financing costs related to the
Old Credit Facility, (iv) $10,823 of estimated expenses related to the
Senior Note Offering and (v) $4,732 of working capital provided in the
Recapitalization.
(r) As adjusted for (i) repayment of the $358,042 outstanding on the Old Credit
Facility and $4,669 of long-term portion of capital lease obligations and
(ii) proceeds of $280,000 from the Senior Note Offering and the New Credit
Facility.
(s) As adjusted for (i) estimated net proceeds of $91,573 from the Common Stock
Offering, (ii) $1,948 of net income related to deferred interest expense no
longer payable under the Old Credit Facility, (iii) write-off of $319 of
deferred financing costs, net of taxes, related to the Old Credit Facility
and (iv) the tax benefit of $4,011 related to the non-cash stock
compensation expense arising out of the issuance of certain shares of Common
Stock to management and the vesting of certain shares of restricted stock
previously issued to management.
9
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN
THE SECURITIES OFFERED HEREBY.
SUBSTANTIAL LEVERAGE; STOCKHOLDERS' DEFICIT
The Company is highly leveraged. At September 28, 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 $293.0 million and the Company's
total consolidated stockholders' deficit would have been $73.5 million. Upon
completion of the Recapitalization, the Company's total available borrowings
under the New Credit Facility are estimated to be $55.0 million, excluding $2.1
million of availability under the Letter of Credit Facility (compared to $27.0
million as of September 28, 1997 under the Old Credit Facility, excluding $2.1
million of letter of credit availability). Additional borrowings may, subject to
certain limitations, be used for capital expenditures and general corporate
purposes, thereby increasing the Company's leverage. The Company's ability to
pay principal on the Senior Notes when due or to repurchase the Senior Notes
upon a Change of Control will be dependent upon the Company's ability to
generate cash from operations sufficient for such purposes or its ability to
refinance the Senior Notes. In addition, under the New Credit Facility, in the
event of circumstances which are similar to a Change of Control, repayment of
borrowings under the New Credit Facility will be subject to acceleration. See
"Description of New Credit Facility."
The degree to which the Company is leveraged could have important
consequences, including the following: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired, (ii)
a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of the principal of and interest on its indebtedness
and, because borrowings under the New Credit Facility in part will bear interest
at floating rates, the Company could be adversely affected by any increase in
prevailing rates, (iii) the New Credit Facility and the Indenture relating to
the Senior Notes will impose significant financial and operating restrictions on
the Company and its subsidiaries which, if violated, could permit the Company's
creditors to accelerate payments thereunder or foreclose upon the collateral
securing the New Credit Facility, (iv) the Company is more leveraged than
certain of its principal competitors, which may place the Company at a
competitive disadvantage and (v) the Company's substantial leverage may limit
its ability to respond to changing business and economic conditions and make it
more vulnerable to a downturn in general economic conditions. See "Use of
Proceeds," "Business--Competition," "Description of New Credit Facility" and
"Description of Senior Notes."
HISTORY OF LOSSES
The Company has reported net losses of $13.3 million, $61.4 million, $3.9
million, $58.7 million and $7.8 million for 1992, 1993, 1994, 1995 and 1996,
respectively, and earnings of $2.4 million for the nine months ended September
28, 1997. There can be no assurance that the Company's profitability 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 and $13.7 million for
1992, 1993, 1994, 1995 and 1996, 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.
10
<PAGE>
RESTRICTIONS IMPOSED UNDER NEW CREDIT FACILITY; SECURITY INTEREST
The New Credit Facility will impose significant operating and financial
restrictions on the Company's ability to, among other things, incur
indebtedness, create liens, sell assets, engage in mergers or consolidations,
pay dividends and engage in certain transactions with affiliates. The New Credit
Facility limits the amount which the Company may spend on capital expenditures
and requires the Company to comply with certain financial ratios. These
requirements may limit the ability of the Company to meet its obligations,
including its obligations with respect to the Senior Notes. The ability of the
Company to comply with the covenants in the New Credit Facility and the Senior
Notes may be affected by events beyond the control of the Company. Failure to
comply with any of these covenants could result in a default under the New
Credit Facility and the Senior Notes, and such default could result in
acceleration thereof. The New Credit Facility will restrict the Company's
ability to repurchase, directly or indirectly, the Senior Notes. In addition,
under the New Credit Facility, in the event of circumstances which are similar
to a Change of Control, repayment of borrowings under the New Credit Facility
will be subject to acceleration, which could further restrict the Company's
ability to repurchase the Senior Notes. There can be no assurance that the
Company will be permitted or have funds sufficient to repurchase the Senior
Notes when it would otherwise be required to offer to do so. It is expected that
the obligations of the Company under the New Credit Facility will be (i) secured
by a first priority security interest in substantially all material assets of
the Company and all other assets owned or hereafter acquired and (ii)
guaranteed, on a senior secured basis, by the Friendly's Restaurants Franchise,
Inc. subsidiary and may also be so guaranteed by certain subsidiaries created or
acquired after consummation of the Recapitalization. The Senior Notes will be
effectively subordinated to all existing and certain future secured indebtedness
of the Company, including indebtedness under the New Credit Facility, to the
extent of the value of the assets securing such secured indebtedness. The Senior
Notes will rank PARI PASSU to any future senior indebtedness of the Company and
be structurally subordinated to all existing and future indebtedness of any
subsidiary of the Company that is not a guarantor of the Senior Notes. Lenders
under the New Credit Facility will also have a prior claim on the assets of
subsidiaries of the Company that are guarantors under the New Credit Facility.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Description of New Credit
Facility" and "Description of Senior Notes."
RISKS RELATING TO THE IMPLEMENTATION OF NEW BUSINESS CONCEPTS AND STRATEGIES
The Company has recently initiated several new business concepts and
strategies, including the remodeling and re-imaging of selected restaurants, the
upgrading of its menu and the development of modified restaurant formats in
non-traditional locations. There can be no assurance that the Company will
continue to develop such concepts and strategies, that such concepts and
strategies will be successful or profitable or that such concepts and strategies
will fill the strategic roles intended for them by the Company. See
"Business--Business Strategies."
RISKS ATTRIBUTABLE TO THE DEVELOPMENT OF A FRANCHISING PROGRAM
The success of the Company's business strategy will also depend, in part, on
the development and implementation of a franchising program. The Company does
not have significant experience in franchising restaurants and there can be no
assurance that the Company will continue to successfully locate and attract
suitable franchisees or that such franchisees will have the business abilities
or sufficient access to capital to open restaurants or will operate restaurants
in a manner consistent with the Company's concept and standards or in compliance
with franchise agreements. The success of the Company's franchising program will
also be dependent upon certain other factors, certain of which are not within
the control of the Company or its franchisees, including the availability of
suitable sites on acceptable lease or purchase terms, permitting and regulatory
compliance and general economic and business conditions. See "Prospectus
Summary--Recent Developments" and "Business--Restaurant Operations--Franchising
Program."
11
<PAGE>
RISKS ARISING OUT OF THE EXPANSION OF INTERNATIONAL OPERATIONS
The Company has operations in South Korea, the United Kingdom and the
People's Republic of China ("China"). These international operations are subject
to various risks, including changing political and economic conditions, currency
fluctuations, trade barriers, trademark rights, adverse tax consequences, import
tariffs, customs and duties and government regulations. Government regulations,
relating to, among other things, the preparation and sale of food, building and
zoning requirements, wages, working conditions and the Company's relationship
with its employees, may vary widely from those in the United States. There can
be no assurance that the Company will be successful in maintaining or expanding
its international operations.
GEOGRAPHIC CONCENTRATION
Approximately 85% of the Company-owned 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 specific to this geographic region may adversely affect the
Company more than certain of its competitors which are more geographically
diverse.
RELATIONSHIPS WITH PERKINS; POTENTIAL CONFLICTS OF INTEREST
After giving effect to the Recapitalization and the Related Transactions,
approximately 10.3% and 2.1% of the Company's Common Stock would have been
owned, as of October 15, 1997, by Donald N. Smith and The Equitable Life
Assurance Society of the United States (the "Equitable"), respectively. These
stockholders indirectly own 33.2% and 28.1%, respectively, of the general
partner of Perkins Family Restaurants, L.P. ("PFR"), which, through Perkins
Restaurants Operating Company, L.P. ("Perkins"), owns and franchises
family-style restaurants. Mr. Smith, the Company's Chairman, Chief Executive
Officer and President, is an officer of the general partner of PFR. In addition,
three of the directors of the general partner of PFR serve as directors of the
Company. In the ordinary course of business, the Company enters into
transactions with Perkins. See "Certain Transactions."
After giving effect to the Recapitalization and the Related Transactions,
the directors and executive officers of the Company would have owned
approximately 13.1% of the Common Stock as of October 15, 1997. Circumstances
could arise in which the interests of such stockholders could be in conflict
with the interests of the other stockholders of the Company and the holders of
the Senior Notes. In addition, Mr. Smith serves as Chairman, Chief Executive
Officer and President of the Company and as Chairman and Chief Executive Officer
of Perkins and, consequently, devotes a portion of his time to the affairs of
each Company and may be required to limit his involvement in those areas, if
any, where the interests of the Company conflict with those of Perkins. Mr.
Smith does not have an employment agreement with the Company nor is he
contractually prohibited from engaging in other business ventures in the future,
any of which could compete with the Company or its subsidiaries. See "Ownership
of Common Stock."
DEPENDENCE ON SENIOR MANAGEMENT
The Company's business is managed, and its business strategies formulated,
by a relatively small number of key executive officers and other personnel,
certain of whom have joined the Company since Mr. Smith's arrival. The loss of
these key management persons, including Mr. Smith, could have a material adverse
effect on the Company. See "Management."
HIGHLY COMPETITIVE BUSINESS ENVIRONMENT
The restaurant business is highly competitive and is affected by changes in
the public's eating habits and preferences, population trends and traffic
patterns, as well as by local and national economic conditions affecting
consumer spending habits, many of which are beyond the Company's control. Key
12
<PAGE>
competitive factors in the industry are the quality and value of the food
products offered, quality and speed of service, attractiveness of facilities,
advertising, name brand awareness and image and restaurant location. Each of the
Company's restaurants competes directly or indirectly with locally-owned
restaurants as well as restaurants with national or regional images, and to a
limited extent, restaurants operated by its franchisees. A number of the
Company's significant competitors are larger or more diversified and have
substantially greater resources than the Company. The Company's retail
operations compete with national and regional manufacturers of frozen desserts,
many of which have greater financial resources and more established channels of
distribution than the Company. Key competitive factors in the retail food
business include brand awareness, access to retail locations, price and quality.
EXPOSURE TO COMMODITY PRICING AND AVAILABILITY RISKS
The basic raw materials for the Company's frozen desserts are dairy products
and sugar. The Company's purchasing department purchases other food products,
such as coffee, in large quantities. Although the Company does not hedge its
positions in any of these commodities as a matter of policy, it may
opportunistically purchase some of these items in advance of a specific need. As
a result, the Company is subject to the risk of substantial and sudden price
increases, shortages or interruptions in supply of such items, which could have
a material adverse effect on the Company.
RISKS ASSOCIATED WITH THE FOOD SERVICE INDUSTRY
Food service businesses are often affected by changes in consumer tastes,
national, regional and local economic conditions, demographic trends, traffic
patterns, the cost and availability of labor, purchasing power, availability of
products and the type, number and location of competing restaurants. The Company
could also be substantially adversely affected by publicity resulting from food
quality, illness, injury or other health concerns or alleged discrimination or
other operating issues stemming from one location or a limited number of
locations, whether or not the Company is liable. In addition, factors such as
increased costs of goods, regional weather conditions and the potential scarcity
of experienced management and hourly employees may also adversely affect the
food service industry in general and the results of operations and financial
condition of the Company.
REGULATION
The restaurant and food distribution industries are subject to numerous
Federal, state and local government regulations, including those relating to the
preparation and sale of food and building and zoning requirements. Also, the
Company is subject to laws governing its relationship with employees, including
minimum wage requirements, overtime, working conditions and citizenship
requirements. The failure to obtain or retain food licenses or an increase in
the minimum wage rate, employee benefit costs or other costs associated with
employees could adversely affect the Company. In September 1997, the second
phase of an increase in the minimum wage was implemented in accordance with the
Federal Fair Labor Standards Act of 1996, which could adversely affect the
Company. See "Business--Government Regulation."
FRAUDULENT CONVEYANCE
The incurrence of indebtedness and other obligations in connection with the
Recapitalization, including the issuance of the Senior Notes, may be subject to
review by a court under federal bankruptcy law or comparable provisions of state
fraudulent transfer law. Generally, if a court or other trier of fact were to
find that the Company did not receive fair consideration or reasonably
equivalent value for incurring such indebtedness or obligation and, at the time
of such incurrence, the Company (i) was insolvent, (ii) was rendered insolvent
by reason of such incurrence, (iii) was engaged in a business or transaction for
which the assets remaining in the Company constituted unreasonably small capital
or (iv) intended to incur or believed it would incur debts beyond its ability to
pay such debts as they mature,
13
<PAGE>
such court, subject to applicable statutes of limitations, could determine to
invalidate, in whole or in part, such indebtedness and obligations as fraudulent
conveyances or subordinate such indebtedness and obligations to existing or
future creditors of the Company. The definition or measure of such matters as
fair consideration, reasonably equivalent value, insolvency or unreasonably
small capital for purposes of the foregoing will vary depending on the law of
the jurisdiction which is being applied. Generally, however, the Company would
be considered insolvent if, at the time it incurred indebtedness, either the
fair market value (or fair saleable value) of its assets was less than the
amount required to pay its total debts and liabilities (including contingent
liabilities) as they became absolute and matured or it had incurred debt beyond
its ability to repay such debt as it matures.
The proceeds of the Recapitalization will be used primarily to repay debt of
the Company. There can be no assurance as to what standard a court would apply
in making determinations under bankruptcy or fraudulent transfer laws or whether
a court would agree with any Company assessment that the Company is receiving
fair consideration or reasonably equivalent value in return for incurring the
indebtedness and other obligations in connection with the Recapitalization or
that, after giving effect to indebtedness incurred in connection with the
Recapitalization and the use of the proceeds of such indebtedness, it will have
sufficient capital for the businesses in which it is engaged. In addition, as of
September 28, 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 PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Common Stock Offering, there has been no public market for the
Common Stock. There can be no assurance that an active trading market will
develop for the Common Stock after the Common Stock Offering or, if developed,
that such market will be sustained. The initial public offering price of the
Common Stock will be based on negotiations between the Company and the
Underwriters and may bear no relationship to the price at which the Common Stock
will trade after the completion of the Common Stock Offering. See "Underwriting"
for factors to be considered in determining the initial public offering price.
In addition, quarterly operating results of the Company or other restaurant
companies, changes in general conditions in the economy, the financial markets
or the restaurant industry, natural disasters, changes in earnings estimates or
recommendations by research analysts, or other developments affecting the
Company or its competitors could cause the market price of the Common Stock to
fluctuate substantially. In recent years, the stock market and the restaurant
industry in particular have experienced extreme price and volume fluctuations.
This volatility has had a significant effect on the market prices of securities
issued by many companies for reasons unrelated to the operating performance of
these companies.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Common Stock Offering, the Company will have
7,125,000 shares of Common Stock outstanding. Of these shares, 5,000,000 shares
sold in the Common Stock Offering will be freely tradeable without restriction
under the Securities Act of 1933, as amended (the "Securities Act"), except any
shares purchased by persons deemed to be "affiliates" of the Company, as that
term is defined in Rule 144 under the Securities Act. The remaining 2,125,000
shares of Common Stock are deemed "restricted securities" (the "Restricted
Shares") under Rule 144 because they were originally issued and sold by the
Company in private transactions in reliance upon exemptions from the Securities
Act. Under Rule 144, substantially all of these remaining Restricted Shares may
become eligible for resale 90 days after the date the Company becomes subject to
the reporting requirements of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act") (i.e., 90 days after the consummation of the Common
Stock Offering), and may be resold prior to such date only in compliance with
the registration requirements of the Securities Act or pursuant to a valid
exemption therefrom. Sales of substantial amounts of shares of
14
<PAGE>
Common Stock in the public market after the Common Stock Offering or the
perception that such sales could occur may adversely affect the market price of
the Common Stock.
All executive officers and directors and the existing shareholders of the
Company who, after the Common Stock Offering, will hold in the aggregate
approximately 2,125,000 shares of Common Stock (1,500,158 shares if the
Underwriters' over-allotment option is exercised in full), have agreed, pursuant
to lock-up agreements, that they will not, without the prior written consent of
NationsBanc Montgomery Securities, Inc., offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock beneficially owned by them for a
period of 360 days after the date of this Prospectus, except that the lenders
under the Old Credit Facility may sell (i) shares of Common Stock to other
stockholders of the Company existing prior to the Common Stock Offering and (ii)
any shares of Common Stock acquired by them in or after the Common Stock
Offering, which shares are not "restricted securities" pursuant to Rule 144
under the Securities Act.
The Company intends to file registration statements under the Securities Act
to register (i) all shares of Common Stock issuable pursuant to the Company's
Stock Option Plan and Restricted Stock Plan and (ii) certain shares of Common
Stock to be issued under the Company's Management Stock Plan and Limited Stock
Compensation Program (as defined herein). Subject to the completion of the
360-day period described above, shares of Common Stock issued under, or issued
upon the exercise of awards issued under, such plans and after the effective
date of such registration statements, generally will be eligible for sale in the
public market. See "Management--Executive Compensation" and "Ownership of Common
Stock."
The Company, its shareholders holding Class A and Class B common shares
prior to the Recapitalization and certain warrant holders have entered into an
amendment to an existing registration rights agreement providing that such
shareholders may demand registration under the Securities Act, at any time
within 18 months (the "Registration Period") after the end of the 360-day
lock-up period commencing with the date of this Prospectus, of shares of the
Company's Common Stock into which such Class A and Class B common shares are
converted in connection with the Recapitalization or for which such warrants are
exercised. The Company may postpone such a demand under certain circumstances.
In addition, such shareholders may request the Company to include such shares of
Common Stock in any registration by the Company of its capital stock under the
Securities Act during the Registration Period. In addition, prior to the
consummation of the Common Stock Offering, the Company and Mr. Smith intend to
enter into a registration rights agreement providing Mr. Smith with a demand
registration right covering his shares of Common Stock. See "Ownership of Common
Stock" and "Shares Eligible for Future Sale."
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Restated Articles of Organization (the "Restated Articles")
and Restated By-Laws (the "Restated By-Laws") contain provisions that may make
it more difficult for a third party to acquire, or discourage acquisition bids
for, the Company. The Restated By-Laws provide that a stockholder seeking to
have business conducted at a meeting of stockholders must give advance notice to
the Company prior to the scheduled meeting. The Restated By-Laws further provide
that a special stockholders meeting may be called only by the Board of
Directors, Chairman of the Board of Directors, or President of the Company.
Massachusetts law, the Restated Articles and the Restated By-Laws provide for a
classified Board of Directors and for the removal of directors only for cause
upon the affirmative vote of (i) the holders of at least a majority of the
shares entitled to vote or (ii) a majority of the directors then in office.
Moreover, upon completion of the Common Stock Offering, the Company expects to
be subject to an anti-takeover provision of the Massachusetts General Laws which
prohibits, subject to certain exceptions, a holder of 5% or more of the
outstanding voting stock of a corporation from engaging in certain transactions
with the corporation, including a merger or stock or asset sale. While the
Company's Restated By-Laws exclude the applicability of another Massachusetts
anti-takeover statute which provides that any stockholder who acquires 20% or
more of the outstanding voting stock of a corporation subject to the statute may
not vote
15
<PAGE>
such stock unless the stockholders of the corporation so authorize, the Board of
Directors of the Company may amend the Restated By-Laws at any time to subject
the Company to this statute prospectively. These provisions could limit the
price that certain investors might be willing to pay in the future for shares of
the Common Stock and may have the effect of preventing changes in the management
of the Company.
In addition, shares of the Company's Preferred Stock may be issued in the
future without further stockholder approval and upon such terms and conditions,
and have such rights, privileges and preferences, as the Board of Directors may
determine. The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of any holders of Preferred Stock that may
be issued in the future. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or discouraging a third party from acquiring, a majority
of the outstanding voting stock of the Company. The Company has no present plans
to issue any shares of Preferred Stock. See "Description of Capital
Stock--Preferred Stock."
EFFECT OF ADOPTION OF STOCKHOLDER RIGHTS PLAN
The Company's Board of Directors intends to enact a stockholder rights plan
(the "Rights Plan") designed to protect the interests of the Company's
stockholders in the event of a potential takeover in a manner or on terms not
approved by the Board of Directors as being in the best interests of the Company
and its stockholders. Pursuant to the Rights Plan, upon the filing of the
Restated Articles prior to the consummation of the Common Stock Offering, the
Board will declare a dividend distribution of one purchase right (a "Right") for
each outstanding share of Common Stock. The Rights Plan provides, in substance,
that should any person or group (other than Mr. Smith, Equitable, senior
management and their respective affiliates) acquire 15% or more of the Company's
Common Stock, each Right, other than Rights held by the acquiring person or
group, would entitle its holder to purchase a specified number of shares of
Common Stock for 50% of their then current market value. Unless a 15%
acquisition has occurred, the Rights may be redeemed by the Company at any time
prior to the termination date of the Rights Plan. The Rights Plan has certain
anti-takeover effects, in that it will cause substantial dilution to a person or
group that attempts to acquire a significant interest in the Company on terms
not approved by the Board of Directors. See "Description of Capital
Stock--Stockholder Rights Plan."
SUBSTANTIAL AND IMMEDIATE DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
significant dilution in net tangible book value per share of approximately
$33.93 per share of Common Stock (at an assumed initial public offering price of
$20.00 per share). See "Dilution."
16
<PAGE>
USE OF PROCEEDS
The Company is implementing the Recapitalization to refinance all of the
indebtedness under the Old Credit Facility and thereby lengthen the average
maturities of the Company's outstanding indebtedness, reduce interest expense
and increase liquidity and operating and financial flexibility. Concurrent with,
and contingent upon, the consummation of the Offerings, the Company will enter
into the New Credit Facility.
As of September 28, 1997, borrowings under the Old Credit Facility accrued
interest at a rate of 11.0% per annum, and such borrowings will become due in
May 1998, unless repaid or previously extended for an additional year pursuant
to the terms of the Old Credit Facility. Borrowings under the New Credit
Facility will bear interest at a floating rate equal to LIBOR plus 2.25% or the
Alternative Base Rate (as defined in the New Credit Facility) plus 0.75% per
annum for drawings under the Revolving Credit Facility and the Letter of Credit
Facility, 0.50% per annum for amounts undrawn under the Revolving Credit
Facility, 2.25% per annum for amounts issued but undrawn under the Letter of
Credit Facility and a weighted average floating rate equal to LIBOR plus 2.46%
or the Alternative Base Rate plus 0.96% for the Term Loan Facility. See
"Description of New Credit Facility."
The following table sets forth the estimated sources and uses of funds in
connection with the Recapitalization after giving effect to the Related
Transactions:
<TABLE>
<CAPTION>
AT CLOSING
--------------------
<S> <C>
(DOLLARS IN
THOUSANDS)
SOURCES OF FUNDS:
Term Loan Facility (a)................................................ $ 105,000
Senior Note Offering (b).............................................. 175,000
Common Stock Offering (c)............................................. 100,000
--------
Total Sources..................................................... $ 380,000
--------
--------
USES OF FUNDS:
Working capital....................................................... $ 4,732
Retirement of Old Credit Facility (d)................................. 348,042
Retirement of capital leases.......................................... 7,976
Estimated fees and expenses (e)....................................... 19,250
--------
Total Uses........................................................ $ 380,000
--------
--------
</TABLE>
- ------------------------
(a) Represents borrowing in full under the Term Loan Facility. As part of the
Recapitalization, the Company will have a $55,000 Revolving Credit Facility
which is expected to be undrawn at closing and $2,093 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 ($358,042 as of September 28, 1997) after giving effect
to the application of $10,000 of previously restricted cash and investments
of RIC which is expected to be released to the Company in exchange for a
$12,907 letter of credit, with the $2,907 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."
17
<PAGE>
DIVIDEND POLICY
The Company currently intends to retain its earnings to finance future
growth and, therefore, does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. Any determination as to the payment of
dividends will depend upon the future results of operations, capital
requirements and financial condition of the Company and its subsidiaries and
such other facts as the Board of Directors of the Company may consider,
including any contractual or statutory restrictions on the Company's ability to
pay dividends. The New Credit Facility and the Indenture relating to the Senior
Notes will each limit the Company's ability to pay dividends on its Common
Stock. See "Description of New Credit Facility" and "Description of Senior
Notes."
DILUTION
The net tangible book value of the Company as of September 28, 1997 was
$(186,203,000), or $(75.30) per share. "Net tangible book value" per share is
determined by dividing the number of shares of Common Stock outstanding into the
net tangible book value of the Company (total tangible assets less total
liabilities). After giving effect to the Recapitalization and the Related
Transactions, the Company's pro forma net tangible book value as of September
28, 1997 would have been $(99,273,000), or $(13.93) per share. This represents
an immediate increase in net tangible book value of $61.37 per share to existing
stockholders and an immediate dilution of $33.93 per share to new investors
purchasing Common Stock in the Common Stock Offering. The following table
illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price.............................. $ 20.00
Net tangible book value per share at September 28, 1997.......... $ (75.30)
Increase per share attributable to new investors in the
Common Stock Offering.......................................... 61.37
---------
Pro forma net tangible book value per share after the Common
Stock Offering................................................. (13.93)
---------
Dilution per share to new investors................................ $ 33.93
---------
---------
</TABLE>
The following table summarizes as of September 28, 1997, on a pro forma as
adjusted basis after giving effect to the Recapitalization and the Related
Transactions, the difference between existing stockholders and new investors
with respect to the number of shares of Common Stock purchased from the Company,
the total cash consideration paid to the Company, and the average price per
share paid by existing stockholders and by the purchasers of the shares offered
by the Company hereby (at an assumed initial public offering price of $20.00 per
share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------------- --------------------------- PRICE
NUMBER (A) PERCENT AMOUNT PERCENT PER SHARE
-------------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......................... 2,125,000(b) 29.8% $ 46,875,000 31.9% $ 22.06
New investors.................................. 5,000,000 70.2 100,000,000 68.1 $ 20.00
-------------- ----- -------------- -----
Total...................................... 7,125,000 100.0% $ 146,875,000 100.0%
-------------- ----- -------------- -----
-------------- ----- -------------- -----
</TABLE>
- ------------------------
(a) Excludes an aggregate of approximately 400,000 shares and 375,000 shares of
Common Stock reserved for issuance under the Stock Option Plan and the
Restricted Stock Plan, respectively. See "Management--Executive
Compensation--Stock Option Plan" and "--Restricted Stock Plan".
(b) Represents actual shares outstanding as of September 28, 1997, plus 27,113
shares to be issued upon consummation of the Common Stock Offering under the
Management Stock Plan, less 375,000 net shares to be returned to the Company
in connection with the Recapitalization. See "Ownership of Common Stock" and
Note 17 of Notes to Consolidated Financial Statements.
18
<PAGE>
CAPITALIZATION
The following table sets forth the balance of Cash and cash equivalents,
Current maturities of long-term debt and capital lease obligations and
capitalization of the Company (i) as of September 28, 1997 and (ii) as of
September 28, 1997, as adjusted to give effect to the Recapitalization and the
Related Transactions. This table should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 28, 1997
------------------------
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.............................................................. $ 12,044 $ 10,102(a)
----------- -----------
----------- -----------
Current maturities of long-term debt and capital lease obligations..................... $ 7,739 $ 4,432
----------- -----------
----------- -----------
Long-term debt
Old Credit Facility.................................................................. $ 358,042 $ --(b)
Revolving Credit Facility............................................................ -- --(c)
Term Loan Facility................................................................... -- 105,000
Senior Notes......................................................................... -- 175,000
Capital lease obligations and other.................................................. 13,254 8,585
----------- -----------
Total long-term debt................................................................... 371,296 288,585
----------- -----------
Stockholders' equity (d)
Preferred Stock, $0.01 par value, 1,000 shares authorized and none outstanding, as
adjusted........................................................................... -- --
Common Stock, $0.01 par value, 7,389 shares authorized and 2,473 shares outstanding;
50,000 shares authorized and 7,125 shares outstanding, as adjusted................. 25 71(e)
Paid-in capital...................................................................... 46,905 148,214(e)
Unrealized gain on investment securities............................................. 130 130
Accumulated deficit.................................................................. (217,796) (221,938)(f)
Cumulative translation adjustment.................................................... 52 52
----------- -----------
Total stockholders' equity (deficit)................................................... (170,684) (73,471)
----------- -----------
Total capitalization................................................................... $ 200,612 $ 215,114
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(a) Gives effect to (i) the $9,581 interest payment made in October 1997 under
the Old Credit Facility, (ii) the receipt of $12,907 of previously
restricted cash from RIC released in exchange for a letter of credit, net of
$10,000 applied to the Old Credit Facility and (iii) $4,732 of working
capital provided in the Recapitalization.
(b) Gives effect to the application of (i) $348,042 of the gross proceeds from
the Recapitalization and (ii) $10,000 of restricted cash released from RIC.
See "Use of Proceeds."
(c) As part of the Recapitalization, the Company will have a $55,000 Revolving
Credit Facility which is expected to be undrawn at closing and $2,093
available under the Letter of Credit Facility. These facilities are expected
to be drawn in part, from time to time, to finance the Company's working
capital and other general corporate requirements.
(d) Historical share information includes Class A common shares and Class B
common shares. In connection with the Recapitalization, the Class A common
shares and Class B common shares will be converted into Common Stock.
(e) Gives effect to (i) an assumed $100,000 of gross proceeds from the Common
Stock Offering, (ii) $8,427 of expenses associated with the Common Stock
Offering, (iii) the 924-for-1 stock split which will occur prior to the
Common Stock Offering and (iv) $9,782 of non-cash stock compensation expense
arising out of the issuance of certain shares of Common Stock to management
and the vesting of certain shares of restricted stock previously issued to
management. See Note 17 of Notes to Consolidated Financial Statements.
(f) Gives effect to (i) $1,948 of net income related to deferred interest no
longer payable under the Old Credit Facility, (ii) $5,771 of non-cash stock
compensation expense, net of taxes, arising out of the issuance of certain
shares of Common Stock to management and the vesting of certain shares of
restricted stock previously issued to management discussed in (e) above and
(iii) the write-off of $319 of deferred financing and debt restructuring
costs, net of taxes, related to the Old Credit Facility.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated historical financial
information of the Company and its consolidated subsidiaries for each of the
periods presented below. This information should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein. The selected consolidated historical financial
information for each of 1994, 1995 and 1996, and as of December 31, 1995 and
December 29, 1996, has been derived from the Company's audited Consolidated
Financial Statements which are included elsewhere herein. The selected
consolidated historical financial information as of and for the nine months
ended September 29, 1996 and September 28, 1997 has been derived from the
Company's unaudited consolidated financial statements which, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) necessary to present fairly, in accordance with GAAP, the information
contained therein. See Note 3 of Notes to Consolidated Financial Statements for
a discussion of the basis of the presentation and significant accounting
policies of the consolidated historical financial information set forth below.
Results for interim periods are not necessarily indicative of full fiscal year
results. No stock dividends were declared or paid for any period presented.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEAR (A) -------------
----------------------------------------------------- SEPTEMBER 29,
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Restaurant........................................ $ 542,859 $ 580,161 $ 589,383 $ 593,570 $ 596,675 $ 452,373
Retail, institutional and other................... 20,346 30,472 41,631 55,579 54,132 39,446
Franchise......................................... -- -- -- -- -- --
--------- --------- --------- --------- --------- -------------
Total revenues...................................... 563,205 610,633 631,014 649,149 650,807 491,819
--------- --------- --------- --------- --------- -------------
Costs and expenses:
Cost of sales..................................... 154,796 170,431 179,793 192,600 191,956 143,388
Labor and benefits................................ 201,431 209,522 211,838 214,625 209,260 159,502
Operating expenses................................ 108,363 120,626 132,010 143,854 143,163 109,006
General and administrative expenses............... 37,372 40,851 38,434 40,705 42,721 31,948
Non-cash write-downs (b).......................... -- 25,552 -- 7,352 227 --
Depreciation and amortization..................... 35,734 35,535 32,069 33,343 32,979 25,127
Gain on sale of restaurant operations............... -- -- -- -- -- --
--------- --------- --------- --------- --------- -------------
Operating income.................................... 25,509 8,116 36,870 16,670 30,501 22,848
Interest expense, net (c)........................... 37,630 38,786 45,467 41,904 44,141 33,084
Equity in net loss of joint venture................. -- -- -- -- -- --
--------- --------- --------- --------- --------- -------------
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) (10,236)
(Provision for) benefit from income taxes........... (1,200) 11,470 4,661 (33,419) 5,868 4,442
Cumulative effect of changes in accounting
principles, net of income taxes (d)............... -- (42,248) -- -- -- --
--------- --------- --------- --------- --------- -------------
Net income (loss)................................... $ (13,321) $ (61,448) $ (3,936) $ (58,653) $ (7,772) $ (5,794)
--------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- -------------
OTHER DATA:
EBITDA (e).......................................... $ 61,243 $ 69,203 $ 68,939 $ 57,365 $ 63,707 47,975
Net cash provided by operating activities........... 34,047 42,877 38,381 27,790 26,163 23,637
Capital expenditures:
Cash.............................................. 33,577 37,361 29,507 19,092 24,217 18,547
Non-cash (f)...................................... 3,121 7,129 7,767 3,305 5,951 3,570
--------- --------- --------- --------- --------- -------------
Total capital expenditures.......................... $ 36,698 $ 44,490 $ 37,274 $ 22,397 $ 30,168 $ 22,117
Ratio of earnings to fixed charges (g).............. -- -- -- -- -- --
PRO FORMA DATA:
EBITDA (e)(h)....................................... $ 64,653 $ 48,685
Interest expense, net (c)(i)........................ 28,804 21,580
Net income(j)....................................... 1,835 1,412
Net income per share................................ $ 0.26 $ 0.20
Weighted average shares outstanding (k)............. 7,125 7,125
Ratio of EBITDA to interest expense, net............ 2.2x 2.3x
Ratio of earnings to fixed charges (g).............. 1.1x 1.1x
Ratio of total long-term debt to EBITDA (e).........
<CAPTION>
SEPTEMBER 28,
1997
-------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
<S> <C>
Revenues:
Restaurant........................................ $ 455,026
Retail, institutional and other................... 49,173
Franchise......................................... 3,834
-------------
Total revenues...................................... 508,033
-------------
Costs and expenses:
Cost of sales..................................... 147,105
Labor and benefits................................ 159,315
Operating expenses................................ 112,009
General and administrative expenses............... 32,775
Non-cash write-downs (b).......................... 607
Depreciation and amortization..................... 24,226
Gain on sale of restaurant operations............... 2,303
-------------
Operating income.................................... 34,299
Interest expense, net (c)........................... 32,972
Equity in net loss of joint venture................. 1,112
-------------
Income (loss) before (provision for) benefit from
income taxes and cumulative effect of changes in
accounting principles............................. 215
(Provision for) benefit from income taxes........... (88)
Cumulative effect of changes in accounting
principles, net of income taxes (d)............... 2,236
-------------
Net income (loss)................................... $ 2,363
-------------
-------------
OTHER DATA:
EBITDA (e).......................................... $ 59,132
Net cash provided by operating activities........... 29,224
Capital expenditures:
Cash.............................................. 14,656
Non-cash (f)...................................... 2,227
-------------
Total capital expenditures.......................... $ 16,883
Ratio of earnings to fixed charges (g).............. 1.0x
PRO FORMA DATA:
EBITDA (e)(h)....................................... $ 59,132
Interest expense, net (c)(i)........................ 21,617
Net income(j)....................................... 9,062
Net income per share................................ $ 1.27
Weighted average shares outstanding (k)............. 7,125
Ratio of EBITDA to interest expense, net............ 2.7x
Ratio of earnings to fixed charges (g).............. 1.4x
Ratio of total long-term debt to EBITDA (e)......... 3.8x(l)
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR (A) AS OF AS OF
----------------------------------------------------- SEPTEMBER 29, SEPTEMBER 28,
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........ $ (28,451) $ (27,919) $ (35,856) $ (14,678) $ (20,700) $ (28,333) $ (17,895)
Total assets..................... 380,087 365,330 374,669 370,292 360,126 359,080 362,914
Total long-term debt and capital
lease obligations, excluding
current maturities............. 358,102 363,028 369,549 389,144 385,977 379,241 371,296
Total stockholders' equity
(deficit)...................... $ (43,993) $(102,965) $(106,901) $(165,534) $(173,156) $(171,306) $(170,684)
<CAPTION>
AS ADJUSTED
SEPTEMBER 28,
1997
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital (deficit)........ $ (10,949)(m)
Total assets..................... 358,348(n)
Total long-term debt and capital
lease obligations, excluding
current maturities............. 288,585(o)
Total stockholders' equity
(deficit)...................... $ (73,471)(p)
</TABLE>
- ------------------------
(a) All fiscal years presented include 52 weeks of operations except 1993 which
includes 53 weeks of operations.
(b) Includes non-cash write-downs of approximately $16,337 in 1993 related to a
trademark license agreement as a result of new product development and the
replacement of certain trademarked menu items and $3,346 in 1995 related to
a postponed debt restructuring. All other non-cash write-downs relate to
property and equipment disposed of in the normal course of the Company's
operations. See Notes 3, 5 and 6 of Notes to Consolidated Financial
Statements.
(c) Interest expense, net is net of capitalized interest of $128, $156, $176,
$62, $49, $44 and $27 and interest income of $222, $240, $187, $390, $318,
$273 and $239 for 1992, 1993, 1994, 1995, 1996, the nine months ended
September 29, 1996 and the nine months ended September 28, 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) Cumulative
effect of changes in accounting principles, net of income taxes, (ii)
(Provision for) benefit from income taxes, (iii) Equity in net loss of joint
venture, (iv) Interest expense, net, (v) Depreciation and amortization 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 expense, 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 and the nine months ended
September 29, 1996, earnings were insufficient to cover fixed charges by
$12,249, $30,826, $8,773, $25,296, $13,689 and $10,280, respectively.
(h) Represents historical EBITDA adjusted to give effect to the benefit from the
change in accounting for pensions related to determining the return-on-asset
component of annual pension expense of $946 in 1996 and $710 for the nine
months ended September 29, 1996. See Note 10 of Notes to Consolidated
Financial Statements.
(i) Represents historical interest expense adjusted to give effect to the
Recapitalization. Borrowings under the New Credit Facility will bear
interest at a floating rate equal to LIBOR plus 2.25% or the Alternative
Base Rate (as defined in the New Credit Facility) plus 0.75% per annum for
drawings under the Revolving Credit Facility and the Letter of Credit
Facility, 0.50% per annum for amounts undrawn under the Revolving Credit
Facility, 2.25% per annum for amounts issued but undrawn under the Letter of
Credit Facility and a weighted average floating rate equal to LIBOR plus
2.46% or the Alternative Base Rate plus 0.96% for the Term Loan Facility.
(j) Represents historical net income adjusted to give effect to (i) the
reduction in interest expense, net of income taxes of $9,049, $6,788 and
$6,699 for 1996, the nine months ended September 29, 1996 and the nine
months ended September 28, 1997, respectively, as a result of the
Recapitalization and the Related Transactions and (ii) the benefit, net of
income taxes, related to the change in accounting for pensions described in
(h) above of $558, $418 and $0 for 1996, the nine months ended September 29,
1996 and the nine months ended September 28, 1997, respectively.
(k) Represents historical weighted average shares outstanding adjusted to give
effect to the issuance of 27 shares upon consummation of the
Recapitalization under the Management Stock Plan (as defined herein), and
the return of 375 net shares to the Company in connection with the
Recapitalization. Actual weighted average shares outstanding were 2,414,
2,394 and 2,473 for 1996, the nine months ended September 29, 1996 and the
nine months ended September 28, 1997, respectively. See "Ownership of Common
Stock" and Note 17 of Notes to Consolidated Financial Statements.
(l) For purposes of this ratio, EBITDA represents historical EBITDA for the
twelve months ended September 28, 1997 adjusted by $236 to give effect to
the benefit related to the change in accounting for pensions described in
(h) above.
(m) As adjusted for (i) $3,307 reduction in current portion of capital lease
obligations in connection with the Recapitalization, (ii) $4,732 of working
capital provided in the Recapitalization, (iii) $2,907 cash provided in
connection with the letter of credit issued to RIC and (iv) the use of
$4,000 of current restricted cash to reduce the amount outstanding on the
Old Credit Facility.
(n) As adjusted for (i) $10,000 of previously restricted cash applied to the Old
Credit Facility, (ii) payment of $9,581 of interest on the Old Credit
Facility, (iii) write-off of $540 of deferred financing costs related to the
Old Credit Facility, (iv) $10,823 of expenses related to the Senior Note
Offering and (v) $4,732 of working capital provided in the Recapitalization.
(o) As adjusted for (i) repayment of the $358,042 outstanding on the Old Credit
Facility and $4,669 of long-term portion of capital lease obligations and
(ii) proceeds of $280,000 from the Senior Note Offering and the New Credit
Facility.
(p) As adjusted for (i) estimated net proceeds of $91,573 from the Common Stock
Offering, (ii) $1,948 of net income related to deferred interest expense no
longer payable under the Old Credit Facility, (iii) write-off of $319 of
deferred financing costs, net of taxes, related to the Old Credit Facility
and (iv) the tax benefit of $4,011 related to the non-cash stock
compensation expense arising out of the issuance of certain shares of Common
Stock to management and the vesting of certain shares of restricted stock
previously issued to management.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE IN
THIS PROSPECTUS.
OVERVIEW
Friendly's owns and operates 662 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, 24 new
restaurants have been opened while 176 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 September 28, 1997, the
Company had a stockholders' deficit of $170.7 million. Cumulative interest
expense of $384.0 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 152 restaurants
(net of restaurants opened) since the beginning of 1989, Restaurant revenues
have increased 7.5% from $557.3 million in 1989 to $599.3 million in the twelve-
months ended September 28, 1997, while average revenue per restaurant has
increased 29.8% from $665,000 to $863,000 during the same period. Retail,
institutional and other revenues and Franchise revenues have also increased from
$1.4 million in 1989 to $67.7 million in the twelve months ended September 28,
1997. In addition, EBITDA has increased 58.0% from $47.4 million in 1989 to
$74.9 million in the twelve-month period ended September 28, 1997, while
operating income has increased from $4.1 million to $42.0 million over the same
period. As a result of the positive impact of the Company's revitalization
program, the closing of under-performing restaurants, the growth of the retail,
institutional and other businesses and the commencement in July 1997 of the
Company's franchising program, 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 South Korea and the United Kingdom
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 receives
(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, franchisees and its
22
<PAGE>
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 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 and Franchise revenues including salaries for sales personnel and
other selling expenses and advertising costs.
General and administrative expenses include costs associated with restaurant
field supervision and the Company's headquarters personnel. Non-cash write-downs
include the write-downs of long-lived assets and certain intangible assets when
circumstances indicate that the carrying amount of an asset may not be
recoverable. See Notes 3 and 6 of Notes to Consolidated Financial Statements.
Interest expense, net is net of capitalized interest and interest income.
RESULTS OF OPERATIONS
The operating results of the Company expressed as a percentage of Total
revenues are set forth below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ----------------------------------
-------------------------------- SEPTEMBER 29, SEPTEMBER 28,
1994 1995 1996 1996 1997
-------- -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues:
Restaurant............................ 93.4% 91.4% 91.7% 92.0% 89.6%
Retail, institutional and other....... 6.6 8.6 8.3 8.0 9.7
Franchise............................. 0.0 0.0 0.0 0.0 0.7
-------- -------- -------- ----- -----
Total revenues.......................... 100.0 100.0 100.0 100.0 100.0
-------- -------- -------- ----- -----
Costs and expenses:
Cost of sales......................... 28.5 29.7 29.5 29.2 29.0
Labor and benefits.................... 33.6 33.1 32.2 32.4 31.4
Operating expenses.................... 20.9 22.2 22.0 22.2 22.0
General and administrative expenses... 6.1 6.2 6.5 6.5 6.4
Non-cash write-downs.................. 0.0 1.1 0.0 0.0 0.1
Depreciation and amortization......... 5.1 5.1 5.1 5.1 4.8
Gain on sale of restaurant operations... 0.0 0.0 0.0 0.0 0.4
-------- -------- -------- ----- -----
Operating income........................ 5.8 2.6 4.7 4.6 6.7
Interest expense, net................... 7.2 6.5 6.8 6.7 6.5
Equity in net loss of joint venture..... 0.0 0.0 0.0 0.0 0.2
-------- -------- -------- ----- -----
Income (loss) before benefit from
(provision for) income taxes and
cumulative effect of change in
accounting principle.................. (1.4) (3.9) (2.1) (2.1) 0.0
Benefit from (provision for) income
taxes................................. 0.8 (5.1) 0.9 0.9 0.0
Cumulative effect of change in
accounting principle, net of income
tax expense........................... 0.0 0.0 0.0 0.0 0.5
-------- -------- -------- ----- -----
Net income (loss)....................... (0.6)% (9.0)% (1.2)% (1.2)% 0.5%
-------- -------- -------- ----- -----
-------- -------- -------- ----- -----
</TABLE>
NINE MONTHS ENDED SEPTEMBER 28, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
29, 1996
REVENUES--Total revenues increased $16.2 million, or 3.3%, to $508.0 million
for the nine months ended September 28, 1997 from $491.8 million for the nine
months ended September 29, 1996. Restaurant revenues increased $2.6 million, or
0.6%, to $455.0 million for the nine months ended September 28, 1997 from $452.4
million for the nine months ended September 29, 1996. Comparable restaurant
revenues increased 3.1%. 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 three new restaurants, the re-imaging of
four restaurants under the Company's FOCUS 2000 program, the revitalization of
14 restaurants, building expansions at five restaurants
23
<PAGE>
and a milder winter in the 1997 period, which allowed for favorable traffic
comparisons. The increase was partially offset by the sale of 34 restaurants to
DavCo which resulted in a $7.2 million reduction in Restaurant revenues and the
closing of 17 under-performing restaurants. Retail, institutional and other
revenues increased by $9.8 million, or 24.9%, to $49.2 million for the nine
months ended September 28, 1997 from $39.4 million for the nine months ended
September 29, 1996. The increase was primarily due to a more effective sales
promotion program. Franchise revenue was $3.8 million for the nine months ended
September 28, 1997 compared to none for the nine months ended September 29,
1996. The increase is a result of the consummation of the DavCo Agreement on
July 14, 1997. See Note 16 of Notes to Consolidated Financial Statements.
COST OF SALES--Cost of sales increased $3.7 million, or 2.6%, to $147.1
million for the nine months ended September 28, 1997 from $143.4 million for the
nine months ended September 29, 1996. Cost of sales as a percentage of Total
revenues decreased to 29.0% in the 1997 period from 29.2% in the 1996 period.
The decrease was due to a 0.6% reduction in food costs at the restaurant level
despite higher guest check averages because of reduced promotional discounts.
The decrease was offset by a 0.4% increase in food costs at the retail and
institutional level.
LABOR AND BENEFITS--Labor and benefits decreased $0.2 million, or 0.1%, to
$159.3 million for the nine months ended September 28, 1997 from $159.5 million
for the nine months ended September 29, 1996. Labor and benefits as a percentage
of Total revenues decreased to 31.4% in the 1997 period from 32.4% 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 cost and lower workers' compensation insurance and pension
costs.
OPERATING EXPENSES--Operating expenses increased $3.0 million, or 2.8%, to
$112.0 million for the nine months ended September 28, 1997 from $109.0 million
for the nine months ended September 29, 1996. Operating expenses as a percentage
of Total revenues decreased to 22.0% in the 1997 period from 22.2% in the 1996
period. The decrease was due to reduced costs for snow removal and the
allocation of fixed costs over higher Total revenues in the 1997 period
partially offset by higher advertising expenditures in the 1997 period.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $0.9 million, or 2.8%, to $32.8 million for the nine months ended
September 28, 1997 from $31.9 million for the nine months ended September 29,
1996. General and administrative expenses as a percentage of Total revenues
decreased to 6.4% in the 1997 period from 6.5% in the 1996 period. This decrease
was due to reductions in pension costs and the elimination of field management
positions associated with the closing of 17 restaurants since the end of the
1996 period.
GAIN ON SALE OF RESTAURANT OPERATIONS--Gain on sale of restaurant operations
represents the income related to the sale of the equipment and operating rights
for the 34 existing locations franchised to DavCo. See Note 16 of Notes to
Consolidated Financial Statements.
EBITDA--As a result of the above, EBITDA increased $11.1 million, or 23.1%,
to $59.1 million for the nine months ended September 28, 1997 from $48.0 million
for the nine months ended September 29, 1996. EBITDA as a percentage of Total
revenues increased to 11.6% in the 1997 period from 9.8% in the 1996 period.
NON-CASH WRITE-DOWNS--Non-cash write-downs were $0.6 million for the nine
months ended September 28, 1997; there were no such write-downs during the nine
months ended September 29, 1996.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased $0.9
million, or 3.6%, to $24.2 million for the nine months ended September 28, 1997
from $25.1 million for the nine months ended September 29, 1996. Depreciation
and amortization as a percentage of Total revenues decreased to 4.8% in the 1997
period from 5.1% in the 1996 period. The decrease was due to the closing of 17
units since the
24
<PAGE>
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, decreased by $0.1 million, or 0.3%, to $33.0 million for the
nine months ended September 28, 1997 from $33.1 million for the nine months
ended September 29, 1996. The decrease in interest expense was due to a
reduction in interest expense on capital lease obligations as a result of lower
amounts outstanding in the 1997 period.
EQUITY IN NET LOSS OF JOINT VENTURE--The equity in net loss of the China
joint venture of $1.1 million for the nine month period ended September 28, 1997
reflected the Company's 50% share of the China joint venture's net loss for such
period. Sales for the joint venture were minimal during the 1997 period.
BENEFIT FROM (PROVISION FOR) INCOME TAXES--The provision for income taxes
was $0.1 million for the nine months ended September 28, 1997 compared to a
benefit of $4.4 million for the nine months ended September 29, 1996 due to the
improved operating results in the 1997 period.
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 income was $2.4 million for the nine months ended
September 28, 1997 compared to a net loss of $5.8 million for the nine months
ended September 29, 1996 for the reasons discussed above.
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 16 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.
25
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $2.0 million, or 4.9%, to $42.7 million in 1996 from $40.7 million in
1995. General and administrative expenses as a percentage of Total revenues
increased to 6.5% in 1996 from 6.2% in 1995. This increase was due to an
increase in management bonuses and the annual merit-based salary increases,
partially offset by reductions in group medical insurance claims and the
elimination of field management positions associated with the closing of 31
restaurants in 1996. General and administrative expenses, exclusive of
management bonuses, increased $0.3 million in 1996.
EBITDA--As a result of the above, EBITDA increased by $6.3 million, or
11.0%, to $63.7 million in 1996 from $57.4 million in 1995. EBITDA as a
percentage of Total revenues increased to 9.8% in 1996 from 8.8% in 1995.
NON-CASH WRITE-DOWNS--Non-cash write-downs decreased $7.2 million to $0.2
million in 1996 from $7.4 million in 1995. The decrease was due to a reduction
in the carrying value of properties held for disposition of $0.2 million in 1996
and $4.0 million in 1995. In 1995, the Company also incurred a non-cash
write-down of $3.3 million relating to costs resulting from a postponed debt
refinancing. For further explanation of the non-cash write-downs, see Notes 3, 5
and 6 of Notes to Consolidated Financial Statements.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased $0.3
million, or 0.9%, to $33.0 million in 1996 from $33.3 million in 1995. The
decrease was due to lower amortization of debt restructuring costs, partially
offset by an increase in depreciation due to the addition of three restaurants
and the ongoing implementation of the Company's revitalization program.
Depreciation and amortization as a percentage of Total revenues was 5.1% for
both periods.
INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and
interest income, increased by $2.2 million, or 5.3%, to $44.1 million in 1996
from $41.9 million in 1995. The increase was due to an increase in the interest
rate on the Company's bank debt as a result of the debt restructuring effective
January 1, 1996.
BENEFIT FROM (PROVISION FOR) INCOME TAXES--The benefit from income taxes was
$5.9 million in 1996 as compared to a provision for income taxes of $33.4
million in 1995. The benefit from income taxes of $5.9 million in 1996
represented the statutory federal and state tax benefit of the Company's loss
partially offset by the impact of the federal and state tax valuation
allowances. The income tax provision of $33.4 million in 1995 resulted primarily
from the anticipated deconsolidation from TRC. As a result, the deferred tax
asset of approximately $19 million related to the NOLs utilized by TRC as of
December 31, 1995 was written off in 1995. Additionally, as a result of the
anticipated change in ownership and Section 382 limitation, a valuation
allowance in 1995 was placed on all Federal NOL carryforwards generated through
December 31, 1995. See Note 9 of Notes to Consolidated Financial Statements. and
"Net Operating Loss Carryforwards."
NET INCOME (LOSS)--As a result of the above, net loss decreased by $50.9
million, or 86.7%, to a net loss of $7.8 million in 1996 from a net loss of
$58.7 million in 1995.
1995 COMPARED TO 1994
REVENUES--Total revenues increased $18.1 million, or 2.9%, to $649.1 million
in 1995 from $631.0 million in 1994. Restaurant revenues increased $4.2 million,
or 0.7%, to $593.6 million in 1995 from $589.4 million in 1994. Comparable
restaurant revenues increased by 0.9%. The increase in Restaurant revenues and
comparable restaurant revenues was due to the introduction of frozen yogurt,
selected menu price increases, a shift in sales mix to higher-priced items, the
opening of one new restaurant, the revitalization of 14 restaurants and building
expansions at five 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
26
<PAGE>
33.7%, to $55.6 million in 1995 from $41.6 million in 1994. This increase was
due to a successful promotional campaign in existing markets and the
introduction of frozen yogurt into these markets.
COST OF SALES--Cost of sales increased $12.8 million, or 7.1%, to $192.6
million in 1995 from $179.8 million in 1994. Cost of sales as a percentage of
Total revenues increased to 29.7% in 1995 from 28.5% in 1994. The increase was
due to a 0.8% rise in food costs at the restaurant level as a result of a sales
mix shift to higher quality items and increased waste in food preparation and to
a 0.4% rise in food costs at the retail and institutional level.
LABOR AND BENEFITS--Labor and benefits increased $2.8 million, or 1.3%, to
$214.6 million in 1995 from $211.8 million in 1994. Labor and benefits as a
percentage of Total revenues decreased in 1995 to 33.1% from 33.6% in 1994.
Approximately 0.7% of the decrease was due to an increase in Retail,
institutional and other revenues as a percent of Total revenues as these
revenues have no associated labor and benefits. This decrease was partially
offset by a 0.2% rise in labor and benefits as a percentage of Restaurant
revenue due to several large group medical claims and the introduction of a
restaurant leadership team concept which placed more focus on customer service
by increasing the hours of supervisory restaurant employees.
OPERATING EXPENSES--Operating expenses increased $11.9 million, or 9.0%, to
$143.9 million in 1995 from $132.0 million in 1994. Operating expenses as a
percentage of Total revenues increased to 22.2% in 1995 from 20.9% in 1994. The
increase was due to the cost of sponsoring a Ladies Professional Golf
Association golf tournament ("The Friendly's Classic") for the first time, an
increase in restaurant advertising expenses, higher restaurant renovation
expenses, an increase in credit card fees as a result of greater use of credit
cards by consumers and an increase in selling expenses associated with the
growth in the retail and institutional business.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $2.3 million, or 6.0%, to $40.7 million in 1995 from $38.4 million in
1994. General and administrative expenses as a percentage of Total revenues
increased to 6.2% in 1995 from 6.1% in 1994. The increase was due to several
large group insurance claims in 1995, the annual merit-based salary increases
and the benefit in 1994 from eliminating a long-term bonus plan.
EBITDA--As a result of the above, EBITDA decreased by $11.5 million, or
16.7%, to $57.4 million in 1995 from $68.9 million in 1994. EBITDA as a
percentage of Total revenues decreased to 8.8% in 1995 from 10.9% in 1994.
NON-CASH WRITE-DOWNS--During 1995, the Company incurred a $3.3 million
non-cash write-down relating to costs resulting from a postponed debt
refinancing and a $4.0 million write-down of the carrying value of 51 restaurant
properties. For a further explanation of the write-downs, see Notes 3, 5 and 6
of Notes to Consolidated Financial Statements.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased $1.2
million, or 3.7%, to $33.3 million in 1995 from $32.1 million in 1994. The
increase was due to the addition of one new restaurant and the ongoing
implementation of the Company's revitalization program, partially offset by a
decrease in amortization as a result of TRC Acquisition financing costs being
fully amortized. Depreciation and amortization as a percentage of Total revenues
was 5.1% for both periods.
INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and
interest income, decreased by $3.6 million, or 7.9%, to $41.9 million in 1995
from $45.5 million in 1994. The decrease was due to the payment of a $3.6
million fee to the Company's lenders in 1994 to facilitate a refinancing of the
Company's debt which was never consummated.
BENEFIT FROM (PROVISION FOR) INCOME TAXES--The provision for income taxes
was $33.4 million as compared to the benefit from income taxes of $4.7 million
in 1994. The provision for income taxes of $33.4 million in 1995 was due to the
anticipated deconsolidation from TRC. As a result, the deferred tax asset of
27
<PAGE>
approximately $19 million related to the NOLs utilized by TRC as of December 31,
1995 was written off in 1995. Additionally, as a result of the anticipated
change in ownership and Section 382 limitation, a valuation allowance in 1995
was placed on all Federal NOL carryforwards generated through December 31, 1995.
See Note 9 of Notes to Consolidated Financial Statements. 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 $29.2 million for the nine months
ended September 28, 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 $27.0
million as of September 28, 1997, excluding $2.1 million of letter of credit
availability.
Additional sources of liquidity consist of capital and operating leases for
financing leased restaurant locations (in malls and shopping centers and land or
building leases), restaurant equipment, manufacturing equipment, distribution
vehicles and computer equipment. Additionally, sales of under-performing
existing restaurant properties and other assets (to the extent the Company's and
its subsidiaries' debt instruments, if any, permit) are sources of cash. The
amounts of debt financing that the Company will be able to incur under capital
leases and for property and casualty insurance financing and the amount of asset
sales by the Company will be limited by the terms of the New Credit Facility and
the Indenture relating to the Senior Notes. See "Description of New Credit
Facility" and "Description of Senior Notes."
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 $270.3 million on
capital expenditures, including $74.1 million on the renovation of restaurants
under its revitalization program.
The following table, which includes the 34 restaurants franchised to DavCo,
presents for the periods indicated (i) the number of 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, (b)
certain exterior and interior renovation was completed under the original
revitalization program and (c) certain re-imaging was completed under the FOCUS
2000 program and (iii) the aggregate number of restaurants expanded, revitalized
and re-imaged since the TRC Acquisition and through the end of each period.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED
------------------------------------------------- SEPTEMBER 28,
1994 1995 1996 1997
--------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Restaurants opened.......................................... 8 1 3 2
Restaurants closed.......................................... 15 16 31 13
Restaurants open (end of period)............................ 750 735 707 696
Restaurants expanded........................................ 7 5 4 5
Aggregate restaurants expanded.............................. 12 17 21 26
Restaurants revitalized..................................... 67 14 16 9
Aggregate restaurants revitalized........................... 594 608 624 633
Aggregate restaurants re-imaged............................. -- -- -- 4
</TABLE>
28
<PAGE>
Net cash used in investing activities was $19.1 million for the nine months
ended September 28, 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 $12.8 million in the nine months ended
September 28, 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 $4.8 million, $8.4 million, $0.9 million and $1.5
million in the nine months ended September 28, 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 $16.7 million for the nine months ended September 28, 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 $17.9 million as of September
28, 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.
The full amount of the Term Loan Facility will be drawn at the closing of
the Offerings. Amounts repaid or prepaid under the Term Loan Facility may not be
reborrowed. The Company's primary sources of liquidity and capital resources in
the future will be cash generated from operations and borrowings under the
Revolving Credit Facility and the Letter of Credit Facility. The Revolving
Credit Facility will be a five-year facility providing for revolving loans to
the Company in a principal amount not to exceed $55 million, including a $5
million sublimit for each of trade and standby letters of credit. The Letter of
Credit Facility will mature contemporaneously with the Revolving Credit Facility
and will provide for up to $15 million of standby letters of credit. It is
expected that no amounts will initially be drawn under the Revolving Credit
Facility and $2.1 million will be available under the Letter of Credit Facility
at the consummation of the Recapitalization. These facilities are expected to be
drawn in part, from time to time, to finance the Company's working capital and
other general corporate requirements. See "Description of New Credit Facility."
It is expected that the Term Loan Facility will require quarterly
amortization payments beginning on April 15, 1999. Annual amortization amounts
will total $4.7 million, $10.7 million, $12.7 million, $14.7 million, $18.7
million, $20.3 million and $23.5 million in 1999 through 2005, respectively. In
addition to the scheduled amortization, it is expected that the Term Loan
Facility will be permanently reduced by (i) specified percentages of each year's
Excess Cash Flow (as defined in the New Credit Facility) and (ii) 100% of the
aggregate net proceeds from asset sales not in the ordinary course of business
and certain insurance claim proceeds, in each case, 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 and Excess Cash
Flow 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.
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 certain of its domestic 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.
At the Company's option, the interest rates per annum applicable to the New
Credit Facility will be either LIBOR (as defined in the New Credit Facility),
plus a margin ranging from 2.25% to 2.75%, or the Alternative Base Rate (as
defined in the New Credit Facility), plus a margin ranging from 0.75% to 1.25%.
The Alternative Base Rate is the greater of (a) Societe Generale's Prime Rate or
(b) the Federal Funds
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<PAGE>
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 fourth quarter of 1997 and for 1998
are anticipated to be $64.3 million in the aggregate, of which $56.3 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" 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 September 28, 1997 to purchase $51.2 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," "--History of Losses" and
"--Restrictions Imposed Under New Credit Facility; Security Interest."
OLD CREDIT FACILITY
In January 1995, the Company and its lenders amended the Old Credit Facility
as a result of certain covenant violations and, in connection therewith, the
lenders were granted the right to receive a contingent payment in certain
circumstances. In January 1996, the Old Credit Facility was amended and restated
pursuant to which revolving credit and term loans totaling $373.6 million were
converted to revolving credit loans of $38.5 million and term loans of $335.1
million. In connection therewith, the lenders received Class B common shares
which increased their interests in the Company to an aggregate of 50% of the
then-issued and outstanding common shares. As a result of the issuance of
certain common shares to management and the exercise of certain warrants,
additional common shares were issued to the lenders in 1996 to maintain their
minimum equity interest at 47.5%. 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 common shares upon certain events. As part of the Recapitalization,
the Old Credit Facility will be repaid, the outstanding Class B common shares
will be converted into shares of Common Stock, the ownership of such lenders
will decrease to approximately 9.8% of the outstanding Common Stock (4.5% if the
Underwriters' over-allotment option is exercised in full) and such lenders'
nominees on the Board of Directors will be replaced. See "Management,"
"Ownership of Common Stock," "Shares Eligible for Future Sale," "Underwriting"
and Note 7 of Notes to Consolidated Financial Statements.
NET OPERATING LOSS CARRYFORWARDS
As of December 29, 1996, the Company and its subsidiaries had a federal net
operating loss ("NOL") carryforward of $40.1 million. Because of a change of
ownership of the Company under Section 382 of the Internal Revenue Code on March
26, 1996 (see Note 9 of Notes to Consolidated Financial Statements), $29.7
million of the NOL carryforward can be used only to offset current or future
taxable income to the
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extent that net unrealized built-in gains which existed at March 26, 1996 are
recognized by March 26, 2001. Accordingly, a valuation allowance has been
recorded to offset the $29.7 million of the NOL carryforward. The consolidated
balance sheet of the Company as of December 29, 1996 includes the tax effect of
the remaining federal and state NOLs ("New NOLs") of $4.6 million for the
periods prior to March 26, 1996 and $5.8 million for the period from March 27,
1996 to December 29, 1996. It is expected that the Common Stock Offering will
result in the Company having another change of ownership under Section 382 of
the Internal Revenue Code. Accordingly, in tax years ending after the Common
Stock Offering, the Company will be limited in how much of its New NOLs it can
utilize. The amount of New NOLs that can be utilized in any tax year ending
after the date of the Common Stock Offering will be limited to an amount equal
to the equity value of the Company immediately prior to the Common Stock
Offering (without taking into account the proceeds of the Offerings) multiplied
by the long-term tax exempt rate in effect for the month of the Common Stock
Offering (5.3% for October 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. See "Risk Factors--
Regulation."
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.
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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 662 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 September 28, 1997, Friendly's generated $667.0 million in total
revenues and $74.9 million in EBITDA (as defined herein) and incurred $44.0
million of interest expense. During the same period, management estimates that
over $230 million of total revenues were from the sale of approximately 21
million gallons of frozen desserts.
Friendly's restaurants target families with children and adults who desire a
reasonably-priced meal in a full-service setting. The Company's menu offers a
broad selection of freshly-prepared foods which appeal to customers throughout
all day-parts. Breakfast items include specialty omelettes and breakfast
combinations featuring eggs, pancakes and bacon or sausage. Lunch and dinner
items include a new line of wrap sandwiches, entree salads, soups, super-melts,
specialty burgers and new stir-fry, chicken, pot pie, tenderloin steak and
seafood entrees. Friendly's is also recognized for its extensive line of ice
cream shoppe treats, including proprietary products such as the
Fribble-Registered Trademark-, Candy Shoppe-Registered Trademark- Sundaes and
the Wattamelon Roll-Registered Trademark-.
The Company believes that one of its key strengths is the strong consumer
awareness of the Friendly's brand name, particularly as it relates to the
Company's signature frozen desserts. This strength and the Company's
vertically-integrated operations provide several competitive advantages,
including the ability to (i) utilize its broad, high-quality menu to attract
customer traffic across multiple day-parts, particularly the afternoon and
evening snack periods, (ii) generate incremental revenues through strong
restaurant and retail market penetration, (iii) promote menu enhancements and
extensions in combination with its unique frozen desserts and (iv) control
quality and maintain operational flexibility through all stages of the
production process.
Friendly's, founded in 1935, was publicly held from 1968 until January 1979,
at which time it was acquired by Hershey Foods Corporation ("Hershey"). While
owned by Hershey, the Company increased the total number of restaurants from 601
to 849 yet devoted insufficient resources to product development and capital
improvements. In 1988, The Restaurant Company ("TRC"), an investor group led by
Donald Smith, the Company's current Chairman, Chief Executive Officer and
President, acquired Friendly's from Hershey (the "TRC Acquisition"). The high
leverage associated with the TRC Acquisition and the Old Credit Facility
severely impacted the liquidity and profitability of the Company and, therefore,
limited the scope and implementation of certain of the Company's business and
growth strategies. The Company has reported net losses and had earnings that
were insufficient to cover fixed charges for each fiscal year since the TRC
Acquisition except for the nine months ended September 28, 1997. As a result of
subsequent restructurings, and upon completion of the Recapitalization and the
Related Transactions, approximately 16.8% and 9.8% of the Common Stock will be
owned by Company's employees and lenders under the Old Credit Facility,
respectively. See "Risk Factors," "Selected Consolidated Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Ownership of Common Stock."
Despite the Company's capital constraints, management 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)
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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 South Korea and the United
Kingdom 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."
Implementation of these initiatives since the TRC Acquisition has resulted
in substantial improvements in revenues and EBITDA. Despite the closing of 152
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 7.5% from $557.3 million in 1989 to $599.3 million in the
twelve-months ended September 28, 1997, while average revenue per restaurant has
increased 29.8% from $665,000 to $863,000 during the same period. Retail,
institutional and other revenues and franchise revenues have also increased from
$1.4 million in 1989 to $67.7 million in the twelve months ended September 28,
1997. In addition, EBITDA has increased 58.0% from $47.4 million in 1989 to
$74.9 million in the twelve-month period ended September 28, 1997, while
operating income has increased from $4.1 million to $42.0 million over the same
period.
Friendly's intends to utilize the increased liquidity and operating and
financial flexibility resulting from consummation of the Recapitalization in
order to continue to grow the Company's revenues and earnings by implementing
the following key business strategies: (i) continuously upgrade the menu and
introduce new products, (ii) revitalize and re-image existing Friendly's
restaurants, (iii) construct new restaurants, (iv) enhance the Friendly's dining
experience, (v) expand the restaurant base through high-quality franchisees,
(vi) increase market share through additional retail accounts and restaurant
locations, (vii) introduce modified formats of the Friendly's concept into
non-traditional locations and (viii) extend the Friendly's brand into
international markets.
COMPETITIVE STRENGTHS
THE COMPANY BELIEVES THAT, IN THE NORTHEAST, ITS LEADING POSITION IN
FULL-SERVICE RESTAURANT AND PREMIUM FROZEN DESSERT SALES IS ATTRIBUTABLE TO THE
FOLLOWING COMPETITIVE STRENGTHS:
STRONG BRAND NAME RECOGNITION. During the past 60 years, management
believes the Friendly's brand name has become synonymous with high-quality food
and innovative frozen desserts. The Company believes that the brand name
awareness created by its premium frozen dessert heritage drives customer
traffic, particularly during the afternoon and evening snack periods, promotes
menu enhancement and extension and generates incremental revenues from the
Company's retail and non-traditional distribution channels. The Company's
independent surveys indicate that, in the Northeast, over 90% of all households
recognize the Friendly's brand and that over 30% of these households visit a
Friendly's restaurant every three months.
SIGNATURE FROZEN DESSERTS. Friendly's produces an innovative line of
high-quality freshly-scooped and packaged frozen desserts, which have been cited
by customers as a key reason for choosing Friendly's. Accordingly, approximately
50% of all visits to a Friendly's restaurant include a frozen dessert purchase.
Freshly-scooped specialties served in Friendly's restaurants include the Jim
Dandy and Oreo-Registered Trademark- Brownie sundaes, and the
Fribble-Registered Trademark-, the Company's signature thick shake. Packaged
goods available for purchase in both restaurant and retail locations include
traditional and low-fat ice cream, yogurt and sorbets in half gallons, pints and
cups and a wide variety of ice cream cakes, pies and rolls such as the Jubilee
Roll-Registered Trademark- and Wattamelon Roll-Registered Trademark-. In
addition, the Company licenses from Hershey the rights to feature in its
signature desserts certain candy brands such as Almond
Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-, Reeses
Pieces-Registered Trademark-, Reeses-Registered Trademark- Peanut Butter Cups
and York-Registered Trademark- Peppermint Patties.
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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 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
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new Oreo-Registered Trademark- Brownie Sundae. Largely as a result of new
premium items, guest check averages have increased 7.4% during the first nine
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 633 restaurants since the beginning of 1989, increasing average
restaurant revenues from $665,000 in 1989 to $863,000 in the twelve months ended
September 28, 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 through the opening of four new Company-owned restaurants in 1997 (two of
which have opened to date) and 10 new restaurants in 1998.
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 696 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 opened in October 1997. 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") participates in a
licensing agreement with a South Korean enterprise to develop Friendly's "Great
American" ice cream shoppes in that country. As of
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September 28, 1997, the licensee and its sublicensees were operating 18 ice
cream shoppes, and the Company expects such parties to operate 28 ice cream
shoppes by the end of 1997. FII also sells the Company's frozen desserts in
several chain restaurants, theaters and food courts in the United Kingdom. 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.
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 the location of the 696 restaurants operating as
of September 28, 1997.
<TABLE>
<CAPTION>
COMPANY-OWNED/LEASED
------------------------------------
FREESTANDING OTHER FRANCHISED TOTAL
STATE RESTAURANTS RESTAURANTS (A) RESTAURANTS (B) RESTAURANTS
- ----------------------------------------------------- --------------- ------------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Connecticut.......................................... 49 20 -- 69
Delaware............................................. -- 1 6 7
Florida.............................................. 13 2 -- 15
Maine................................................ 10 -- -- 10
Maryland............................................. 3 7 22 32
Massachusetts........................................ 116 37 -- 153
Michigan............................................. 1 -- -- 1
New Hampshire........................................ 14 6 -- 20
New Jersey........................................... 47 18 -- 65
New York............................................. 130 34 -- 164
Ohio................................................. 57 3 -- 60
Pennsylvania......................................... 51 13 -- 64
Rhode Island......................................... 8 -- -- 8
Vermont.............................................. 7 3 -- 10
Virginia............................................. 10 2 6 18
--- --- --- ---
Total............................................ 516 146 34 696
</TABLE>
- ------------------------
(a) Includes primarily malls and strip centers.
(b) The franchised restaurants (representing 30 freestanding and four other
restaurants) have been leased or subleased to DavCo pursuant to the DavCo
Agreement. See "Prospectus Summary--Recent Developments."
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The 546 freestanding restaurants, including 30 franchised to DavCo, range in
size from approximately 2,600 square feet to approximately 5,000 square feet.
The 150 mall and strip center restaurants, including four franchised to DavCo,
average approximately 3,000 square feet. Of the 662 restaurants operated by the
Company at September 28, 1997, the Company owned the buildings and the land for
279 restaurants, owned the buildings and leased the land for 145 restaurants,
and leased both the buildings and the land for 238 restaurants. The Company's
leases generally provide for the payment of fixed monthly rentals and related
occupancy costs (e.g. property taxes, common area maintenance and insurance).
Additionally, most mall and strip center leases require the payment of common
area maintenance charges and incremental rent of between 3.0% and 6.0% of the
restaurant's sales.
RESTAURANT ECONOMICS
During the twelve-month period ended September 28, 1997, average revenue per
restaurant was $863,000, average restaurant cash flow was $153,000 (after rent
expense of $20,000) and average restaurant operating income was $121,000.
Average cash flow represents operating income before depreciation and
amortization. Average revenue per restaurant for the 232 freestanding
restaurants with more than 100 seats was $1,099,000, average revenue per
restaurant for the 285 freestanding restaurants with less than 100 seats was
$694,000 and average revenue per restaurant for the 145 other restaurants was
$818,000. The Company has opened 12 new restaurants since the beginning of 1994,
nine of which had been operating for at least 12 months as of September 28,
1997. Such nine restaurants, which had an average of 136 seats, generated
average revenue per restaurant of $1,201,000, average restaurant cash flow of
$186,000 (after rent expense of $91,000) and average restaurant operating income
of $130,000.
The average cash investment to open such nine restaurants (all of which were
conversions) was approximately $460,000, excluding pre-opening expenses, or
$1,394,000 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 conversions will cost $500,000 to $600,000 per
restaurant, excluding land and pre-opening expenses. The Company converted a
178-seat restaurant in Burlington, Vermont in December 1996 at a cost of
$540,000, or $1,568,000 including rent expense capitalized at 9.0%. This
restaurant has achieved average weekly revenues of $36,000 through September 28,
1997. The Company also converted a 136-seat restaurant in Berlin, Vermont in
September 1997 at a cost of approximately $500,000, or approximately $972,000
including rent expense capitalized at 9.0%.
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 land and
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 $800,000, or $1,080,000 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."
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RESTAURANT RE-IMAGING. The Company expects to complete the re-imaging of 70
restaurants in 1997 (12 of which have been completed to date) at an estimated
cost of $120,000 per restaurant (not including $850,000 of one time costs
related to development of the prototype). This cost typically includes interior
and exterior redecoration and a new exterior lighting package. The Company
expects to complete the re-imaging of approximately 110 restaurants during 1998.
NEW RESTAURANT CONVERSION AND CONSTRUCTION. The Company has converted one
restaurant in 1997 at a cost of approximately $500,000. The Company expects to
construct three new restaurants in 1997 (one of which has been completed to
date) at an estimated cost of approximately $800,000 per restaurant, excluding
land and pre-opening expenses. The Company expects to complete the conversion or
construction of approximately ten restaurants during 1998.
SEATING CAPACITY EXPANSION PROGRAM. Since the TRC Acquisition and through
September 28, 1997, the Company has expanded seating capacity by an average of
50 seats at 26 restaurants at an average cost of $292,000 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 seven restaurants in 1997 (five of
which have been completed to date) at an estimated cost of $244,000 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 September 28, 1997, the Company has installed touch-screen point of
sale ("POS") register systems in approximately 340 restaurants at an average
cost of $34,000 per restaurant. These POS register systems are designed to
improve revenue realization, food cost management and labor scheduling while
increasing the speed and accuracy of processing customer orders. The Company
expects to install POS register systems in approximately 40 restaurants during
1998.
FRANCHISING PROGRAM
The Company recently initiated a franchising strategy to expand its
restaurant presence in under-penetrated markets, accelerate restaurant growth in
new markets, increase marketing and distribution efficiencies and preempt
competition by acquiring restaurant locations in the Company's targeted markets.
With the substantial completion of the Company's restaurant revitalization
program, the development and initial deployment of its two new freestanding
restaurant prototypes and the successful introduction of its new dinner line,
the Company believes it is in a position to maximize the value of its brand
appeal to prospective franchisees. The Company's wholly owned subsidiary,
Friendly's Restaurants Franchise, Inc. ("FRFI") commenced operations in 1996 for
the purpose of franchising various restaurant concepts. Since it began
operations, FRFI has developed and now offers a franchise program for both
Friendly's restaurants and Friendly's Cafes. The Company seeks franchisees who
have related business experience, capital adequacy to build-out the Friendly's
concept and no operations which have directly competitive restaurant or food
concepts. On July 14, 1997, the Company entered into the DavCo Agreement
pursuant to which DavCo purchased certain assets and rights in 34 existing
Friendly's restaurants in Maryland, Delaware, the District of Columbia and
northern Virginia, committed to open an additional 74 restaurants over the next
six years and, subject to the fulfillment of certain conditions, further agreed
to open 26 additional restaurants, for a total of 100 new restaurants in this
franchising region over the next ten years.
QUALITY CONTROL PROGRAMS
The Company's high quality standards are promoted through strict product
specifications, guest service programs and defined daily operating systems and
procedures for maintenance, cleanliness and safety. Policy and operating manuals
and video support materials for employee training are maintained in all
Friendly's restaurants. The Company uses a variety of guest feedback systems to
measure, monitor and
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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
freestanding 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 $60.1 million in the twelve months ended September 28, 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-
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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 opened in October 1997. The Company
supplies frozen desserts to non-traditional locations such as colleges and
universities, sports facilities, amusement parks, secondary school systems and
business cafeterias directly or through selected vendors pursuant to multi-year
license agreements.
INTERNATIONAL OPERATIONS
The Company, through its FII subsidiary, has a master license agreement with
a South Korean enterprise to develop Friendly's "Great American" ice cream
shoppes offering freshly-scooped and packaged frozen desserts. As of September
28, 1997, the licensee and its sublicensees were operating 18 ice cream shoppes,
and the Company expects such parties to operate 28 ice cream shoppes by the end
of 1997. FII also has various licensing arrangements with several companies in
the United Kingdom under which certain of the Company's frozen desserts are
distributed in the United Kingdom. The Company's strategy in the United Kingdom
is to sell Friendly's branded frozen deserts in full and quick-service
restaurants, movie theaters, railway and bus stations, shopping malls and
airport locations pursuant to license agreements. Non-restaurant locations will
vary from full dipping stations to sundae station kiosks or sundae carts. In
addition, the Company's products will be distributed to selected retailers for
resale. In addition, the Company is a 50% partner in a joint venture in
Shanghai, China which has manufactured and distributed frozen desserts on a
limited basis. The joint venture is currently seeking additional distribution
for its products in China. In markets where a capital investment by the Company
is required to introduce its brand, the Company seeks to monetize such
investment by entering into franchising or licensing arrangements, and
subsequently to redeploy its capital, if necessary, into new international
markets. The Company believes that there are significant growth opportunities
within South Korea, the United Kingdom and China, as well as in other countries,
in particular those within the Pacific Rim.
MARKETING
The Company's marketing strategy is to continue to strengthen Friendly's
brand equity and further capitalize on its strong customer 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
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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 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.
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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.
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 24,000 and
28,000 depending on the season of the year. As of September 28, 1997, the
Company employed approximately 24,000 employees, of which approximately 23,000
were employed in Friendly's restaurants (including 120 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
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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.
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
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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.
The Company's restaurant operations are also subject to Federal and state
laws governing such matters as wages, working conditions, citizenship
requirements and overtime. Some states have set minimum wage requirements higher
than the Federal level, and the Federal government recently increased the
Federal minimum wage. In September 1997, the second phase of an increase in the
minimum wage was implemented in accordance with the Federal Fair Labor Standards
Act of 1996. Significant numbers of hourly personnel at the Company's
restaurants are paid at rates related to the Federal minimum wage and,
accordingly, increases in the minimum wage will increase labor costs at the
Company's restaurants. Other governmental initiatives such as mandated health
insurance, if implemented, could adversely affect the Company as well as the
restaurant industry in general. The Company is also subject to the Americans
with Disabilities Act of 1990, which, among other things, may require certain
minor renovations to its restaurants to meet federally-mandated requirements.
The cost of these renovations is not expected to be material to the Company.
LEGAL PROCEEDINGS
From time to time the Company is named as a defendant in legal actions
arising in the ordinary course of its business. The Company is not party to any
pending legal proceedings other than routine litigation incidental to its
business. The Company does not believe that the resolutions of these claims
should have a material adverse effect on the Company's financial condition or
results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The executive officers and directors of the Company and their respective
ages and positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ------------------------------ --- ---------------------------------------------------------------------------
<S> <C> <C>
Donald N. Smith 57 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 52 Executive Vice President, Corporate Finance, General Counsel and Secretary
Gerald E. Sinsigalli 59 President, Food Service Division
Dennis J. Roberts 48 Senior Vice President, Restaurant Operations
Scott D. Colwell 39 Vice President, Marketing
Henry V. Pettis III 52 Vice President, Franchising and Operations Services
George G. Roller 49 Vice President, Finance, Chief Financial Officer and Treasurer
Garrett J. Ulrich 46 Vice President, Human Resources
Michael J. Daly* 55 Director
Steven L. Ezzes 50 Director
Barry Krantz* 53 Director
Charles A. Ledsinger, Jr. 47 Director
Burton J. Manning* 65 Director
Gregory L. Segall* 34 Director
</TABLE>
* Messrs. Krantz and Segall, currently on the Board of Directors as the
nominees of the lenders under the Old Credit Facility, will be replaced as
directors by Messrs. Daly and Manning upon consummation of the
Recapitalization.
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, Vice President Corporate Development and Vice
President, Finance and Chief Financial Officer. Mr. McDonald is a certified
public accountant.
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JOSEPH A. O'SHAUGHNESSY has been Senior Executive Vice President since
October 1988. Mr. O'Shaughnessy has been employed in various capacities with the
Company since 1957. Mr. O'Shaughnessy's duties have included District and
Division Manager, Director and Vice President of Operations and Executive Vice
President.
LARRY W. BROWNE has been Executive Vice President, Corporate Finance,
General Counsel and Secretary of the Company since September 1988. Mr. Browne
has also been President and Managing Director of Friendly's International, Inc.
since 1996. Mr. Browne has been the Executive Vice President, Corporate Finance,
General Counsel and Secretary of TRC since November 1985 and was with Perkins
from 1985 until 1996, most recently holding the position of Senior Vice
President, Corporate Finance.
GERALD E. SINSIGALLI has been President, Food Service Division of the
Company since January 1989. Mr. Sinsigalli has been employed in various
capacities with the Company since 1965. Mr. Sinsigalli's duties have included
District and Division Manager, Director and Vice President of Operations and
Senior Vice President.
DENNIS J. ROBERTS has been Senior Vice President, Restaurant Operations of
the Company since January 1996. Mr. Roberts has been employed in various
capacities with the Company since 1969. Mr. Roberts' duties have included
Restaurant, District and Division Manager, Regional Training Manager, Director
and Vice President of Restaurant Operations.
SCOTT D. COLWELL has been Vice President, Marketing of the Company since
January 1996. Mr. Colwell has been employed in various capacities with the
Company since 1982 including Director, New Business Development; Senior
Director, Marketing and Sales and Senior Director, Retail Business.
HENRY V. PETTIS III has been employed by the Company since 1990 and became
Vice President, Franchising and Operations Services in 1996. Mr. Pettis was
President and Chief Executive Officer of Florida Food Industries from 1988 to
1990.
GEORGE G. ROLLER has been Vice President, Finance and Chief Financial
Officer and Treasurer of the Company since January 1996. Mr. Roller was Vice
President and Treasurer of the Company from 1989 until January 1996. Mr. Roller
is a certified public accountant.
GARRETT J. ULRICH has been Vice President, Human Resources since September
1991. Mr. Ulrich held the position of Vice President, Human Resources for Dun &
Bradstreet Information Services, North America from 1988 to 1991. From 1978 to
1988, Mr. Ulrich held various Human Resource executive and managerial positions
at Pepsi Cola Company, a division of PepsiCo.
MICHAEL J. DALY will become a Director of the Company upon consummation of
the Recapitalization. Mr. Daly has been President and CEO of Baystate Health
System since December 1981.
STEVEN L. EZZES was reelected as a Director of the Company in December 1995.
Mr. Ezzes previously served as a Director of the Company from January 1991 to
May 1992. Mr. Ezzes has been a Managing Director of Scotia Capital Markets
(USA), an investment banking firm, since November 1996. Prior to that he was a
partner of the Airlie Group, a private investment firm, since 1988. Mr. Ezzes
has also been a Managing Director of Lehman Brothers, an investment banking
firm.
BARRY KRANTZ has been a Director of the Company since April 1996. From
January 1994 to August 1995, Mr. Krantz served as President and Chief Operating
Officer of Family Restaurants, Inc. Mr. Krantz served at Restaurant Enterprises
Group, Inc. from December 1988 until January 1994 where he held the positions of
Chief Operating Officer and President of the Family Restaurant Division.
CHARLES A. LEDSINGER, JR. became a Director of the Company in October 1997
and had previously served as a Director of the Company from August 1992 to July
1997. Mr. Ledsinger is the Senior Vice President and Chief Financial Officer of
St. Joe Corporation where he has been employed since May 1997. Prior to
46
<PAGE>
joining St. Joe Corporation, he served as the Senior Vice President and Chief
Financial Officer of Harrah's Entertainment, Inc. where he was employed since
1978.
BURTON J. MANNING will become a Director of the Company upon consummation of
the Recapitalization. Mr. Manning has been the Chairman and Chief Executive
Officer of J. Walter Thompson, Inc. since 1987.
GREGORY L. SEGALL has been a Director of the Company since April 1996. Mr.
Segall has served as Chairman, Chief Executive Officer and President of
Consolidated Vision Group, Inc. since April 1997. Since October 1992, Mr. Segall
has also been Managing Director and Principal of Chrysalis Management Group,
LLC. Prior to 1992, Mr. Segall was a Managing Director of Sigoloff & Associates,
Inc. Mr. Segall has also served as Chief Executive Officer of a number of
retail, real estate and technology companies. In connection with his management
consulting practice, Mr. Segall has, over the past ten years, served as an
officer and/or director of a variety of companies which have either filed
petitions or had petitions filed against them under the U.S. Bankruptcy Code.
Mr. Segall's involvement in these companies was required by his employment by
Chrysalis Management Group, LLC and Sigoloff & Associates, Inc., both of which
are management consulting groups which specialize in restructuring and
reorganizing businesses. In each case, Mr. Segall became an officer and/or
director only after his employer had been retained for the purpose of taking a
company through the reorganization process.
The Executive Officers of the Company serve at the discretion of the Board
of Directors.
INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES
CLASSES OF DIRECTORS
Following the closing of the Common Stock Offering, the Board of Directors
will be divided into three classes, each of whose members will serve for a
staggered three-year term. At this time, Messrs. Daly and Manning will join the
Board of Directors, replacing Messrs. Krantz and Segall who currently serve as
Directors as the nominees of the lenders under the Old Credit Facility. Messrs.
Daly and Manning will serve in the class whose term expires in 1998; Messrs.
Ezzes and Ledsinger will serve in the class whose term expires in 1999; and Mr.
Smith will serve in the class whose term expires in 2000. Upon the expiration of
the term of a class of Directors, Directors within such class will be elected
for a three-year term at the annual meeting of stockholders in the year in which
such term expires.
BOARD COMMITTEES
The Company's Board of Directors has established an Audit Committee, a
Compensation Committee and a Nominating Committee. The Audit Committee is
responsible for nominating the Company's independent accountants for approval by
the Board of Directors, reviewing the scope, results and costs of the audit by
the Company's independent accountants and reviewing the financial statements of
the Company. Upon consummation of the Recapitalization, Messrs. Ledsinger and
Ezzes will be 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. Upon the consummation of the Recapitalization, a
Compensation Committee will be installed whose members shall be Messrs.
Ledsinger and Manning. The Nominating Committee is responsible for nominating
individuals to stand for election to the Board of Directors. Upon consummation
of the Recapitalization, Messrs. Daly, Ezzes and Smith will be 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.
47
<PAGE>
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 of Directors and special
Board of Directors meeting attended, plus expenses.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
After consideration of the recommendations of Mr. Smith, compensation
matters of the Company are currently determined by Messrs. Ezzes, Segall, Krantz
and Ledsinger, members of the Company's Board of Directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Summary Compensation Table below sets forth the annual base salary and
other annual compensation paid during the last three fiscal years to the
Company's chief executive officer and each of the other four most highly
compensated executive officers whose cash compensation exceeded $100,000 in a
combination of salary and bonus (the "named executive officers"). During 1994,
1995 and 1996, no long-term compensation was paid to the named executive
officers.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------------
RESTRICTED
STOCK OTHER ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS AWARDS(A) COMPENSATION COMPENSATION
- ---------------------------------- ------------- ---------- ---------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Donald N. Smith (b)............... 1996 $ 495,355 $ 150,000 $ 0 $ 0 $ 0
Chairman, Chief Executive 1995 472,640
Officer and President 1994 450,736
Larry W. Browne................... 1996 265,822 30,000 201 0 0
Executive Vice President, 1995 257,788
Corporate Finance, General 1994 249,619
Counsel and Secretary
Joseph A. O'Shaughnessy........... 1996 255,974 37,000 201 0 0
Senior Executive Vice President 1995 253,348
1994 245,720
Gerald E. Sinsigalli.............. 1996 249,552 40,000 201 0 0
President, Food Service Division 1995 239,646
1994 229,582
Paul J. McDonald.................. 1996 246,145 47,000 201 0 0
Senior Executive Vice President, 1995 236,780
Chief Administrative Officer and 1994 213,076
Assistant Secretary
</TABLE>
- ------------------------
(a) Represents the value of restricted stock awarded on March 25, 1996 under the
Company's management stock plan (the "Management Stock Plan"), which was
issued in substitution of stock rights awarded under a subsequently
terminated stock rights plan. As of December 29, 1996, Messrs. Browne,
O'Shaughnessy, Sinsigalli and McDonald each had 3,765 shares with a value of
$151 as of such date. Twenty-five percent of the shares of restricted stock
vested on December 29, 1996 upon the attainment of a minimum operating cash
flow target. The remaining shares of restricted stock will vest upon
consummation of the Recapitalization. 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.
48
<PAGE>
PENSION PLAN TABLE
The following table sets forth the estimated annual benefits payable, based
on the indicated credited years of service and the indicated average annual
remuneration used in calculating benefits, under the Pension Plan (as defined
below).
<TABLE>
<CAPTION>
ESTIMATED BENEFIT BASED ON YEARS OF SERVICE (A)
----------------------------------------------------------
REMUNERATION 15 20 25 30 35
- ------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 125,000 $ 11,171 $ 17,544 $ 24,444 $ 31,475 $ 39,031
150,000 13,405 21,053 29,333 37,770 46,837
175,000 15,639 24,562 34,222 44,065 54,643
200,000 17,873 28,071 39,111 50,360 62,451
300,000 26,809 42,106 58,664 75,539 93,675
400,000 35,746 56,142 78,221 100,720 124,901
500,000 44,682 70,177 97,775 125,899 156,123
600,000 53,619 84,214 117,330 151,078 187,350
700,000 62,555 98,249 136,885 176,259 218,573
</TABLE>
- ------------------------------
(a) Benefits under the Friendly Ice Cream Corporation Cash Balance Pension Plan
(the "Pension Plan") are generally determined based on the value of a
participant's cash balance account under the plan. Each year, a percentage
of compensation (limited to $150,000 for 1996 in accordance with rules
promulgated under the Internal Revenue Code of 1986 (the "Code")) is
contributed to an individual's cash balance account under the Pension Plan
based on his years of credited service. Interest credits are also
contributed to each cash balance account annually. The cash balance formula
was implemented effective January 1, 1992, at which time the accrued
benefits of participants were converted to the opening balance in the cash
balance account. The above amounts are annual straight life annuity amounts
(which are not reduced for social security benefits) payable upon retirement
at age 65 and assume salary increases of 5.0% per year, interest credits of
5.0% per year and that the cash balance formula under the Pension Plan has
always been in effect. The foregoing amounts also reflect amounts
attributable to benefits payable under the Friendly Ice Cream Corporation
Supplemental Executive Retirement Plan, (the "SERP"), which provides
benefits to the covered individuals which cannot be provided under the
Pension Plan due to the certain limitations of the Internal Revenue Code,
including the limitation on compensation. The SERP was implemented effective
as of January 1, 1995. Mr. Smith did not become a participant in the SERP
until January 1, 1996. As of January 1, 1997, Messrs. Smith, Browne and
McDonald had 8, 8 and 21 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 PROGRAM
In connection with the Common Stock Offering, the Company established a
program pursuant to which a one-time award of Common Stock will be made to
approximately 70 employees of the Company in recognition of their services to
the Company (the "Limited Stock Compensation Program"). Approximately 300,000
shares of Common Stock will be awarded under the program (after giving effect to
the Recapitalization). The Common Stock awards will vest upon consummation of
the Common Stock Offering, however, the shares will be subject to transfer
restrictions for a period of four years. The shares will become transferable on
a pro rata basis on the first through fourth anniversaries of the Common Stock
Offering. Messrs. O'Shaughnessy, Sinsigalli and McDonald will be awarded 14,011,
17,284 and 17,284 shares respectively under the program.
Under a separate component of the Limited Stock Compensation Program, Mr.
Smith will be awarded approximately 100,742 shares of Common Stock which will
vest upon consummation of the Common Stock Offering. This one-time award was
made in recognition of his services to the Company. See "Shares Eligible for
Future Sale."
49
<PAGE>
RESTRICTED STOCK PLAN
The Company currently maintains a restricted stock plan for the benefit of
eligible employees. All outstanding awards under such restricted stock plan will
vest upon consummation of the Common Stock Offering, and no new awards will be
issued under that plan. Prior to the Common Stock Offering, the Company will
adopt a new restricted stock plan (the "Restricted Stock Plan"), pursuant to
which 375,000 shares of Common Stock will be reserved for issuance, subject to
adjustment in the case of certain corporate transactions affecting the number or
type of shares of outstanding common stock. The Restricted Stock Plan will
provide for the award of Common Stock, the vesting of which will be subject to
such conditions and limitations as shall be established by the Board of
Directors, which may include conditions relating to continued employment with
the Company or the achievement of performance measures. Unless the Board of
Directors determines otherwise, any shares of restricted stock which are not
vested upon the participant's termination of employment with the Company shall
be forfeited. Upon a change in control of the Company, all restrictions on
outstanding shares of restricted stock shall lapse and such shares shall become
nonforfeitable.
The Restricted Stock Plan shall be administered by the Board of Directors,
which shall have the authority to determine the employees who will receive
awards under the Restricted Stock Plan and the terms and conditions of such
awards. Approximately 70 employees of the Company who are classified as salary
grade 109 and above will initially be eligible for participation in the
Restricted Stock Plan. The Board of Directors, in its sole discretion, may
designate other employees and persons providing material services to the Company
as eligible for participation in the Restricted Stock Plan.
STOCK OPTION PLAN
The Company does not currently maintain a stock option plan, although
certain employees of the Company participated in a previously terminated stock
rights plan. See Note 13 of Notes to Consolidated Financial Statements.
In connection with the Common Stock Offering, the Company will adopt a stock
option plan (the "Stock Option Plan"), pursuant to which approximately 400,000
shares of Common Stock will be reserved for issuance, subject to adjustment in
the case of certain corporate transactions affecting the number or type of
shares of outstanding Common Stock. The Stock Option Plan will provide for the
issuance of nonqualified stock options and incentive stock options which are
intended to satisfy the requirements of section 422 of the Code and stock
appreciation rights.
The Stock Option Plan will be administered by the Board of Directors. The
Board of Directors will determine the employees who will receive awards under
the Stock Option Plan and the terms of such awards. The award of a stock option
will entitle the recipient thereof to purchase a specified number of shares of
Common Stock at the exercise price specified by the Board of Directors. The
award of a stock appreciation right entitles the recipient thereof to a payment
equal to the excess of the fair market value of a share of Common Stock on the
date of exercise over the exercise price specified by the Board of Directors.
The exercise price of a stock option or stock appreciation right shall not be
less than the fair market value of a share of Common Stock on the date the stock
option or stock appreciation right is granted. The Board of Directors may
delegate its authority under the Stock Option Plan to a committee of the Board
of Directors.
Stock options and stock appreciation rights shall become exercisable in
accordance with the terms established by the Board of Directors, which terms may
relate to continued service with the Company or attainment of performance goals.
Stock options awarded in connection with the Common Stock Offering will become
exercisable over a five-year period, subject to the optionee's continued
employment with the Company. All awards under the Stock Option Plan will become
fully vested and exercisable upon a change in control of the Company.
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,
50
<PAGE>
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.
51
<PAGE>
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding beneficial
ownership of (i) the Class A and Class B common shares of the Company prior to
the Recapitalization, and (ii) the Common Stock, after giving effect to the
Common Stock Offering, by (a) each person who is known by the Company to own
beneficially more than 5% of the outstanding (1) Class A and Class B common
shares as of October 15, 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 Executive Officers and (d) all Directors and Executive Officers of
the Company as a group.
<TABLE>
<CAPTION>
COMMON SHARES BENEFICIALLY OWNED COMMON STOCK BENEFICIALLY
PRIOR TO THE RECAPITALIZATION
--------------------------------------- OWNED AFTER THE
RECAPITALIZATION (A)
NUMBER --------------------------
------------------------ PERCENTAGE PERCENTAGE
NAME CLASS A (B) CLASS B (B) OF TOTAL NUMBER OF TOTAL
- ---------------------------------------------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Donald N. Smith..................................... 759,680 -- 30.7% 736,164 10.3%
Equitable........................................... 256,375 -- 10.4 151,349 2.1
Larry W. Browne..................................... 28,702 -- 1.2 21,130 *
Paul J. McDonald.................................... 7,726 -- * 26,031 *
Joseph A. O'Shaughnessy............................. 7,726 -- * 13,747 *
Gerald E. Sinsigalli................................ 7,726 -- * 26,031 *
Michael J. Daly (c)................................. -- -- * -- *
Steven L. Ezzes..................................... -- -- * -- *
Barry Krantz (c).................................... -- -- * 924 *
Charles A. Ledsinger, Jr............................ -- -- * -- *
Burton J. Manning (c)............................... -- -- * -- *
Gregory L. Segall (c)............................... -- -- * 924 *
All directors and Executive Officers as a group (14
persons).......................................... 843,012 -- 34.1 934,544 13.1
Lenders under Old Credit Facility (d)(e)............ -- 1,187,503 48.0 701,036 9.8
</TABLE>
- ------------------------
* Represents less than 1% of the outstanding (i) Class A and Class B common
shares prior to the Recapitalization and (ii) Common Stock after the
Recapitalization.
(a) Gives effect to the Common Stock Offering, and the following, which will
occur in connection with the Recapitalization: (i) the return of 124,258,
105,026, 8,593, 486,467 and 51,398 shares of Common Stock to the Company by
Mr. Smith, Equitable, Mr. Browne, the lenders under the Old Credit Facility
and the other existing non-management shareholders, respectively, (ii) the
issuance of 100,742 and 300,000 of such shares to Mr. Smith and certain
members of management under the Company's Limited Stock Compensation
Program, respectively and (iii) the issuance of 27,113 shares of Common
Stock under the Management Stock Plan. Of the 300,000 shares issued under
the Limited Stock Compensation Program, 17,284, 5,000, 17,284 and 114,532
shares have been allocated to Messrs. McDonald, O'Shaughnessy, Sinsigalli
and to all directors and executive officers as a group, respectively. Of the
27,113 shares of Common Stock to be issued under the Management Stock Plan,
each of Messrs. Browne, McDonald, O'Shaughnessy and Sinsigalli is to receive
1,021 shares. Does not reflect 400,000 shares and 375,000 shares reserved
for issuance under the Stock Option Plan and Restricted Stock Plan,
respectively. It is anticipated that approximately 30,000 shares of Common
Stock will be issued to Directors and Executive Officers as a group under
the Restricted Stock Plan shortly after the consummation of the
Recapitalization. See "Shares Eligible for Future Sale" and Note 17 of Notes
to Consolidated Financial Statements.
(b) In connection with the Recapitalization, each outstanding Class A common
share and Class B common share of the Company will be converted into one
share of Common Stock.
(c) Messrs. Krantz and Segall, currently on the Board of Directors as nominees
of the lenders under the Old Credit Facility, will be replaced as Directors
by Messrs. Daly and Manning upon consummation of the Recapitalization. See
"Management."
(d) Prior to the Recapitalization, the Bank of Boston, as agent for the lenders
under the Old Credit Facility, held 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) Foothill Capital Corporation, Baker Nye Special Credits, Inc., D K
Acquisition Partners, L.P., Contrarian Capital Advisors, L.L.C., CoMac
Partners L.P., CoMac International N.V., Tribeca Investments L.L.C., Carl
Marks Management Company, L.P., Sanwa Business Credit Corporation, Halcyon
Distressed Securities L.P., Bedrock Asset Trust I and Morgan Stanley & Co.
International Limited, each of which is a lender under the Old Credit
Facility, and Equitable, Quidnet Partners, BMA Limited Partnership, Mr.
Browne and Peter Joost, other stockholders of the Company, have granted to
the Underwriters a 30-day option to purchase 86,790, 11,680, 65,367, 8,970,
23,316, 8,970, 24,919, 57,286, 15,246, 48,409, 12,274, 15,066, 151,349,
46,893, 19,085, 21,130 and 8,092 shares of Common Stock beneficially owned
by such lenders and other stockholders, respectively, as part of the
Underwriters' over-allotment option. If such over-allotment option is
exercised in full, the lenders under the Old Credit Facility would
beneficially own 4.5%, and such other stockholders would no longer
beneficially own any, of the outstanding Common Stock. See "Underwriting."
52
<PAGE>
CERTAIN TRANSACTIONS
The Company's policy is to only enter into a transaction with an affiliate
in the ordinary course of, and pursuant to the reasonable requirements of, its
business and upon terms that are no less favorable to the Company than could be
obtained if the transaction was entered into with an unaffiliated third party.
Set forth below is a description of certain transactions between the Company and
its affiliates during 1994, 1995 and 1996 and ongoing transactions between the
Company and its affiliates. The Company believes that the terms of such
transactions were or are no less favorable to the Company than could have been
obtained if the transaction was entered into with an unaffiliated third party.
In March 1996, the Company's pension plan acquired three restaurant
properties from the Company. The land, buildings and improvements were purchased
by the plan at their appraised value of $2.0 million and are located in
Connecticut, Vermont and Virginia. Simultaneously with the purchase, the pension
plan leased back the three properties to the Company at an aggregate annual base
rent of $214,000 for the first five years and $236,000 for the following five
years. The pension plan was represented by independent legal and financial
advisors.
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 purchases 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.
53
<PAGE>
The Company is a party to two agreements with TRC relating to taxes. In
connection with the distribution by TRC to its shareholders of the Common Stock
in the Company immediately prior to the 1996 bank restructuring, the Company
entered into a Tax Disaffiliation Agreement dated March 25, 1996. Under the Tax
Disaffiliation Agreement, TRC must indemnify the Company for all income taxes
during periods when the Company and its affiliates were includible in a
consolidated federal income tax return with TRC and for any income taxes due as
a result of the Company ceasing to be a member of the TRC consolidated group.
TRC does not retain any liability for periods when the Company and its
affiliates were not includible in the TRC consolidated federal income tax return
and the Company must indemnify TRC if any such income taxes are assessed against
TRC. TRC also does not indemnify the Company for a reduction of the Company's
existing NOLs or for NOLs previously utilized by TRC. The Tax Disaffiliation
Agreement terminates 90 days after the statute of limitations expires for each
tax covered by the agreement including unfiled returns as if such returns had
been filed by the appropriate due date.
The Company also entered into a Tax Responsibility Agreement dated as of
March 19, 1997 in connection with the sale of RIC to the Company. Under the Tax
Responsibility Agreement, the Company must indemnify TRC for any income taxes
that are assessed against TRC as a result of the operations of RIC. The Tax
Responsibility Agreement terminates 90 days after the statute of limitations
expires for each tax covered by the agreement.
DESCRIPTION OF NEW CREDIT FACILITY
The Company has entered into a commitment letter with Societe Generale
relating to a $175 million senior secured credit facility to be entered into
contingent upon completion of the Offerings (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.
The senior secured New Credit Facility will consist of (a) the $105 million
Term Loan Facility, (b) the five-year Revolving Credit Facility providing for
revolving loans to the Company in a principal amount not to exceed $55 million
(including a $5 million sublimit for each of trade and standby letters of
credit) and (c) the $15 million Letter of Credit Facility providing for standby
letters of credit in the normal course of business and having a maturity
contemporaneous with that of the Revolving Credit Facility.
The full amount of the Term Loan Facility will be drawn on the closing date
of the Recapitalization (the "Closing Date"). Amounts repaid or prepaid under
the Term Loan Facility may not be reborrowed. Loans under the Revolving Credit
Facility will be available at any time on and after the Closing Date and prior
to the date which is five years after the Closing Date. Letters of credit shall
expire annually, but shall have a final expiration date no later than thirty
days prior to final maturity, which for the Letter of Credit Facility will also
be five years from the Closing Date.
It is expected that the Term Loan Facility will require quarterly
amortization payments beginning on April 15, 1999. Annual amortization payments
will total $4.7 million, $10.7 million, $12.7 million, $14.7 million, $18.7
million, $20.3 million and $23.5 million in 1999 through 2005, respectively. In
addition to the scheduled amortization, it is expected that the Term Loan
Facility will be permanently reduced by (i) specified percentages of each year's
Excess Cash Flow (as defined in the New Credit Facility) and (ii) 100% of the
aggregate net proceeds from asset sales not in the ordinary course of business
and certain insurance claim proceeds, in each case, 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 and Excess Cash Flow 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.
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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 certain of its domestic subsidiaries 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.
At the Company's option, the interest rates per annum applicable to the New
Credit Facility will be either LIBOR (as defined in the New Credit Facility),
plus a margin ranging from 2.25% to 2.75%, or the Alternative Base Rate (as
defined in the New Credit Facility), plus a margin ranging from 0.75% to 1.25%.
The Alternative Base Rate is the greater of (a) Societe Generale's Prime Rate or
(b) the Federal Funds Rate plus 0.50%. It is expected that after the first
twelve calendar months of the New Credit Facility, pricing reductions will be
available in certain circumstances.
The 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.
DESCRIPTION OF SENIOR NOTES
Concurrent with consummating the Common Stock Offering and entering into the
New Credit Facility, the Company is offering to the public $175 million
aggregate principal amount of its Senior Notes due 2007. The consummation of the
Common Stock Offering and the Senior Note Offering and the closing with respect
to the New Credit Facility are each contingent upon the others.
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 specified declining redemption prices, plus accrued and unpaid interest
thereon, if any, to the date of redemption. In addition, on or prior to ,
2000, the Company may redeem, at any time and from time to time, up to $60
million of the aggregate principal amount of the Senior Notes at a redemption
price of % of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of redemption, with the net cash proceeds from one
or more qualified equity offerings; provided, however, that at least $115
million of the aggregate principal amount of the Senior Notes remains
outstanding following each such redemption.
Upon the occurrence of a change of control, 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 repurchase date. The Company
will also be obligated in certain circumstances to offer to repurchase Senior
Notes at a purchase price of 100% of the principal amount thereof, plus accrued
interest, with the net available cash from certain asset sales and dispositions.
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 future secured indebtedness
of the Company, including indebtedness under the New Credit Facility. The Senior
Notes will be unconditionally guaranteed on a senior unsecured basis, by
Friendly's Restaurants Franchise, Inc., the Company's franchise subsidiary and
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may also be so guaranteed by certain subsidiaries of the Company created or
acquired after consummation of the Recapitalization.
The Indenture under which the Notes will be issued (the "Indenture") will
contain certain covenants pertaining to the Company and its Restricted
Subsidiaries (as defined in the Indenture), 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 or restrictions on distributions
from restricted subsidiaries, (iv) limitations on sales of assets and,
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.
The Indenture will contain customary events of default, including a
cross-default provision triggered by the non-payment of outstanding indebtedness
at stated final maturity or by the acceleration of outstanding indebtedness, in
each case in excess of a specified amount. If an event of default occurs and is
continuing under the Indenture, the trustee or the holders of at least 25% in
aggregate principal amount of the outstanding Senior Notes may declare the
principal of and accrued but unpaid interest on all the Senior Notes to be due
and payable. 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. 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.
DESCRIPTION OF CAPITAL STOCK
Effective upon the filing of the Restated Articles prior to the consummation
of the Common Stock Offering, the authorized capital stock of the Company will
consist of 50,000,000 shares of Common Stock, $0.01 par value per share, and
1,000,000 shares of preferred stock, $0.01 par value per share (the "Preferred
Stock"), which may be issued in one or more series.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of the Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in the Common Stock Offering will be, when issued and
paid for, fully paid and nonassessable. The rights, preferences and privileges
of holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future. Upon the closing of the Common
Stock Offering, there will be no shares of Preferred Stock outstanding.
PREFERRED STOCK
Upon filing of the Restated Articles, the Board of Directors will be
authorized, subject to certain limitations prescribed by law, without further
stockholder approval, to issue from time to time up to an
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aggregate of 1,000,000 shares of Preferred Stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each such series thereof, including
the dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices,
liquidation preferences and the number of shares constituting any series or
designations of such series. The issuance of Preferred Stock may have the effect
of delaying, deferring or preventing a change of control of the Company. The
Company has no present plans to issue any shares of Preferred Stock. See "Risk
Factors--Effect of Certain Anti-Takeover Provisions."
MASSACHUSETTS LAW AND CERTAIN PROVISIONS OF THE COMPANY'S RESTATED ARTICLES OF
ORGANIZATION AND RESTATED BY-LAWS
Following the Common Stock Offering, the Company expects that it will be
subject to Chapter 110F of the Massachusetts General Laws, an anti-takeover law.
In general, this statute prohibits a publicly held Massachusetts corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
becomes an interested stockholder, unless (i) the interested stockholder obtains
the approval of the Board of Directors prior to becoming an interested
stockholder, (ii) the interested stockholder acquires 90% of the outstanding
voting stock of the corporation (excluding shares held by certain affiliates of
the corporation) at the time it becomes an interested stockholder, or (iii) the
business combination is approved by both the Board of Directors and the holders
of two-thirds of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder). An "interested stockholder" is a
person who, together with affiliates and associates, owns 5% or more of the
outstanding voting stock of the corporation or, if the person is an affiliate or
associate of the corporation, did own 5% or more of the outstanding voting stock
of the corporation at any time within the prior three years. A "business
combination" includes a merger, a stock or asset sale, and certain other
transactions resulting in a financial benefit to the interested stockholder.
The Company's Restated Articles and Restated By-Laws provide for a
classified board of directors consisting of three classes as nearly equal in
size as possible. In addition, the Restated Articles and Restated By-Laws
provide that directors may be removed only for cause by the affirmative vote of
(i) the holders of at least a majority of the shares issued outstanding and
entitled to vote or (ii) a majority of the directors then in office. Under the
Restated Articles and Restated By-Laws, the Board of Directors is empowered to
fix the exact number of directors and any vacancy, however occurring, including
a vacancy resulting from an enlargement of the Board, may only be filled by a
vote of a majority of the directors then in office. The classification of the
Board of Directors and the limitations on the removal of directors and filling
of vacancies could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from acquiring, control of the
Company. See "Management--Executive Officers and Directors of the Company."
The Restated By-Laws include a provision excluding the Company from the
applicability of Massachusetts General Laws Chapter 110D, entitled "Regulation
of Control Share Acquisitions." In general, this statute provides that any
stockholder of a corporation subject to this statute who acquires 20% or more of
the outstanding voting stock of a corporation may not vote such stock unless the
stockholders of the corporation so authorize. The Board of Directors may amend
the Company's Restated By-Laws at any time to subject the Company to this
statute prospectively.
The Restated By-Laws also require that a stockholder seeking to have any
business conducted at a meeting of stockholders give notice to the Company prior
to the scheduled meeting. The notice from the stockholder must describe the
proposed business to be brought before the meeting and include information about
the stockholder making the proposal, any beneficial owner on whose behalf the
proposal is made and any other stockholder known to be supporting the proposal.
The Restated By-Laws further provide that a special stockholders meeting may be
called only by the Board of Directors, Chairman of the
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Board of Directors or President of the Company. These provisions may discourage
another person or entity from making a tender offer for the Common Stock,
because such person or entity, even if it acquired a majority of the outstanding
shares, would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders meeting.
The Massachusetts General Laws provide generally that an amendment to the
Articles of Organization which changes the authorized capital stock of a
corporation requires the affirmative vote of a majority of the shares entitled
to vote on any matter and any amendment which impairs or diminishes the rights
of stockholders or any other amendment to the Articles of Organization requires
the affirmative vote of two-thirds of the shares entitled to vote on any matter.
Under Massachusetts law and the Restated By-Laws, the Board of Directors, upon
the affirmative vote of a majority of the directors then in office, or the
stockholders, upon the affirmative vote of a majority of the shares entitled to
vote on any matter, may amend the Restated By-Laws, except that the Restated
By-Laws provide that the anti-takeover provisions (described in the preceding
three paragraphs) contained in the Restated By-Laws may not be amended by the
stockholders except upon the affirmative vote of two-thirds of the shares
entitled to vote on any matter.
The Restated Articles and Restated By-Laws contain provisions to indemnify
the Company's directors and officers to the fullest extent authorized by
Massachusetts law against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company. In addition, the
Restated Articles provide that the directors of the Company will not be
personally liable for monetary damages to the Company for breaches of their
fiduciary duty as directors, unless they violated their duty of loyalty to the
Company or its stockholders, acted in bad faith, knowingly or intentionally
violated the law, authorized illegal dividends or redemptions or derived an
improper personal benefit from their action as directors.
STOCKHOLDER RIGHTS PLAN
The Company's Board of Directors intends to enact a stockholder rights plan
(the "Rights Plan") designed to protect the interests of the Company's
stockholders in the event of a potential takeover for a price which does not
reflect the Company's full value or which is conducted in a manner or on terms
not approved by the Board of Directors as being in the best interests of the
Company and its stockholders. The Rights Plan has certain anti-takeover effects,
in that it will cause substantial dilution to a person or group that attempts to
acquire a significant interest in the Company on terms not approved by the Board
of Directors.
Pursuant to the Rights Plan, upon the filing of the Restated Articles prior
to the closing of the Common Stock Offering, the Board will declare a dividend
distribution of one purchase right ("Right") for every outstanding share of
Common Stock. The terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between the Company and The Bank of New York (the "Rights
Agent"). The Rights Agreement provides for the issuance of one Right for every
share of Common Stock issued and outstanding on the date the dividend is
declared (the "Dividend Record Date") and for each share of Common Stock which
is issued or sold after that date and prior to the Distribution Date (as defined
below).
Each Right entitles the holder to purchase from the Company one
one-thousandth of a share of Series A Junior Preferred Stock, $0.01 par value,
of the Company (the "Junior Preferred Stock"), at a price of $0.09 per one
one-thousandth of a share, subject to adjustments in certain events. The Rights
will expire on the date which is ten years from the Dividend Record Date (the
"Expiration Date"), or upon the earlier redemption of the Rights, and are not
exercisable until the Distribution Date.
No separate Rights certificates will be issued at the present time. Until
the Distribution Date (or earlier redemption or expiration of the Rights), (i)
the Rights will be evidenced by the outstanding Common Stock certificates and
will be transferred with and only with the Common Stock certificates, (ii) new
Common Stock certificates issued after the Dividend Record Date upon transfer or
new issuance of the Common Stock will contain a notation incorporating the
Rights Agreement by reference and
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(iii) the surrender for transfer of any Common Stock certificate will also
constitute the transfer of the Rights associated with the Common Stock
represented by such certificate.
The Rights will separate from the Common Stock on the Distribution Date.
Unless otherwise determined by a majority of the Continuing Directors (as
defined below) then in office, the Distribution Date (the "Distribution Date")
will occur on the earlier of (i) the tenth business day following the date of a
public announcement that a person, together with its affiliates and associates,
except as described below, has acquired or owns the rights to acquire beneficial
ownership of 15% or more of the outstanding shares of Common Stock
(collectively, an "Acquiring Person") (such date is referred to herein as the
"Shares Acquisition Date") or (ii) the tenth business day following commencement
of a tender offer or exchange offer that would result in any person, together
with its affiliates and associates, owning 15% or more of the outstanding Common
Stock. After the Distribution Date, separate certificates evidencing the Rights
("Rights Certificates") will be mailed to holders of record of the Common Stock
as of the close of business on the Distribution Date and thereafter such
separate Rights Certificates alone will evidence the Rights. The Board of
Directors, by action of the Continuing Directors, may delay the distribution of
the Certificates. The term "Continuing Directors" means (i) any member of the
Company's Board of Directors who is not an Acquiring Person, or an affiliate,
associate or representative of an Acquiring Person, or (ii) any person who
subsequently becomes a member of the Board, who is not an Acquiring Person or an
affiliate, associate or representative of an Acquiring Person, if such person's
nomination for election or election to the Board is recommended or approved by a
majority of Continuing Directors. The Rights Plan excludes Mr. Smith, Equitable,
the Company's senior management and their respective affiliates from the
definition of "Acquiring Person."
If, at any time after the Dividend Record Date, any person or group of
affiliated or associated persons (other than the Company and its affiliates)
shall become an Acquiring Person, each holder of a Right will have the right to
receive shares of Common Stock (or, in certain circumstances, cash, property or
other securities of the Company) having a market value of two times the exercise
price of the Right. Following the occurrence of any such event, any Rights that
are, or (under certain circumstances specified in the Rights Agreement) were,
beneficially owned by any Acquiring Person shall immediately become null and
void. Also, if the Company were acquired in a merger or other business
combination, or if more than 50% of its assets or earning power were sold, each
holder of a Right would have the right to exercise such Right and thereby
receive common stock of the acquiring company with a market value of two times
the exercise price of the Right.
The Board of Directors may, at its option, at any time after any person
becomes an Acquiring Person, exchange all or part of the then outstanding and
exercisable Rights for shares of Common Stock at an exchange ratio of one share
of Common Stock per Right, appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the Dividend Record Date
(as the same may be adjusted, the "Exchange Ratio"). The Board of Directors
however, may not effect an exchange at any time after any person (other than (i)
the Company, (ii) any subsidiary of the Company, (ii) any employee benefit plan
of the Company or of any subsidiary of the Company or (iv) any entity holding
Common Stock for or pursuant to the terms of any such plan), together with all
affiliates of such person, becomes the beneficial owner of 50% or more of the
Common Stock then outstanding. Immediately upon the action of the Board of
Directors ordering the exchange of any Rights and without any further action and
without any notice, the right to exercise such Rights will terminate and the
only right thereafter of a holder of such Rights will be to receive that number
of shares of Common Stock equal to the number of such Rights held by the holder
multiplied by the Exchange Ratio.
The exercise price of the Rights, and the number of one one-thousandths of a
share of Junior Preferred Stock or other securities or property issuable upon
exercise of the Rights, are subject to adjustment from time to time to prevent
dilution (i) in the event of a stock dividend on, or a subdivision combination
or reclassification of, the Junior Preferred Stock, (ii) upon the grant to
holders of the Junior Preferred Stock of certain rights or warrants to subscribe
for shares of the Junior Preferred Stock or
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certain convertible securities at less than the current market price of the
Junior Preferred Stock, or (iii) upon the distribution to holders of the Junior
Preferred Stock of evidences of indebtedness or assets (excluding cash dividends
paid out of the earnings or retained earnings of the Company and certain other
distributions) or of subscription rights, or warrants (other than those referred
to above).
At any time prior to the tenth day (or such later date as may be determined
by a majority of the Continuing Directors) after the Shares Acquisition Date,
the Company, by a majority vote of the Continuing Directors, may redeem the
Rights at a redemption price of $0.01 per Right, subject to adjustment in
certain events (as the same may be adjusted, the "Redemption Price").
Immediately upon the action of the Continuing Directors electing to redeem the
rights, the right to exercise the Rights will terminate, and the only right of
the holders of Rights will be to receive the Redemption Price.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of the Company, including, without limitation, the right to
vote or to receive dividends.
The Rights Agreement may be amended by the Board of Directors at any time
prior to the Distribution Date without the approval of the holders of the
Rights. From and after the Distribution Date, the Rights Agreement may be
amended by the Board of Directors without the approval of the holders of the
Rights in order to cure any ambiguity, to correct any defective or inconsistent
provisions, to change any time period for redemption or any other time period
under the Rights Agreement or to make any other changes that do not adversely
affect the interests of the holders of the Rights (other than any Acquiring
Person or its affiliates and associates or their transferees).
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is The Bank
of New York.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Common Stock Offering, there has been no market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in the
public market following the Common Stock Offering could adversely affect the
prevailing market price of the Common Stock.
Upon completion of the Common Stock Offering, the Company will have
7,125,000 shares of Common Stock outstanding. Of these shares, the 5,000,000
shares sold in the Common Stock Offering will be freely tradeable without
restriction under the Securities Act, except that any shares purchased by
persons deemed to be "affiliates" of the Company, as that term is defined in
Rule 144 ("Rule 144") under the Securities Act ("Affiliates"), generally may be
sold only in compliance with the limitations of Rule 144 described below.
The remaining 2,125,000 shares of Common Stock are deemed "restricted
securities" (the "Restricted Shares") under Rule 144 because they were
originally issued and sold by the Company in private transactions in reliance
upon exemptions from the Securities Act. Under Rule 144, substantially all of
these remaining Restricted Shares may become eligible for resale 90 days after
the date the Company becomes subject to the reporting requirements of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act") (i.e., 90
days after the consummation of the Common Stock Offering), and may be resold
prior to such date only in compliance with the registration requirements of the
Securities Act or pursuant to a valid exemption therefrom. However, the
2,125,000 shares are subject to the lock-up agreements described below.
In general, under Rule 144, if a period of at least one year has elapsed
between the later of the date on which "restricted securities" were acquired
from the Company or an "affiliate" of the Company then the holder of such
restricted securities is entitled to sell a number of shares within any
three-month period that does not exceed the greater of (i) 1.0% (approximately
75,000 shares after the Common Stock Offering) of the then outstanding shares of
the Common Stock or (ii) the average weekly reported volume
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of trading of the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements pertaining
to the manner of such sales, notices of such sales and the availability of
current public information concerning the Company. Affiliates of the Company may
sell shares not constituting restricted shares in accordance with the foregoing
volume limitations and other requirements but without regard to the one-year
period. Under Rule 144(k), if a period of at least two years has elapsed between
the later of the date on which restricted shares were acquired from the Company
or the date on which they were acquired from an affiliate of the Company, a
holder of such restricted shares who is not an affiliate of the Company at the
time of the sale and has not been an affiliate of the Company for at least three
months prior to the sale would be entitled to sell the shares immediately
without regard to the volume limitations and other conditions described above.
All executive officers and directors and the existing shareholders of the
Company who, after the Common Stock Offering, will hold in the aggregate
approximately 2,125,000 shares of Common Stock (1,500,158 shares if the
Underwriters' over-allotment option is exercised in full), have agreed, pursuant
to lock-up agreements, that they will not, without the prior written consent of
NationsBanc Montgomery Securities, Inc., offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock beneficially owned by them for a
period of 360 days after the date of this Prospectus, except that the lenders
under the Old Credit Facility may sell (i) shares of Common Stock to other
stockholders of the Company existing prior to the Common Stock Offering and (ii)
any shares of Common Stock acquired by them in or after the Common Stock
Offering, which shares are not "restricted securities" pursuant to Rule 144
under the Securities Act.
The Company intends to file registration statements under the Securities Act
to register (i) all shares of Common Stock issuable pursuant to the Company's
Stock Option Plan and Restricted Stock Plan and (ii) certain shares of Common
Stock to be issued under the Company's Management Stock Plan and Limited Stock
Compensation Program. Subject to the completion of the 360-day period described
above, shares of Common Stock issued under, or issued upon the exercise of
awards issued under such plans and after the effective date of such registration
statements, generally will be eligible for sale in the public market. See
"Management--Executive Compensation" and "Ownership of Common Stock."
The Company, its shareholders holding Class A and Class B common shares
prior to the Recapitalization and certain warrant holders have entered into an
amendment to an existing registration rights agreement providing that such
shareholders may demand registration under the Securities Act, at any time
within 18 months (the "Registration Period") after the end of the 360-day
lock-up period commencing with the date of this Prospectus, of shares of the
Company's Common Stock into which such Class A and Class B common shares are
converted in connection with the Recapitalization or for which such warrants are
exercised. The Company may postpone such a demand under certain circumstances.
In addition, such shareholders may request the Company to include such shares of
Common Stock in any registration by the Company of its capital stock under the
Securities Act during the Registration Period. In addition, prior to the
consummation of the Common Stock Offering, the Company and Mr. Smith intend to
enter into a registration rights agreement providing Mr. Smith with a demand
registration right covering his shares of Common Stock. See "Ownership of Common
Stock."
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UNDERWRITING
The underwriters named below, represented by NationsBanc Montgomery
Securities, Inc., Piper Jaffray Inc. and Tucker Anthony Incorporated (the
"Representatives"), have severally agreed, subject to the terms and conditions
contained in the underwriting agreement (the "Underwriting Agreement") by and
among the Company and the Underwriters, to purchase from the Company the number
of shares of Common Stock indicated below opposite their respective names at the
initial public offering price less the underwriting discount set forth on the
cover page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent and
that the Underwriters are committed to purchase all of such shares if they
purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------ ----------
<S> <C>
NationsBanc Montgomery Securities, Inc. ....................
Piper Jaffray Inc...........................................
Tucker Anthony Incorporated.................................
----------
Total................................................... 5,000,000
----------
----------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share, and the
Underwriters may allow to selected dealers, and such dealers may reallow, a
concession of not more than $ per share to certain other dealers. After the
Common Stock Offering, the public offering price and other selling terms may be
changed by the Representatives. The Common Stock is offered subject to receipt
and acceptance by the Underwriters, and to certain other conditions, including
the right to reject an order in whole or in part.
The Company, certain lenders under the Old Credit Facility and certain other
stockholders of the Company have granted an option to the Underwriters,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to a maximum of 750,000 additional shares of Common Stock to cover
over-allotments, if any, at the same price per share as the initial 5,000,000
shares to be purchased by the Underwriters. To the extent that the Underwriters
exercise this option, the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with the Common Stock
Offering. To the extent that such over-allotment option is not exercised in
full, the Underwriters will purchase up to 125,158 of such shares of Common
Stock from the Company pursuant to such option only after all of the 624,842
shares of Common Stock subject to such
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<PAGE>
option purchasable from the lenders under the Old Credit Facility and such other
stockholders of the Company have been purchased. See "Ownership of Common
Stock."
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, as amended, or will contribute to payments the Underwriters may
be required to make in respect thereof.
The Representatives have informed the Company that the Underwriters do not
expect to make sales of Common Stock offered by this Prospectus to accounts over
which they exercise discretionary authority.
Prior to the Common Stock Offering, there has been no public trading market
for the Common Stock. Consequently, the initial public offering price will be
determined by negotiations between the Representatives and the Company. Among
the factors to be considered in such negotiations are the history of, and the
prospects for, the Company and the industry in which it competes, an assessment
of the Company's management, its past and present earnings and the trend of such
earnings, the prospects for future earnings of the Company, the present state of
the Company's development, the general condition of securities markets at the
time of the Common Stock Offering and the market price of publicly traded stock
of comparable companies in recent periods.
The Company's executive officers, directors and certain principal
stockholders have agreed that, for a period of 360 days from the date of this
Prospectus, they will not offer, sell or otherwise dispose of any shares of
their Common Stock or options to acquire shares of Common Stock without the
prior written consent of NationsBanc Montgomery Securities, Inc. The Company has
agreed not to sell any shares of Common Stock for a period of 90 days from the
date of this Prospectus without the prior written consent of NationsBanc
Montgomery Securities, Inc., except for shares issued pursuant to the exercise
of options granted under employee stock option plans.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission (the "Commission") may limit the ability of
the Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the Representatives are permitted
to engage in certain transactions that stabilize the price of the Common Stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock. If the Underwriters create
a short position in the Common Stock in connection with the Common Stock
Offering, i.e., if they sell more shares of Common Stock than are set forth on
the cover page of this Prospectus, the Representatives may reduce that short
position by purchasing Common Stock in the open market. The Representatives may
also elect to reduce any short position by exercising all or part of the
over-allotment option described above. The Representatives may also impose a
penalty bid on certain Underwriters and selling group members. This means that
if the Representatives purchase shares of Common Stock in the open market to
reduce the Underwriters' short position or to stabilize the price of the Common
Stock, they may reclaim the amount of the selling concession from the
Underwriters and selling group members who sold those shares as part of the
Common Stock Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security. Neither the Company nor any of the
Underwriters makes any representation or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Representatives will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
Societe Generale Securities Corporation, the lead underwriter of the Senior
Note Offering, is providing certain advisory services in connection with the
Recapitalization, for which it is receiving a fee. Societe Generale, an
affiliate of Societe Generale Securities Corporation, is to be a lender under
the New
63
<PAGE>
Credit Facility and to act as arranger and administrative agent thereunder. See
"Description of New Credit Facility."
At the request of the Company, up to 250,000 shares of Common Stock offered
hereby have been reserved for sale to certain individuals, including directors
and employees of the Company and members of their families, and in management's
discretion, to others with whom the Company has maintained long-standing and
significant business relationships. The price of such shares to such parties
will be the initial public offering price set forth on the cover of this
Prospectus. The number of shares available to the general public will be reduced
to the extent those parties purchase reserved shares. Any shares not so
purchased will be offered hereby at the initial public offering price set forth
on the cover of this Prospectus.
The Equitable, which currently beneficially owns 10.4% of the outstanding
common shares, is an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation, a member of the National Association of Securities Dealers, Inc.
(the "NASD") and an underwriter in the Common Stock Offering. As a result of the
foregoing, the Common Stock Offering is subject to the provisions of Section
2720 of the Conduct Rules of the NASD (formerly Schedule E to the Bylaws of the
NASD) ("Section 2720"). Accordingly, the underwriting terms for the Common Stock
Offering will conform with the requirements set forth in Section 2720. In
particular, the price at which the Common Stock is to be distributed to the
public must be at a price no higher than that recommended by a "qualified
independent underwriter" who has also participated in the preparation of this
Prospectus and the Registration Statement of which this Prospectus is a part and
who meets certain standards. In accordance with this requirement, NationsBanc
Montgomery Securities, Inc. will serve in such role and will recommend the
public offering price in compliance with the requirements of Section 2720.
NationsBanc Montgomery Securities, Inc., in its role as qualified independent
underwriter, has performed the due diligence investigations and reviewed and
participated in the preparation of this Prospectus and the Registration
Statement of which this Prospectus is a part.
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 Common Stock, 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
64
<PAGE>
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. The Company intends to
furnish its stockholders with annual reports containing financial statements
audited by independent accountants and with quarterly reports containing interim
financial information for each of the first three quarters of each year.
65
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1995, December 29, 1996 and September 28, 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 Nine Months Ended September 29, 1996 (unaudited) and September 28,
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 Nine Months Ended September 28, 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 Nine Months Ended September 29, 1996 (unaudited) and September 28,
1997 (unaudited).................................................................................... F-6
Notes to Consolidated Financial Statements........................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Friendly Ice Cream Corporation:
We have audited the accompanying consolidated balance sheets of Friendly Ice
Cream Corporation and subsidiaries as of December 31, 1995 and December 29,
1996, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 29, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Friendly Ice Cream
Corporation and subsidiaries as of December 31, 1995 and December 29, 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 29, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 14, 1997 (except with respect to the matter
discussed in Note 16, as to which
the date is July 14, 1997)
F-2
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 28,
1997
DECEMBER 31, DECEMBER 29, -------------
1995 1996
------------ ------------ (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................................... $ 23,690 $ 18,626 $ 12,044
Restricted cash................................................................... -- -- 4,000
Trade accounts receivable......................................................... 5,233 4,992 7,863
Inventories....................................................................... 15,079 15,145 17,017
Deferred income taxes............................................................. 9,885 12,375 12,381
Prepaid expenses and other current assets......................................... 3,985 1,658 6,735
------------ ------------ -------------
TOTAL CURRENT ASSETS................................................................ 57,872 52,796 60,040
RESTRICTED CASH..................................................................... -- -- 8,907
INVESTMENT IN JOINT VENTURE......................................................... -- 4,500 3,388
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization............ 295,448 286,161 273,189
INTANGIBLES AND DEFERRED COSTS, net of accumulated amortization of $3,419, $4,790
and $5,858 (unaudited) at December 31, 1995, December 29, 1996 and September 28,
1997, respectively................................................................ 16,607 16,019 15,519
OTHER ASSETS........................................................................ 365 650 1,871
------------ ------------ -------------
TOTAL ASSETS........................................................................ $ 370,292 $ 360,126 $ 362,914
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt.............................................. $ 3,204 $ 1,289 $ 2,961
Current maturities of capital lease obligations................................... 6,466 6,353 4,778
Accounts payable.................................................................. 20,972 20,773 25,542
Accrued salaries and benefits..................................................... 13,525 13,855 14,130
Accrued interest payable.......................................................... 5,940 9,838 9,581
Insurance reserves................................................................ 6,605 3,973 6,773
Other accrued expenses............................................................ 15,838 17,415 14,170
------------ ------------ -------------
TOTAL CURRENT LIABILITIES........................................................... 72,550 73,496 77,935
------------ ------------ -------------
DEFERRED INCOME TAXES............................................................... 51,908 48,472 50,104
CAPITAL LEASE OBLIGATIONS, less current maturities.................................. 15,375 14,182 13,160
LONG-TERM DEBT, less current maturities............................................. 373,769 371,795 358,136
OTHER LONG-TERM LIABILITIES......................................................... 22,224 25,337 34,263
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 September 28, 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 September 28, 1997, respectively......................... 11 13 13
Class B, authorized -0-, 2,000 and 2,000 shares at December 31, 1995, December
29, 1996 and September 28, 1997, respectively; -0-, 1,187,503 and 1,187,503
(unaudited) shares issued and outstanding at December 31, 1995, December 29,
1996 and September 28, 1997, respectively...................................... -- 12 12
Class C, authorized -0-, 2,000 and 2,000 shares at December 31, 1995, December
29, 1996 and September 28, 1997, respectively; -0- shares issued and
outstanding at December 31, 1995, December 29, 1996 and September 28, 1997..... -- -- --
Additional paid-in capital........................................................ 46,842 46,905 46,905
Unrealized gain on investment securities, net of taxes............................ -- -- 130
Accumulated deficit............................................................... (212,387) (220,159) (217,796)
Cumulative translation adjustment................................................. -- 73 52
------------ ------------ -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)................................................ (165,534) (173,156) (170,684)
------------ ------------ -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)................................ $ 370,292 $ 360,126 $ 362,914
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------------- FOR THE NINE MONTHS ENDED
JANUARY 1, DECEMBER 31, DECEMBER 29, --------------------------------
1995 1995 1996 SEPTEMBER 29, SEPTEMBER 28,
------------ -------------- -------------- 1996 1997
--------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES................................... $ 631,014 $ 649,149 $ 650,807 $ 491,819 $ 508,033
COSTS AND EXPENSES:
Cost of sales.......................... 179,793 192,600 191,956 143,388 147,105
Labor and benefits..................... 211,838 214,625 209,260 159,502 159,315
Operating expenses..................... 132,010 143,854 143,163 109,006 112,009
General and administrative expenses.... 38,434 40,705 42,721 31,948 32,775
Debt restructuring expenses (Note 5)... -- 3,346 -- -- --
Write-down of property and equipment
(Note 6)............................. -- 4,006 227 -- 607
Depreciation and amortization.......... 32,069 33,343 32,979 25,127 24,226
GAIN ON SALE OF RESTAURANT OPERATIONS (NOTE
16)...................................... -- -- -- -- 2,303
------------ -------------- -------------- --------------- ---------------
OPERATING INCOME........................... 36,870 16,670 30,501 22,848 34,299
Interest expense, net of capitalized
interest of $176, $62, $49, $44
(unaudited) and $27 (unaudited) and
interest income of $187, $390, $318, $273
(unaudited) and $239 (unaudited) for the
years ended January 1, 1995, December 31,
1995 and December 29, 1996 and the nine
months ended September 29, 1996 and
September 28, 1997, respectively......... 45,467 41,904 44,141 33,084 32,972
Equity in net loss of joint venture........ -- -- -- -- 1,112
------------ -------------- -------------- --------------- ---------------
INCOME (LOSS) BEFORE BENEFIT FROM
(PROVISION FOR) INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................ (8,597 ) (25,234 ) (13,640 ) (10,236 ) 215
Benefit from (provision for) income
taxes.................................... 4,661 (33,419 ) 5,868 4,442 (88 )
------------ -------------- -------------- --------------- ---------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE........... (3,936 ) (58,653 ) (7,772 ) (5,794 ) 127
Cumulative effect of change in accounting
principle, net of income tax expense of
$1,554 (Note 10)......................... -- -- -- -- 2,236
------------ -------------- -------------- --------------- ---------------
NET INCOME (LOSS).......................... $ (3,936 ) $ (58,653 ) $ (7,772 ) $ (5,794 ) $ 2,363
------------ -------------- -------------- --------------- ---------------
------------ -------------- -------------- --------------- ---------------
PRO FORMA NET INCOME (LOSS) PER SHARE (NOTE
17) (UNAUDITED):
Income (loss) before cumulative effect
of change in accounting principle.... $ (1.09 ) $ (0.81 ) $ 0.02
Cumulative effect of change in
accounting principle, net of income
tax expense.......................... -- -- 0.31
-------------- --------------- ---------------
Net income (loss)...................... $ (1.09 ) $ (0.81 ) $ 0.33
-------------- --------------- ---------------
-------------- --------------- ---------------
PRO FORMA AMOUNTS ASSUMING NEW PENSION
METHOD IS RETROACTIVELY APPLIED:
Net income (loss) (Note 10)............ $ (3,506 ) $ (58,134 ) $ (7,214 ) $ (5,375 ) $ 127
------------ -------------- -------------- --------------- ---------------
------------ -------------- -------------- --------------- ---------------
Net income (loss) per share
(unaudited).......................... $ (1.01 ) $ (0.75 ) $ 0.02
-------------- --------------- ---------------
-------------- --------------- ---------------
PRO FORMA SHARES USED IN NET INCOME (LOSS)
PER SHARE CALCULATION (NOTE 17)
(UNAUDITED).............................. 7,125 7,125 7,125
-------------- --------------- ---------------
-------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------------------------------
CLASS A CLASS B CLASS C ADDITIONAL
---------------------- ---------------------- -------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- --------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 2, 1994...... 1,090,969 $ 11 -- $ -- -- $ -- $ 46,822
Net loss.................... -- -- -- -- -- -- --
--
--------- --- --------- --- --- -------
BALANCE, JANUARY 1, 1995...... 1,090,969 11 -- -- -- -- 46,822
Net loss.................... -- -- -- -- -- -- --
Contribution of capital..... -- -- -- -- -- -- 20
--
--------- --- --------- --- --- -------
BALANCE, DECEMBER 31, 1995.... 1,090,969 11 -- -- -- -- 46,842
Net loss.................... -- -- -- -- -- -- --
Issuance of common stock to
lenders................... -- -- 1,187,503 12 -- -- 38
Proceeds from exercise of
warrants.................. 71,527 1 -- -- -- -- 21
Compensation expense
associated with management
stock plan................ 122,888 1 -- -- -- -- 4
Translation adjustment...... -- -- -- -- -- -- --
--
--------- --- --------- --- --- -------
BALANCE, DECEMBER 29, 1996.... 1,285,384 13 1,187,503 12 -- -- 46,905
Net income (unaudited)...... -- -- -- -- -- -- --
Change in unrealized gain on
investment securities, net
of tax (unaudited)........ -- -- -- -- -- -- --
Translation adjustment
(unaudited)............... -- -- -- -- -- -- --
--
--------- --- --------- --- --- -------
BALANCE, SEPTEMBER 28, 1997
(unaudited).................. 1,285,384 $ 13 1,187,503 $ 12 -- $ -- $ 46,905
--
--
--------- --- --------- --- --- -------
--------- --- --------- --- --- -------
<CAPTION>
UNREALIZED
GAIN ON
INVESTMENT CUMULATIVE
SECURITIES, ACCUMULATED TRANSLATION
NET OF TAXES DEFICIT ADJUSTMENT TOTAL
------------------- ----------------- ------------------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 2, 1994...... $ -- $ (149,798) $ -- $(102,965)
Net loss.................... -- (3,936) -- (3,936)
--- ----------------- --- ---------
BALANCE, JANUARY 1, 1995...... -- (153,734) -- (106,901)
Net loss.................... -- (58,653) -- (58,653)
Contribution of capital..... -- -- -- 20
--- ----------------- --- ---------
BALANCE, DECEMBER 31, 1995.... -- (212,387) -- (165,534)
Net loss.................... -- (7,772) -- (7,772)
Issuance of common stock to
lenders................... -- -- -- 50
Proceeds from exercise of
warrants.................. -- -- -- 22
Compensation expense
associated with management
stock plan................ -- -- -- 5
Translation adjustment...... -- -- 73 73
--- ----------------- --- ---------
BALANCE, DECEMBER 29, 1996.... -- (220,159) 73 (173,156)
Net income (unaudited)...... -- 2,363 -- 2,363
Change in unrealized gain on
investment securities, net
of tax (unaudited)........ 130 -- -- 130
Translation adjustment
(unaudited)............... -- -- (21) (21)
--- ----------------- --- ---------
BALANCE, SEPTEMBER 28, 1997
(unaudited).................. $ 130 $ (217,796) $ 52 $(170,684)
--- ----------------- --- ---------
--- ----------------- --- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
----------------------------------------- -------------
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29,
1995 1995 1996 1996
----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ (3,936) $ (58,653) $ (7,772) $ (5,794)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of change in accounting principle...... -- -- -- --
Depreciation and amortization............................ 32,069 33,343 32,979 25,127
Write-down of property and equipment..................... -- 4,006 227 --
Deferred income tax (benefit) expense.................... (4,207) 33,419 (5,926) (4,442)
(Gain) loss on asset retirements......................... (259) 595 (916) (303)
Equity in net loss of joint venture...................... -- -- -- --
Changes in operating assets and liabilities:
Receivables............................................ (2,071) 679 241 480
Inventories............................................ 1,635 (1,044) (66) (2,183)
Other assets........................................... (1,603) 587 1,309 247
Accounts payable....................................... 2,333 (1,714) (199) 5,127
Accrued expenses and other long-term liabilities....... 14,420 16,572 6,286 5,378
----------- ------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 38,381 27,790 26,163 23,637
----------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................ (29,507) (19,092) (24,217) (18,547)
Proceeds from sales of property and equipment.............. 1,475 926 8,409 5,107
Purchases of investment securities......................... -- -- -- --
Proceeds from sales and maturities of investment
securities............................................... -- -- -- --
Acquisition of Restaurant Insurance Corporation, net of
cash acquired............................................ -- -- -- --
Advances to or investments in joint venture................ -- -- (4,500) (4,500)
----------- ------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES...................... (28,032) (18,166) (20,308) (17,940)
----------- ------------- ------------- -------------
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 32,196
Repayments of debt......................................... (69,338) (72,713) (52,084) (41,658)
Repayments of capital lease obligations.................... (6,190) (7,293) (7,131) (5,484)
----------- ------------- ------------- -------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES........ (7,899) 176 (10,997) (14,924)
----------- ------------- ------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH...................... -- -- 78 --
----------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 2,450 9,800 (5,064) (9,227)
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 $ 14,463
----------- ------------- ------------- -------------
----------- ------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES
Interest paid.............................................. $ 29,430 $ 25,881 $ 36,000 $ 26,042
Capital lease obligations incurred......................... 7,767 3,305 5,951 3,570
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 --
<CAPTION>
SEPTEMBER 28,
1997
-------------
<S> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ 2,363
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of change in accounting principle...... (2,236)
Depreciation and amortization............................ 24,226
Write-down of property and equipment..................... 607
Deferred income tax (benefit) expense.................... 78
(Gain) loss on asset retirements......................... 1,077
Equity in net loss of joint venture...................... 1,112
Changes in operating assets and liabilities:
Receivables............................................ (1,122)
Inventories............................................ (1,872)
Other assets........................................... 3,049
Accounts payable....................................... 4,769
Accrued expenses and other long-term liabilities....... (2,827)
-------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 29,224
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................ (14,656)
Proceeds from sales of property and equipment.............. 4,842
Purchases of investment securities......................... (8,181)
Proceeds from sales and maturities of investment
securities............................................... 316
Acquisition of Restaurant Insurance Corporation, net of
cash acquired............................................ (35)
Advances to or investments in joint venture................ (1,400)
-------------
NET CASH USED IN INVESTING ACTIVITIES...................... (19,114)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution of capital.................................... --
Proceeds from exercise of stock purchase warrants.......... --
Proceeds from borrowings................................... 44,211
Repayments of debt......................................... (56,199)
Repayments of capital lease obligations.................... (4,683)
-------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES........ (16,671)
-------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH...................... (21)
-------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... (6,582)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............... 18,626
-------------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 12,044
-------------
-------------
SUPPLEMENTAL DISCLOSURES
Interest paid.............................................. $ 30,236
Capital lease obligations incurred......................... 2,227
Capital lease obligations terminated....................... 141
Conversion of accrued interest payable to debt............. --
Issuance of common stock to lenders........................ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 29, 1996
AND SEPTEMBER 28, 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 September 28, 1997, none of these warrants had been
exercised.
As of December 29, 1996 and September 28, 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, 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 nine months
ended September 29, 1996 and September 28, 1997, restaurant sales were
approximately 93%, 91%, 92%, 92% and 90%, respectively, of FICC's revenues. As
of January 1, 1995, December 31, 1995, December 29, 1996 and September 28, 1997,
approximately 80%, 80%, 80% and 85% of FICC's owned restaurants were located in
the Northeast United States. As a result, a severe or prolonged economic
recession in this geographic area may adversely affect FICC more than certain of
its competitors which are more geographically diverse. Commencing in 1997, FICC
has franchised restaurants (see Note 16).
F-7
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION --
The consolidated financial statements include the accounts of FICC and its
subsidiaries after elimination of intercompany accounts and transactions.
FISCAL YEAR --
FICC's fiscal year ends on the last Sunday in December, unless that day is
earlier than December 27 in which case the fiscal year ends on the following
Sunday.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS --
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Future facts
and circumstances could alter management's estimates with respect to the
carrying value of long-lived assets and the adequacy of insurance reserves.
REVENUE RECOGNITION --
FICC recognizes restaurant revenue upon receipt of payment from the customer
and retail revenue upon shipment of product. Franchise royalty income, based on
gross sales of franchisees, is payable monthly and is recorded on the accrual
method as earned. Initial franchise fees are recorded upon completion of all
significant services, generally upon opening of the restaurant.
CASH AND CASH EQUIVALENTS --
FICC considers all investments with an original maturity of three months or
less when purchased to be cash equivalents.
INVENTORIES --
Inventories are stated at the lower of first-in, first-out cost or market.
Inventories at December 31, 1995, December 29, 1996 and September 28, 1997 were
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Raw Materials.................................... $ 2,129 $ 1,436 $ 2,191
Goods In Process................................. 114 58 207
Finished Goods................................... 12,836 13,651 14,619
------------ ------------ -------------
Total...................................... $ 15,079 $ 15,145 $ 17,017
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
INVESTMENT IN JOINT VENTURE --
In February 1996, FICC and another entity entered into a joint venture,
Shanghai Friendly Food Co., Ltd., a Chinese corporation. FICC has a 50%
ownership interest in the venture. Operations commenced in April 1997. FICC
accounts for the investment using the equity method. As of September 28, 1997,
FICC
F-8
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 $956,000.
INVESTMENTS --
FICC, through its wholly-owned subsidiary Restaurant Insurance Corporation
("RIC") (see Note 4), invests in equity securities ($576,000 fair market value
at September 28, 1997) which are included in other assets in the accompanying
consolidated balance sheet. 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 --
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 September 28, 1997, cash of $12,907,000 was
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 September 28, 1997, property and
equipment included (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Land............................................. $ 77,765 $ 75,004 $ 74,022
Buildings and Improvements....................... 110,231 112,359 113,347
Leasehold Improvements........................... 37,703 39,120 38,850
Assets Under Capital Leases...................... 37,307 42,893 41,642
Equipment........................................ 206,266 216,536 209,269
Construction In Progress......................... 6,147 6,424 13,941
------------ ------------ -------------
Property and Equipment........................... 475,419 492,336 491,071
Less: Accumulated Depreciation and
Amortization................................... (179,971) (206,175) (217,882)
------------ ------------ -------------
Property and Equipment--Net...................... $ 295,448 $ 286,161 $ 273,189
------------ ------------ -------------
</TABLE>
Major renewals and betterments are capitalized. Replacements and maintenance
and repairs which do not extend the lives of the assets are charged to
operations as incurred.
F-9
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
LONG-LIVED ASSETS --
Effective January 2, 1995, FICC adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" which had no impact.
FICC reviews the license agreement for the right to use various trademarks
and tradenames (see Note 5) for impairment on a quarterly basis. FICC recognizes
an impairment has occurred when the carrying value of the license agreement
exceeds the estimated future cash flows of the trademarked products.
FICC reviews each restaurant property quarterly to determine which
properties should be disposed of. This determination is made based on poor
operating results, deteriorating property values and other factors. FICC
recognizes an impairment has occurred when the carrying value of property
exceeds its estimated fair value, which is estimated based on FICC's experience
with similar properties and local market conditions, less costs to sell. (see
Note 6).
RESTAURANT CLOSURE COSTS --
Restaurant closure costs are recognized when a decision is made to close a
restaurant. Restaurant closure costs include the cost of writing-down the
carrying amount of a restaurant's assets to estimated fair market value, less
costs of disposal, and the net present value of any remaining operating lease
payments after the expected closure date.
INSURANCE RESERVES --
FICC is self-insured through retentions or deductibles for the majority of
its workers' compensation, automobile, general liability, product liability and
group health insurance programs. Self-insurance amounts vary up to $500,000 per
occurrence. Insurance with third parties, some of which is then reinsured
through RIC (see Note 4), is in place for claims in excess of these self-insured
amounts. RIC assumes 100% of the risk from $500,000 to $1,000,000 per occurrence
for FICC's worker's compensation, general liability and product liability
insurance. FICC and RIC's liability for estimated incurred losses are
actuarially determined and recorded on an undiscounted basis.
INCOME TAXES --
FICC accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. A valuation allowance is recorded for deferred tax assets whose
realization is not likely.
ADVERTISING --
FICC expenses production and other advertising costs the first time the
advertising takes place. For the years ended January 1, 1995, December 31, 1995
and December 29, 1996 and the nine months ended September 29, 1996 and September
28, 1997, advertising expense was approximately $15,430,000, $17,459,000,
$18,231,000, $13,854,000 and $15,270,000, respectively.
F-10
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS --
Effective December 30, 1996, FICC adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
which had no effect. This statement requires that after a transfer of financial
assets, an entity should recognize all financial assets and servicing assets it
controls and liabilities it has incurred, derecognize financial assets when
control has been surrendered, and derecognize liabilities when extinguished.
This statement also provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings and is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share", which establishes new standards for
computing and presenting earnings per share. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997 and
earlier application is not permitted. Upon adoption, all prior period earnings
per share data presented will be restated.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income (net income (loss) together with other non-owner changes in equity) and
its components in a full set of general purpose financial statements. SFAS No.
130 is effective for financial statements issued for periods ending after
December 15, 1997 and earlier application is permitted. Comprehensive income is
not materially different than net income (loss) for all periods presented.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which requires disclosures for each
segment of an enterprise that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. SFAS No. 131 is effective for financial
statements issued for periods ending after December 15, 1997 and earlier
application is encouraged. Under the terms of the new standard, FICC will report
segment information for restaurant and retail operations when material.
RECLASSIFICATIONS --
Certain prior year amounts have been reclassified to conform with current
year presentation.
INTERIM FINANCIAL INFORMATION --
The accompanying financial statements as of September 28, 1997 and for the
nine months ended September 29, 1996 and September 28, 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 nine months ended September 29, 1996 and
September 28, 1997 are not necessarily indicative of the results that may be
expected for the entire year due to the seasonality of the business.
Historically, higher revenues and profits are experienced during the second and
third fiscal quarters.
F-11
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITION OF RESTAURANT INSURANCE CORPORATION
On March 19, 1997, FICC acquired all of the outstanding shares of common
stock of Restaurant Insurance Corporation ("RIC"), a Vermont corporation, from
TRC for cash of $1,300,000 and a $1,000,000 promissory note payable to TRC
bearing interest at an annual rate of 8.25%. The promissory note and accrued
interest of approximately $1,024,000 was paid on June 30, 1997. RIC, which was
formed in 1993, reinsures certain FICC risks (i.e. workers' compensation,
employer's liability, general liability and product liability) from a third
party insurer (see Note 12).
The acquisition was accounted for as a purchase. Accordingly, the results of
operations for RIC for the period subsequent to March 20, 1997 are included in
the accompanying consolidated financial statements. No pro forma information is
included since the effect of the acquisition is not material. The purchase price
was allocated to net assets acquired based on the estimated fair market values
at the date of acquisition. The purchase price was allocated as follows (in
thousands):
<TABLE>
<S> <C>
Cash and Cash Equivalents......................................... $ 2,265
Restricted Cash and Investments................................... 12,061
Receivables and Other Assets...................................... 3,090
Loss Reserves..................................................... (13,231)
Other Liabilities................................................. (1,885)
---------
$ 2,300
---------
---------
</TABLE>
5. INTANGIBLE ASSETS AND DEFERRED COSTS
Intangible assets and deferred costs net of accumulated amortization as of
December 31, 1995, December 29, 1996 and September 28, 1997 were (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
License agreement for the right to use
various trademarks and tradenames amortized
over a 40 year life on a straight line basis... $ 15,231 $ 14,764 $ 14,415
Deferred financing costs amortized over
the terms of the loans on an effective yield
basis.......................................... 1,376 1,255 540
Deferred financing costs related to pending
registration statement (see Note 17)........... -- -- 564
------------ ------------ -------------
$ 16,607 $ 16,019 $ 15,519
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
In November 1994, FHC filed a Form S-1 Registration Statement and in 1995
elected not to proceed with the registration. Accordingly, previously deferred
costs totaling $3,346,000 related to this registration were expensed during the
year ended December 31, 1995.
6. WRITE-DOWN OF PROPERTY AND EQUIPMENT
At December 31, 1995, December 29, 1996 and September 28, 1997, there were
81, 50 and 41 restaurant properties held for disposition, respectively. The
restaurants held for disposition generally have
F-12
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. WRITE-DOWN OF PROPERTY AND EQUIPMENT (CONTINUED)
poor operating results, deteriorating property values or other adverse factors.
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
nine months ended September 28, 1997, the carrying values of 10 properties were
reduced by an aggregate of $607,000. FICC plans to dispose of the 41 properties
by December 31, 1998. The operating loss, prior to depreciation expense which is
not reported at the restaurant level, for the properties held for disposition
was $1,972,000, $1,129,000 and $769,000 for the years ended December 31, 1995
and December 29, 1996 and the nine months ended September 28, 1997,
respectively. The carrying value of the properties held for disposition at
December 31, 1995, December 29, 1996 and September 28, 1997 was approximately
$7,491,000, $4,642,000 and $3,308,000, 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 nine months ended
September 28, 1997, interest was accrued on the revolving credit and term loans
at an annual rate of 11%, with .5% of the accrued interest which is not
currently payable being accrued and classified as other long-term liabilities in
the accompanying consolidated balance sheet. The deferred interest will be
waived if the revolving credit and term loans are repaid in full in cash on or
before the due date. The deferred interest as of September 28, 1997 was
approximately $3,302,000.
Under the terms of the Amendment, as of December 29, 1996, principal of
$371,678,000 is due on May 1, 1998. FICC may extend the due date to May 1, 1999
by paying a fee equal to 1% of the aggregate of the revolver commitment of
$50,000,000, the letters of credit commitment (see below) and the principal
amount of the term loan. FICC does not expect to generate sufficient cash flow
to make all of the principal payments required by May 1, 1998; therefore, FICC
will exercise its option to extend the due date to May 1, 1999 if the pending
recapitalization is not consummated (see Note 17). Accordingly, these loans are
classified as long-term in the accompanying consolidated financial statements.
In connection with the Amendment, in March 1996 the lenders received
1,090,972 shares of FICC's Class B Common Stock, which represented 50% of the
issued and outstanding equity of FICC. As a result of the issuance of stock
under the Management Stock Plan (see Note 13) and the exercise of certain
warrants (see Note 1), additional shares of FICC's Class B Common Stock were
issued to the lenders in 1996 to maintain their minimum equity interest in FICC
of 47.50% on a fully diluted basis in accordance with the Amendment. Total
shares issued to the lenders as of December 29, 1996 were 1,187,503. The
estimated fair market value of the shares issued of $50,000 was recorded as a
deferred financing cost during the year ended December 29, 1996. Prior to the
occurrence of a Special Rights Default (see below), lenders with limited voting
stock may elect two of the five members to FICC's board of directors. In the
event of a Special Rights Default, lenders with limited voting stock may appoint
two additional directors to FICC's board. Additionally, in the event of a
Special Rights Default, the lenders are entitled to receive
F-13
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
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 September 28, 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 September 28,
1997 were:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 29, 1996 SEPTEMBER 28, 1997
-------------------------- -------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
REQUIREMENT ACTUAL REQUIREMENT ACTUAL REQUIREMENT ACTUAL
------------ ------------ ------------ ------------ ------------ -------------
Consolidated Earnings Before
Interest, Taxes, Depreciation
and Amortization, as defined.... $ 55,000,000 $ 58,094,000 $ 58,000,000 $ 64,001,000 $ 63,000,000 $ 73,352,000
Ratio of Consolidated Adjusted
EBITDA to Consolidated Debt
Service Payments................ .95 to 1 1.11 to 1 .73 to 1 .99 to 1 .82 to 1 1.25 to 1
Consolidated Net Worth............ $(168,000,000) $(165,534,000) $(181,000,000) $(173,156,000) $(186,000,000) $(170,684,000)
</TABLE>
FICC has a commitment from a bank to issue letters of credit totaling
$5,815,000 through May 1, 1998, or through May 1, 1999 if the Credit Agreement
is extended. As of December 31, 1995, December 29, 1996 and September 28, 1997,
total letters of credit issued were $5,815,000, $4,390,000 and $3,695,000,
respectively. An annual fee of 2% is charged on the maximum drawing amount of
each letter of credit issued. During the years ended January 1, 1995, December
31, 1995 and December 29, 1996 and the nine months ended September 29, 1996 and
September 28, 1997, there were no drawings against the letters of credit. Under
the terms of the Amendment, interest will be charged at 13.5%, compounded
monthly, on drawings against letters of credit issued.
F-14
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
Debt at December 31, 1995, December 29, 1996 and September 28, 1997
consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Revolving Credit Loan, 12% through December 31,
1995 and 11% thereafter; due May 1, 1998 unless
FICC extends to May 1, 1999.................... $ 210,984 $ 36,605 $ 22,969
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%-8.75%; due
July 10, 1998-November 2, 1998................. 3,177 1,259 2,930
Other............................................ 174 147 125
------------ ------------ -------------
376,973 373,084 361,097
Less: Current Portion............................ 3,204 1,289 2,961
------------ ------------ -------------
Total Long-Term Debt............................. $ 373,769 $ 371,795 $ 358,136
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The revolving credit and term loans are collateralized by a lien on
substantially all of FICC's assets and by a pledge of FICC's shares of its
subsidiaries' stock.
At December 29, 1996, aggregate future annual principal payments of debt,
exclusive of capitalized leases (see Note 8), were: 1997, $1,289,000; 1998,
$33,000; 1999, $371,715,000; and 2000, $47,000. The payments for the revolving
credit and term loans are reflected in 1999, since, as discussed above, FICC
will not repay the loans in 1998.
At December 31, 1995, December 29, 1996 and September 28, 1997, the unused
portion of the revolving credit loan was $11,451,000, $13,395,000 and
$27,031,000, 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 $13,359,000 for the years ended December 31, 1995
and December 29, 1996 and the nine months ended September 28, 1997,
respectively.
In October 1994, FICC paid a fee of approximately $3,582,000 to the lenders
to facilitate a refinancing of the obligations under the Credit Agreement. This
amount was included in interest expense for the year ended January 1, 1995
since, under the proposed refinancing, the Credit Agreement would have been
repaid.
FICC's revolving credit and term loans are not publicly traded and prices
and terms of the few transactions which were completed are not available to
FICC. Since no information is available on prices of completed transactions, the
terms of the loans are complex and the relative risk involved is difficult to
evaluate, management believes it is not practicable to estimate the fair value
of the revolving credit and term loans without incurring excessive costs.
Additionally, since the letters of credit are associated with the
F-15
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
revolving credit and term loan agreement, management believes it is also not
practicable to estimate the fair value of the letters of credit without
incurring excessive costs.
8. LEASES
As of December 31, 1995, December 29, 1996 and September 28, 1997, FICC
operated 735, 707 and 662 restaurants, respectively. These operations were
conducted in premises owned or leased as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Land and Building Owned.......................... 313 296 279
Land Leased and Building Owned................... 164 161 145
Land Leased and Building Leased.................. 258 250 238
--- --- ---
735 707 662
--- --- ---
--- --- ---
</TABLE>
Restaurants in shopping centers are generally leased for a term of 10 to 20
years. Leases of freestanding restaurants generally are for a 15 or 20 year
lease term and provide for renewal options for three or four five-year renewals.
Most leases provide for minimum payments plus a percentage of sales in excess of
stipulated amounts. Additionally, FICC leases certain restaurant equipment over
lease terms from three to seven years.
Future minimum lease payments under non-cancellable leases with an original
term in excess of one year as of December 29, 1996 were (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR LEASES LEASES
- ------------------------------------------------------------------------ ----------- ---------
<S> <C> <C>
1997.................................................................... $ 13,366 $ 8,446
1998.................................................................... 12,524 6,445
1999.................................................................... 11,635 3,429
2000.................................................................... 10,277 2,354
2001.................................................................... 8,401 1,815
2002 and thereafter..................................................... 26,096 7,163
----------- ---------
Total Minimum Lease Payments............................................ $ 82,299 29,652
-----------
Less: Amounts Representing Interest..................................... 9,117
---------
Present Value of Minimum Lease Payments................................. $ 20,535
---------
---------
</TABLE>
F-16
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LEASES (CONTINUED)
Capital lease obligations reflected in the accompanying consolidated balance
sheets have effective rates ranging from 8% to 12% and are payable in monthly
installments through 2016. Maturities of such obligations at December 29, 1996
were (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
- --------------------------------------------------------------- ---------
<S> <C>
1997........................................................... $ 6,353
1998........................................................... 4,967
1999........................................................... 2,371
2000........................................................... 1,539
2001........................................................... 1,187
2002 and thereafter............................................ 4,118
---------
Total.................................................... $ 20,535
---------
---------
</TABLE>
Rent expense included in the accompanying consolidated financial statements
for operating leases was (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
1995 1995 1996 1996 1997
----------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Minimum Rentals....... $ 14,767 $ 15,175 $ 16,051 $ 12,229 $ 12,456
Contingent Rentals.... 2,003 2,012 1,918 1,292 1,164
----------- ------------ ------------ ------------- -------------
Total........... $ 16,770 $ 17,187 $ 17,969 $ 13,521 $ 13,620
----------- ------------ ------------ ------------- -------------
----------- ------------ ------------ ------------- -------------
</TABLE>
9. INCOME TAXES
Prior to March 23, 1996 (see below), FICC and its subsidiaries were included
in the consolidated Federal income tax return of TRC. Under a tax sharing
agreement between TRC and FICC (formerly FHC) (the "TRC/FICC Agreement"), FICC
and its subsidiaries (the "FICC Group") were obligated to pay TRC its allocable
share of the TRC group tax liability, determined as if the FICC Group were
filing a separate consolidated income tax return.
On March 23, 1996, TRC distributed its shares of FICC's voting common stock
to TRC's shareholders (see Note 1), the FICC Group deconsolidated from the TRC
group and the TRC/FICC Agreement expired. In addition, on March 26, 1996, shares
of Class B Common Stock were issued to FICC's lenders which resulted in an
ownership change pursuant to Internal Revenue Code Section 382.
As a result of the deconsolidation from TRC, the FICC Group is required to
file two short year Federal income tax returns for 1996. For the period from
January 1, 1996 through March 23, 1996, the FICC Group was included in the
consolidated Federal income tax return of TRC and for the period from March 24,
1996 through December 29, 1996, the FICC Group filed a consolidated return for
its group only.
Under the TRC/FICC Agreement, NOLs generated by the FICC Group and utilized
or allocated to TRC were available to the FICC Group on a separate company basis
to carryforward. Pursuant to the TRC/FICC Agreement, as of March 23, 1996,
$99,321,000 of carryforwards would have been available to the FICC Group to
offset future taxable income of the FICC Group. However, as a result of the
deconsolidation from TRC, the deferred tax asset of approximately $23 million
related to the $65,034,000 of NOLs utilized by TRC was written off.
Approximately $19.0 million of the write-off was recorded in
F-17
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
fiscal 1995, which amount approximated the benefit of NOLs utilized by TRC as of
December 31, 1995, and the balance was recorded in fiscal 1996, which amount
approximated the benefit of the NOLs utilized by TRC for the period from January
1, 1996 to the deconsolidation. Additionally, as a result of the change in
ownership and Section 382 limitation, a valuation allowance of approximately $10
million has been placed on $29,686,000 of the $34,287,000 remaining Federal NOL
carryforwards generated for the period prior to March 23, 1996. The amount of
pre-change NOLs not reserved for represents the amount of NOLs which have become
available as a result of FICC realizing gains which were unrealized as of the
date of the ownership change. FICC will reduce the valuation allowance on
pre-change NOLs if they become available to FICC via realization of additional
unrealized gains. FICC does not believe that it is more likely than not that
such NOLs will become available, and therefore the valuation allowance is
appropriate. For the period from March 23, 1996 to December 29, 1996, FICC
generated a net operating loss carryforward of $5,765,000. Due to restrictions
similar to Section 382 in most of the states FICC operates in and short
carryforward periods, FICC has fully reserved for all state NOL carryforwards
generated through March 26, 1996 as of December 29, 1996.
The benefit from (provision for) income taxes for the years ended January 1,
1995, December 31, 1995 and December 29, 1996 and the nine months ended
September 29, 1996 and September 28, 1997 was as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
1995 1995 1996 1996 1997
----------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Current Benefit (Provision)
Federal.............................. $ 454 $ -- $ -- $ -- $ --
State................................ -- -- -- -- --
Foreign.............................. -- -- (58) -- (10)
----------- ------------ ------ ------ ------
Total Current Benefit (Provision)...... 454 -- (58) -- (10)
----------- ------------ ------ ------ ------
Deferred Benefit (Provision)
Federal.............................. 3,608 (27,465) 5,126 3,848 (78)
State................................ 599 (5,954) 800 594 --
Foreign.............................. -- -- -- -- --
----------- ------------ ------ ------ ------
Total Deferred Benefit (Provision)..... 4,207 (33,419) 5,926 4,442 (78)
----------- ------------ ------ ------ ------
Total Benefit From (Provision For)
Income Taxes......................... $ 4,661 $ (33,419) $ 5,868 $ 4,442 $ (88)
----------- ------------ ------ ------ ------
----------- ------------ ------ ------ ------
</TABLE>
F-18
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
A reconciliation of the differences between the statutory Federal income tax
rate and the effective income tax rates follows:
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
------------- --------------- -----------------
<S> <C> <C> <C>
Statutory Federal Income Tax Rate.................... 35% 35 % 35 %
State Income Taxes Net of Federal Benefit............ 17 11 14
Write-off of Intercompany NOL Carryforwards and Tax
Credits............................................ -- (85 ) (13 )
Increase (Decrease) in Federal NOL Valuation
Allowance.......................................... -- (57 ) 10
Increase in State NOL Valuation Allowance............ (4 ) (30 ) (8 )
Tax Credits.......................................... 8 3 3
Nondeductible Expenses............................... (2 ) (1 ) (1 )
Other................................................ -- (8 ) 3
-- --
---
Effective Tax Rate................................... 54 % (132 )% 43%
-- --
-- --
---
---
</TABLE>
Deferred tax assets and liabilities are determined as the difference between
the financial statement and tax bases of the assets and liabilities multiplied
by the enacted tax rates in effect for the year in which the differences are
expected to reverse. Significant deferred tax assets (liabilities) at December
31, 1995 and December 29, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
Property and Equipment........................................... $ (51,903) $ (50,866)
Federal and State NOL Carryforwards (net of valuation allowance
of $23,026 and $21,220 at December 31, 1995 and December 29,
1996, respectively)............................................ -- 4,355
Insurance Reserves............................................... 6,311 5,788
Inventories...................................................... 2,450 1,862
Accrued Pension.................................................. 3,272 4,388
Intangible Assets................................................ (3,600) (6,037)
Tax Credit Carryforwards......................................... -- 1,001
Other............................................................ 1,447 3,412
------------ ------------
Net Deferred Tax Liability....................................... $ (42,023) $ (36,097)
------------ ------------
------------ ------------
</TABLE>
At December 31, 1995, December 29, 1996 and September 28, 1997, the
classification of deferred taxes was as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Current Asset.................................... $ 9,885 $ 12,375 $ 12,381
Long-term Liability.............................. (51,908) (48,472) (50,104)
------------ ------------ -------------
$ (42,023) $ (36,097) $ (37,723)
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
F-19
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS
Substantially all of the employees of FICC are covered by a non-contributory
defined benefit pension plan. Effective January 1, 1992, the plan was changed to
a defined benefit cash balance plan. Plan benefits are based on years of service
and participant compensation during their years of employment. FICC accrues the
cost of its pension plan over its employees' service lives.
Under the cash balance plan, a nominal account for each participant is
established. The plan administrator makes an annual contribution to each account
based on current wages and years of service. Each account earns a specified rate
of interest which is adjusted annually.
FICC's policy is to make contributions to the plan which provide for
benefits and pay plan expenses. Contributions are intended to provide not only
for benefits attributable to service to date, but also for those benefits
expected to be earned in the future.
For the years ended January 1, 1995, December 31, 1995 and December 29,
1996, net pension expense was (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Service Cost......................................... $ 4,011 $ 3,877 $ 4,202
Interest Cost........................................ 5,106 5,420 5,781
Actual Loss (Gain) on Plan Assets.................... 5,180 (17,438) (9,428)
Deferral of Asset (Loss) Gain........................ (11,725) 10,850 2,377
Net Amortization of Deferral of Asset Gain........... (548) (770) (651)
----------- ------------ ------------
Net Pension Expense.................................. $ 2,024 $ 1,939 $ 2,281
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
The funded status of the plan as of December 31, 1995 and December 29, 1996
was (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
Actuarial Present Value of Benefit Obligations:
Vested......................................................... $ 49,581 $ 56,752
Non-vested..................................................... 1,081 1,316
------------ ------------
Accumulated Benefit Obligations.................................. $ 50,662 $ 58,068
------------ ------------
------------ ------------
Projected Benefit Obligations.................................... $ 69,188 $ 76,768
Plan Assets at Market Value...................................... 86,477 90,626
------------ ------------
Plan Assets in Excess of Projected Benefit Obligation............ 17,289 13,858
Unrecognized Prior Service Costs................................. (3,486) (3,077)
Unrecognized Net Gain............................................ (21,785) (21,044)
------------ ------------
Accrued Pension Liability........................................ $ (7,982) $ (10,263)
------------ ------------
------------ ------------
</TABLE>
For the years ended January 1, 1995, December 31, 1995 and December 29,
1996, the weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 8.50%, 8.00% and 7.75%,
respectively. The rate of annual increase in future compensation levels used
ranged from 5.0% to 6.5% for the year ended January 1, 1995, from 4.5% to 6.0%
for the year ended
F-20
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
December 31, 1995 and 4.0% to 5.5% for the year ended December 29, 1996,
depending on the employee group. The expected long-term rate of return on plan
assets was 9.5% for each of the three years.
Effective December 30, 1996, FICC changed its method of calculating the
market-related value of plan assets used in determining the return-on-asset
component of annual pension expense and the cumulative net unrecognized gain or
loss subject to amortization. Under the previous accounting method, the
calculation of the market-related value of assets reflected amortization of the
actual realized and unrealized capital return on assets on a straight-line basis
over a five-year period. Under the new method, the calculation of the
market-related value of assets reflects the long-term rate of return expected by
FICC and amortization of the difference between the actual return (including
capital, dividends and interest) and the expected return over a five-year
period. FICC believes the new method is widely used in practice and preferable
because it results in calculated plan asset values that more closely approximate
fair value, while still mitigating the effect of annual market-value
fluctuations. Under both methods, only the cumulative net unrecognized gain or
loss which exceeds 10% of the greater of the projected benefit obligation or the
market-related value of plan assets is subject to amortization. This change
resulted in a noncash benefit for the nine months ended September 28, 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 $455,000 (net of taxes
of $316,000) in lower pension expense related to the nine months ended September
28, 1997 as compared to the previous accounting method. Had this change been
applied retroactively, pension expense would have been reduced by $729,000,
$879,000 and $946,000 for the years ended January 1, 1995, December 31, 1995 and
December 29, 1996, respectively.
FICC's Employee Savings and Investment Plan (the "Plan") covers all eligible
employees and is qualified under Section 401(k) of the Internal Revenue Code.
For the years ended January 1, 1995, December 31, 1995 and December 29, 1996,
FICC made discretionary matching contributions at the rate of 75% of a
participant's first 2% of his/her contributions and 50% of a participant's next
2% of his/her contributions. All employee contributions are fully vested.
Employer contributions are vested at the completion of five years of service or
at retirement, death, disability or termination at age 65 or over, as defined by
the Plan. Contribution and administrative expenses for the Plan were
approximately $1,032,000, $1,086,000 and $1,002,000 for the years ended January
1, 1995, December 31, 1995 and December 29, 1996, respectively.
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
FICC provides health care and life insurance benefits to certain groups of
employees upon retirement. Eligible employees may continue their coverages if
they are receiving a pension benefit, are 55 years of age, and have completed 10
years of service. The plan requires contributions for health care coverage from
participants who retired after September 1, 1989. Life insurance benefits are
non-contributory. The plan is not funded.
F-21
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
FICC accrues the cost of postretirement benefits over the years employees
provide services to the date of their full eligibility for such benefits. The
components of the net postretirement benefit cost for the years ended January 1,
1995, December 31, 1995 and December 29, 1996 were (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
------------- --------------- ---------------
<S> <C> <C> <C>
Service Cost of Benefits Earned...................... $ 108 $ 105 $ 125
Interest Cost on Accumulated Postretirement Benefit
Obligation, net of Amortization.................... 405 478 374
----- ----- -----
Net Postretirement Benefit Expense................... $ 513 $ 583 $ 499
----- ----- -----
----- ----- -----
</TABLE>
The postretirement benefit liability as of December 31, 1995 and December
29, 1996 included the following components (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------- -------------
<S> <C> <C>
Actuarial Present Value of Postretirement Benefit Obligation:
Retirees..................................................... $ 4,267 $ 3,837
Other fully eligible plan participants....................... 428 358
Other active plan participants............................... 1,480 1,514
------ ------
Accumulated Postretirement Benefit Obligation.................... 6,175 5,709
Plan Changes..................................................... 1,175 1,113
Unrecognized Net (Loss) Gain..................................... (293) 328
------ ------
Postretirement Benefit Liability................................. $ 7,057 $ 7,150
------ ------
------ ------
</TABLE>
The discount rate used to determine the accumulated postretirement benefit
obligation was 8.50%, 8.00% and 7.75% for the years ended January 1, 1995,
December 31, 1995 and December 29, 1996, respectively. The assumed health care
cost trend rate used to measure the accumulated postretirement benefit
obligation was 14% gradually declining to 6% in 2000 and thereafter for the year
ended January 1, 1995, 11.5% gradually declining to 5.5% in 2000 and thereafter
for the year ended December 31, 1995 and 9.25% gradually declining to 5.25% in
2000 and thereafter for the year ended December 29, 1996. A one-percentage-point
increase in the assumed health care cost trend rate would have increased the
postretirement benefit expense by approximately $56,000, $55,000 and $49,000,
and would have increased the accumulated postretirement benefit obligation by
approximately $484,000, $478,000 and $411,000 for the years ended January 1,
1995, December 31, 1995 and December 29, 1996, respectively.
FICC increased the required contributions from participants who retired
after July 31, 1994, for health coverage. This and other plan changes are being
amortized over the expected remaining employee service period of active plan
participants.
12. INSURANCE RESERVES
At December 31, 1995, December 29, 1996 and September 28, 1997, insurance
reserves of approximately $20,847,000, $16,940,000 and $29,306,000,
respectively, had been recorded. Insurance reserves at
F-22
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INSURANCE RESERVES (CONTINUED)
September 28, 1997 included RIC's reserve for FICC's insurance liabilities of
approximately $13,625,000. Reserves at December 31, 1995, December 29, 1996 and
September 28, 1997 also included accruals related to postemployment benefits and
postretirement benefits other than pensions. While management believes these
reserves are adequate, it is reasonably possible that the ultimate liabilities
will exceed such estimates.
Classification of the reserves was as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Current.......................................... $ 6,605 $ 3,973 $ 6,773
Long-term........................................ 14,242 12,967 22,533
------------ ------------ -------------
Total........................................ $ 20,847 $ 16,940 $ 29,306
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
Following is a summary of the activity in the insurance reserves for the
years ended January 1, 1995, December 31, 1995 and December 29, 1996 and for the
nine months ended September 28, 1997 (in thousands):
<TABLE>
<CAPTION>
JANUARY 1,
1995 DECEMBER 31, 1995 DECEMBER 29, 1996 SEPTEMBER 28, 1997
-------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Beginning balance..................... $ 24,977 $ 23,216 $ 20,847 $ 16,940
Provision............................. 11,727 11,336 8,363 8,948
Payments.............................. (13,488) (13,705) (12,270) (9,813)
Acquisition of RIC.................... -- -- -- 13,231
------- ------- ------- -------
Ending balance........................ $ 23,216 $ 20,847 $ 16,940 $ 29,306
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
13. STOCK PLANS
A Stock Rights Plan ("SRP") was adopted by FICC in 1991. Under the SRP,
certain eligible individuals were granted rights to purchase shares of voting
common stock of FICC for $.01 per share, subject to certain vesting,
anti-dilution and exercise requirements. As of December 31, 1995, the aggregate
number of shares which could have been issued under the SRP was 88,801 of which
41,316 rights were issued and vested. The estimated fair value of the rights
vested was not material and no compensation expense was recorded. On March 25,
1996, FICC established the Management Stock Plan ("MSP"). The MSP provided for
persons with rights granted under the SRP to waive their rights under such plan
and receive shares of FICC's Class A Common Stock. Accordingly, in April 1996,
all of the participants in the SRP made this election and the SRP rights then
outstanding were cancelled and 122,888 shares of Class A Common Stock were
issued, of which 61,650 were vested as of December 29, 1996. In April 1996, the
fair value of the 122,888 shares of Class A Common Stock issued was
approximately $30,700, or $0.25 per share. 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 September 28, 1997, 27,113 additional shares are available
for grant under the MSP (see Note 17). Net loss and net loss per share (see Note
17) for the year ended December 29, 1996 would have been $7,786,000 and $1.09,
respectively had FICC used the fair value based method prescribed by SFAS No.
123 to account for the restricted stock issued in 1996.
F-23
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK PLANS (CONTINUED)
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation" which was adopted by FICC effective January 1, 1996.
SFAS No. 123 requires the measurement of the fair value of stock options or
warrants granted to be included in the statement of operations or that pro forma
information related to the fair value be disclosed in the notes to financial
statements. FICC has determined that it will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No. 25 and
elect the disclosure-only alternative under SFAS No. 123. Since no options were
granted since January 2, 1995, the pro forma disclosures required by SFAS No.
123 are not applicable.
14. RELATED PARTY TRANSACTIONS
In March 1996, the FICC pension plan acquired three restaurant properties
from FICC. The land, buildings and improvements were purchased by the plan at
their appraised value of $2,043,000 and are located in Connecticut, Vermont and
Virginia. Simultaneous with the purchase, the pension plan leased back the three
properties to FICC at an aggregate annual base rent of $214,000 for the first
five years and $236,000 for the following five years. The pension plan was
represented by independent legal and financial advisors.
FICC's Chairman and President is an officer of the general partner of
Perkins Family Restaurant L.P. ("PFR"), a subsidiary of TRC (formerly FICC's
majority shareholder). Three of FICC's directors are also directors of PFR. FICC
entered into subleases for certain land, buildings, and equipment with Perkins
Restaurants Operating Company, L.P. (Perkins), a subsidiary of TRC. During the
years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the
nine months ended September 29, 1996 and September 28, 1997, rent expense
related to the subleases was approximately $245,000, $266,000, $278,000,
$208,000 and $209,000, 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 nine months ended September 29, 1996 and September 28, 1997 was
approximately $336,000, $620,000, $590,000, $447,000 and $465,000, 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 nine months ended September 29, 1996 and
September 28, 1997, purchases were approximately $1,335,000, $1,909,000,
$1,425,000, $1,103,000 and $741,000, respectively.
F-24
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
TRC provided FICC with certain management services for which TRC was
reimbursed approximately $773,000, $785,000, $800,000, $600,000 and $618,000 for
the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the
nine months ended September 29, 1996 and September 28, 1997, respectively.
Expenses were charged to FICC on a specific identification basis. FICC believes
the allocation method used was reasonable and approximates the amount that would
have been incurred on a stand alone basis had FICC been operated as an
unaffiliated entity.
During the year ended December 29, 1996 and the nine months ended September
29, 1996 and September 28, 1997, FICC paid approximately $69,000, $46,000 and
$138,000, 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 nine months ended September 29, 1996 and September 28, 1997, FICC
expensed approximately $200,000, $763,000, $196,000, $146,000 and $150,000,
respectively, for fees paid to the lenders' agent bank. The expense for the year
ended December 31, 1995 included approximately $563,000 related to the filing of
a Form S-1 Registration Statement (see Note 5).
15. COMMITMENTS AND CONTINGENCIES
FICC is a party to various legal proceedings arising in the ordinary course
of business which management believes, after consultation with legal counsel,
will not have a material adverse effect on FICC's financial position or future
operating results.
As of December 29, 1996, FICC had commitments to purchase approximately
$50,587,000 of raw materials, food products and supplies used in the normal
course of business that cover periods of one to twelve months. Most of these
commitments are non-cancellable.
16. FRANCHISE AGREEMENT
On July 14, 1997, FICC entered into an agreement which granted a franchisee
exclusive rights to operate, manage and develop Friendly's full-service
restaurants in the franchising region of Maryland, Delaware, the District of
Columbia and northern Virginia (the "Agreement"). Pursuant to the Agreement, the
franchisee purchased certain assets and rights in 34 existing Friendly's
restaurants in this franchising region, has committed to open an additional 74
restaurants over the next six years and, subject to the fulfillment of certain
conditions, has further agreed to open 26 additional restaurants, for a total of
100 new restaurants in this franchising region over the next ten years. Proceeds
from the sale were approximately $8,238,000, which amount includes $860,000 for
initial franchise fees for the 34 initial restaurants, $500,000 for development
rights and $930,000 for franchise fees for certain of the additional restaurants
described above. The $860,000 was recorded as revenue in the nine months ended
September 28, 1997 and the development and franchise fees received will be
amortized into income over the initial ten-year term of the Agreement and as
additional restaurants are opened, respectively. FICC recognized income of
$2,303,000 related to the sale of the equipment and operating rights for the 34
existing franchised locations in the nine months ended September 28, 1997. The
proceeds were allocated between the assets sold and the development rights by
FICC and the franchisee based on the estimated fair market values. As part of
the Agreement, the franchisee will also manage 14 other Friendly's restaurants
located in the same area
F-25
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. FRANCHISE AGREEMENT (CONTINUED)
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 (UNAUDITED)
The Company has filed Registration Statements with the Securities and
Exchange Commission related to an initial public offering of 5,000,000 shares of
the Company's Common Stock (the "Common Stock Offering") and $175 million of
Senior Notes due 2007 (the "Senior Note Offering") and will, contingent upon
consummation of the offerings, enter into a new credit facility consisting of a
$105 million term loan facility, a $55 million revolving credit facility and a
$15 million letter of credit facility (the "New Credit Facility").
The Company will amend its articles of organization in connection with the
Common Stock Offering to give effect to a 923.6442-for-1 split of Class A and
Class B Common Stock and increase the number of authorized shares. The
accompanying consolidated financial statements have been restated to reflect the
anticipated share split.
Pursuant to a stockholder rights plan FICC plans to adopt (the "Plan"),
prior to the consummation of the Common Stock Offering, the Board will declare a
dividend distribution of one purchase right (a "Right") for each outstanding
share of Common Stock. The Plan provides, in substance, that should any person
or group (other than Mr. Smith, Equitable, senior management and their
respective affiliates) acquire 15% or more of FICC's Common Stock, each Right,
other than Rights held by the acquiring person or group, would entitle its
holder to purchase a specified number of shares of Common Stock for 50% of their
then current market value. Unless a 15% acquisition has occurred, the Rights may
be redeemed by FICC at any time prior to the termination date of the Plan.
In connection with the offerings, the 27,113 shares in the MSP not
previously allocated will be allocated and immediately vested and the 61,238
shares previously issued but not vested will become vested (see Note 13).
Additionally, 775,742 shares of Class A Common Stock will be returned to FICC
from certain shareholders for no consideration. The shares are being returned in
accordance with an agreement with FICC's existing lenders as a condition to the
offerings. Of such shares, 100,742 shares will be issued to FICC's Chief
Executive Officer and vest immediately, 375,000 shares will be reserved for
issuance under a restricted stock option plan (the "Restricted Stock Plan") to
be adopted by FICC in connection with the offerings and 300,000 shares will be
issued to certain employees. The 300,000 shares will vest immediately. The
estimated fair value of $9,782,000 of the (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 will be recorded as
compensation expense by FICC upon consummation of the offerings. In connection
with the offerings, FICC also plans to adopt a stock option plan.
Pro forma net loss per share amounts assume the issuance of 5,000,000
additional shares of Common Stock in connection with the Common Stock Offering
and the return of 375,000 net shares to FICC in connection with the offerings.
In addition, pursuant to the requirements of the Securities and Exchange
Commission, common stock to be issued at prices below the anticipated public
offering price during the twelve months immediately preceding the initial public
offering are to be included in the calculation of weighted average number of
common shares outstanding. Therefore, the 27,113 incremental shares issued
F-26
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. PROPOSED INITIAL PUBLIC OFFERING (UNAUDITED) (CONTINUED)
to management in connection with the offerings have been included in the pro
forma shares used in computing net loss per share. Historical net loss per share
is not presented in the accompanying consolidated financial statements, as such
amounts are not meaningful.
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
FICC's obligation related to the $175,000,000 of Senior Notes (see Note 17)
are guaranteed fully and unconditionally by one of FICC's subsidiaries. There
are no restrictions on FICC's ability to obtain dividends or other distributions
of funds from this subsidiary except those imposed by applicable law. The
following supplemental financial information sets forth, on a condensed
consolidating basis, statements of operations, balance sheets and statements of
cash flows for Friendly Ice Cream Corporation ("the Parent Company"), Friendly's
Restaurants Franchise, Inc. ("the Guarantor Subsidiary") and Friendly's
International, Inc. (FII), Friendly Holding (UK) Limited, Friendly Ice Cream
(UK) Limited and Restaurant Insurance Corporation (collectively "the
Non-guarantor Subsidiaries"). Prior to the consummation of the offerings (see
Note 17), the investment in joint venture will be transferred to FII, therefore,
the equity in net loss of joint venture and investment in joint venture are
included in Non-guarantor Subsidiaries in the accompanying consolidating
financial statements. Stockholders' equity (deficit), total assets and net
income (loss) of the Non-guarantor Subsidiaries are insignificant to
consolidated amounts for prior periods. Accordingly, supplemental condensed
consolidating financial information is not presented for prior periods. Separate
complete financial statements and other disclosures of the respective Guarantor
Subsidiary as of December 29, 1996 and September 28, 1997 and for the year and
nine months then ended are not presented because management has determined that
such information is not material to investors.
Investments in subsidiaries are accounted for by the Parent Company on the
equity method for purposes of the supplemental consolidating presentation.
Earnings of the subsidiaries are, therefore, reflected in the Parent Company's
investment accounts and earnings. The principal elimination entries eliminate
the Parent Company's investments in subsidiaries and intercompany balances and
transactions.
F-27
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 29, 1996
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues.................................... $ 650,024 $ 145 $ 638 $ -- $ 650,807
Costs and expenses:
Cost of sales............................. 191,578 51 327 -- 191,956
Labor and benefits........................ 209,145 115 -- -- 209,260
Operating expenses and write-down of
property and equipment.................. 143,046 -- 344 -- 143,390
General and administrative expenses....... 41,061 106 1,554 -- 42,721
Depreciation and amortization............. 32,953 6 20 -- 32,979
Interest expense.......................... 44,141 -- -- -- 44,141
---------- ----------- ------------- ------ ------------
Loss before benefit from (provision for)
income taxes and equity in net loss of
consolidated subsidiaries................. (11,900) (133) (1,607) -- (13,640)
Benefit from (provision for) income taxes... 5,594 (2) 276 -- 5,868
---------- ----------- ------------- ------ ------------
Loss before equity in net loss of
consolidated subsidiaries................. (6,306) (135) (1,331) -- (7,772)
Equity in net loss of consolidated
subsidiaries.............................. (1,466) -- -- 1,466 --
---------- ----------- ------------- ------ ------------
Net loss.................................... $ (7,772) $ (135) $ (1,331) $ 1,466 $ (7,772)
---------- ----------- ------------- ------ ------------
---------- ----------- ------------- ------ ------------
</TABLE>
F-28
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 29, 1996
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
<CAPTION>
Assets
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 17,754 $ 268 $ 604 $ -- $ 18,626
Trade accounts receivable.................. 4,765 -- 227 -- 4,992
Inventories................................ 14,796 24 325 -- 15,145
Deferred income taxes...................... 12,366 9 -- -- 12,375
Prepaid expenses and other current
assets................................... 4,805 -- 517 (3,664) 1,658
---------- ----- ------ ------------ ------------
Total current assets......................... 54,486 301 1,673 (3,664) 52,796
Investment in joint venture.................. -- -- 4,500 -- 4,500
Property and equipment, net.................. 285,460 522 179 -- 286,161
Intangibles and deferred costs, net.......... 16,019 -- -- -- 16,019
Investments in subsidiaries.................. 3,531 -- -- (3,531) --
Other assets................................. 650 -- -- -- 650
---------- ----- ------ ------------ ------------
Total assets................................. $ 360,146 $ 823 $ 6,352 $ (7,195) $ 360,126
---------- ----- ------ ------------ ------------
---------- ----- ------ ------------ ------------
<CAPTION>
Liabilities and Stockholders' Equity
(Deficit)
<S> <C> <C> <C> <C> <C>
Current liabilities:
Current maturities of long-term
obligations.............................. $ 7,642 $ -- $ -- $ -- $ 7,642
Accounts payable........................... 20,773 -- -- -- 20,773
Accrued expenses........................... 44,780 141 3,824 (3,664) 45,081
---------- ----- ------ ------------ ------------
Total current liabilities.................... 73,195 141 3,824 (3,664) 73,496
Deferred income taxes........................ 48,793 11 (332) -- 48,472
Long-term obligations, less current
maturities................................. 385,977 -- -- -- 385,977
Other liabilities............................ 25,337 -- -- -- 25,337
Stockholders' equity (deficit)............... (173,156) 671 2,860 (3,531) (173,156)
---------- ----- ------ ------------ ------------
Total liabilities and stockholders' equity
(deficit).................................. $ 360,146 $ 823 $ 6,352 $ (7,195) $ 360,126
---------- ----- ------ ------------ ------------
---------- ----- ------ ------------ ------------
</TABLE>
F-29
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 29, 1996
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities.................................. $ 25,519 $ (38) $ 682 $ -- $ 26,163
---------- ----------- ------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment......... (24,043) -- (174) -- (24,217)
Proceeds from sales of property and
equipment................................. 8,409 -- -- -- 8,409
Investments in joint venture................ (4,500) -- -- -- (4,500)
Investments in consolidated subsidiaries.... (306) -- -- 306 --
---------- ----------- ------ ------------ ------------
Net cash used in investing activities......... (20,440) -- (174) 306 (20,308)
---------- ----------- ------ ------------ ------------
Cash flows from financing activities:
Contribution of capital..................... -- 306 -- (306) --
Proceeds from exercise of stock purchase
warrants.................................. 22 -- -- -- 22
Proceeds from borrowings.................... 48,196 -- -- -- 48,196
Repayments of long-term obligations......... (59,215) -- -- -- (59,215)
---------- ----------- ------ ------------ ------------
Net cash (used in) provided by financing
activities.................................. (10,997) 306 -- (306) (10,997)
---------- ----------- ------ ------------ ------------
Effect of exchange rate changes on cash....... 5 -- 73 -- 78
---------- ----------- ------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents................................. (5,913) 268 581 -- (5,064)
Cash and cash equivalents, beginning of
period...................................... 23,667 -- 23 -- 23,690
---------- ----------- ------ ------------ ------------
Cash and cash equivalents, end of period...... $ 17,754 $ 268 $ 604 $ -- $ 18,626
---------- ----------- ------ ------------ ------------
---------- ----------- ------ ------------ ------------
Supplemental disclosures:
Interest paid............................... $ 36,000 $ -- $ -- $ -- $ 36,000
Capital lease obligations incurred.......... 5,923 28 -- -- 5,951
Capital lease obligations terminated........ 128 -- -- -- 128
Issuance of common stock to lenders......... 50 -- -- -- 50
</TABLE>
F-30
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1997
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues..................................... $ 506,407 $ 1,146 $ 480 $ -- $ 508,033
Costs and expenses:
Cost of sales.............................. 146,674 -- 431 -- 147,105
Labor and benefits......................... 159,315 -- -- -- 159,315
Operating expenses and write-down of
property and equipment................... 113,009 -- (393) -- 112,616
General and administrative expenses........ 31,908 158 709 -- 32,775
Depreciation and amortization.............. 24,226 -- -- -- 24,226
Interest expense (income).................. 33,029 -- (57) -- 32,972
Gain on sale of restaurant operations........ 2,303 -- -- -- 2,303
Equity in net loss of joint venture.......... -- -- 1,112 -- 1,112
---------- ----------- ------------- ------------ ------------
Income (loss) before (provision for) benefit
from income taxes, cumulative effect of
change in accounting principle and equity
in net loss of consolidated subsidiaries... 549 988 (1,322) -- 215
(Provision for) benefit from income taxes.... (225) (405) 542 -- (88)
---------- ----------- ------------- ------------ ------------
Income (loss) before cumulative
effect of change in accounting
principle and equity in net loss of
consolidated subsidiaries.................. 324 583 (780) -- 127
Cumulative effect of change in accounting
principle.................................. 2,236 -- -- -- 2,236
---------- ----------- ------------- ------------ ------------
Income (loss) before equity in net loss of
consolidated subsidiaries.................. 2,560 583 (780) -- 2,363
Equity in net loss of consolidated
subsidiaries............................... (197) -- -- 197 --
---------- ----------- ------------- ------------ ------------
Net income (loss)............................ $ 2,363 $ 583 $ (780) $ 197 $ 2,363
---------- ----------- ------------- ------------ ------------
---------- ----------- ------------- ------------ ------------
</TABLE>
F-31
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 28, 1997
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................. $ 10,976 $ 248 $ 820 $ -- $ 12,044
Restricted cash........................... -- -- 4,000 -- 4,000
Trade accounts receivable................. 7,105 277 481 -- 7,863
Inventories............................... 16,573 -- 444 -- 17,017
Deferred income taxes..................... 12,375 -- 6 -- 12,381
Prepaid expenses and other current
assets.................................. 10,896 2,274 219 (6,654) 6,735
----------- ----------- ------------- ------------ ------------
Total current assets........................ 57,925 2,799 5,970 (6,654) 60,040
Restricted cash............................. -- -- 8,907 -- 8,907
Investment in joint venture................. -- -- 3,388 -- 3,388
Property and equipment, net................. 272,950 -- 239 -- 273,189
Intangibles and deferred costs, net......... 15,519 -- -- -- 15,519
Investments in subsidiaries................. 4,970 -- -- (4,970) --
Other assets................................ 412 -- 2,359 (900) 1,871
----------- ----------- ------------- ------------ ------------
Total assets................................ $ 351,776 $ 2,799 $ 20,863 $ (12,524) $ 362,914
----------- ----------- ------------- ------------ ------------
----------- ----------- ------------- ------------ ------------
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Current maturities of long-term
obligations............................. $ 8,139 $ -- $ -- $ (400) $ 7,739
Accounts payable.......................... 25,542 -- -- -- 25,542
Accrued expenses.......................... 43,126 47 7,735 (6,254) 44,654
----------- ----------- ------------- ------------ ------------
Total current liabilities................... 76,807 47 7,735 (6,654) 77,935
Deferred income taxes....................... 50,240 -- (136) -- 50,104
Long-term obligations, less current
maturities................................ 372,196 -- -- (900) 371,296
Other liabilities........................... 23,217 1,422 9,624 -- 34,263
Stockholders' equity (deficit).............. (170,684) 1,330 3,640 (4,970) (170,684)
----------- ----------- ------------- ------------ ------------
Total liabilities and stockholders' equity
(deficit)................................. $ 351,776 $ 2,799 $ 20,863 $ (12,524) $ 362,914
----------- ----------- ------------- ------------ ------------
----------- ----------- ------------- ------------ ------------
</TABLE>
F-32
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1997
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities.................................. $ 22,188 $ (162) $ 7,198 $ -- $ 29,224
---------- ----------- ------------- ----- ------------
Cash flows from investing activities:
Purchases of property and equipment......... (14,595) -- (61) -- (14,656)
Proceeds from sales of property and
equipment................................. 4,842 -- -- -- 4,842
Purchases of investment securities.......... -- -- (8,181) -- (8,181)
Proceeds from sales and maturities of
investment securities..................... -- -- 316 -- 316
Cash (paid) received in acquisition of
Restaurant Insurance Corporation.......... (2,300) -- 2,265 -- (35)
Advances to joint venture................... (1,400) -- -- -- (1,400)
Investments in consolidated subsidiaries.... (142) -- -- 142 --
---------- ----------- ------------- ----- ------------
Net cash (used in) provided by investing
activities.................................. (13,595) -- (5,661) 142 (19,114)
---------- ----------- ------------- ----- ------------
Cash flows from financing activities:
Contribution of capital..................... -- 142 -- (142) --
Proceeds from borrowings (advances to
parent)................................... 45,511 -- (1,300) -- 44,211
Repayments of long-term obligations......... (60,882) -- -- -- (60,882)
---------- ----------- ------------- ----- ------------
Net cash (used in) provided by financing
activities.................................. (15,371) 142 (1,300) (142) (16,671)
---------- ----------- ------------- ----- ------------
Effect of exchange rate changes on cash....... -- -- (21) -- (21)
---------- ----------- ------------- ----- ------------
Net (decrease) increase in cash and cash
equivalents................................. (6,778) (20) 216 -- (6,582)
Cash and cash equivalents, beginning of
period...................................... 17,754 268 604 -- 18,626
---------- ----------- ------------- ----- ------------
Cash and cash equivalents, end of period...... $ 10,976 $ 248 $ 820 $ -- $ 12,044
---------- ----------- ------------- ----- ------------
---------- ----------- ------------- ----- ------------
Supplemental disclosures:
Interest paid............................... $ 30,236 $ -- $ -- $ -- $ 30,236
Capital lease obligations incurred.......... 2,227 -- -- -- 2,227
Capital lease obligations terminated........ 141 -- -- -- 141
</TABLE>
F-33
<PAGE>
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THIS OFFERING AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN
SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
------------------------
TABLE OF CONTENTS
------------------------
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUMMARY................................ 3
RISK FACTORS...................................... 10
USE OF PROCEEDS................................... 17
DIVIDEND POLICY................................... 18
DILUTION.......................................... 18
CAPITALIZATION.................................... 19
SELECTED CONSOLIDATED FINANCIAL INFORMATION....... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...................................... 22
BUSINESS.......................................... 32
MANAGEMENT........................................ 45
OWNERSHIP OF COMMON STOCK......................... 52
CERTAIN TRANSACTIONS.............................. 53
DESCRIPTION OF NEW CREDIT FACILITY................ 54
DESCRIPTION OF SENIOR NOTES....................... 55
DESCRIPTION OF CAPITAL STOCK...................... 56
SHARES ELIGIBLE FOR FUTURE SALE................... 60
UNDERWRITING...................................... 62
LEGAL MATTERS..................................... 64
EXPERTS........................................... 64
AVAILABLE INFORMATION............................. 64
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS........ F-1
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THE COMMON STOCK OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, 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.
5,000,000 SHARES
[LOGO]
COMMON STOCK
-----------------
PROSPECTUS
-----------------
NATIONSBANC MONTGOMERY
SECURITIES, INC.
PIPER JAFFRAY INC.
TUCKER ANTHONY
INCORPORATED
, 1997
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of the expenses payable by the Company in
connection with issuance and distribution of the securities being registered
hereby. All amounts shown are estimates, except the SEC registration fee and the
NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 36,600
NASD filing fee................................................... 12,575
Nasdaq filing fee................................................. 36,250
Printing and engraving............................................ 39,500
Legal fees and expenses........................................... 197,400
Accounting fees and expenses...................................... 39,500
Transfer Agent and Registrar fees and expenses.................... 10,000
Blue sky fees and expenses........................................ 7,500
Miscellaneous..................................................... 47,675
---------
Total............................................................. $ 427,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 67 of Chapter 156B of the Massachusetts General Laws provides that a
corporation may indemnify its directors and officers to the extent specified in
or authorized by (i) the articles of organization, (ii) a by-law adopted by the
stockholders, or (iii) a vote adopted by the holders of a majority of the shares
of stock entitled to vote on the election of directors. In all instances, the
extent to which a corporation provides indemnification to its directors and
officers under Section 67 is optional. In its Restated Articles of Organization,
the Registrant has elected to provide indemnification to its directors and
officers in appropriate circumstances. Generally, the Restated Articles of
Organization provide that the Registrant shall indemnify directors and officers
of the Registrant against liabilities and expenses arising out of legal
proceedings brought against them by reason of their status as directors or
officers of the Registrant or by reason of their agreeing to serve, at the
request of the Registrant, as a director or officer of another organization.
Under this provision, a director or officer 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, unless he is adjudicated in such proceedings not to have acted in
good faith and in the reasonable belief that his action was in the best interest
of the Registrant or, to the extent such matter relates to service with respect
to an employee benefit plan, in the best interest of the participants or
beneficiaries of such benefit plan. Any indemnification shall be made by the
Registrant unless a court of competent jurisdiction holds that the director or
officer did not meet the standard of conduct set forth above or the Registrant
determines, by clear and convincing evidence, that the director or officer did
not meet such standard. Such determination shall be made by the Board of
Directors of the Registrant, based on advice of independent legal counsel. The
Registrant shall advance litigation expenses to a director or officer at his
request upon receipt of an undertaking by any such director or officer to repay
such expenses if it is ultimately determined that he is not entitled to
indemnification for such expenses. The Registrant may, to the extent authorized
from time to time by the Board of Directors, grant indemnification rights to
employees, agents or other persons serving the Registrant.
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
II-1
<PAGE>
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 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 8 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.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
**1.1 Form of Underwriting Agreement.
<C> <S>
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 Stockholder and Registration Rights Agreement of the Company, as amended.
*4.2 Registration Rights Agreement between the Company and Donald N. Smith.
4.3 Rights Agreement between the Company and The Bank of New York, a Rights
Agent.
*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.
(Incorporated by reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1, No. 333-34635.)
**10.2 Form of Senior Note Indenture between Friendly Ice Cream Corporation,
Friendly's Restaurants Franchise, Inc. and The Bank of New York, as Trustee.
(Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1, No. 333-34635.)
10.3 The Company's Stock Option Plan.
10.4 The Company's Restricted Stock Plan.
**10.5 Form of Agreement relating to the Company's Limited Stock Compensation
Program.
10.6 Development Agreement between Friendly Ice Cream Corporation and FriendCo
Restaurants, Inc.
10.7 Franchise Agreement between Friendly's Restaurants Franchise, Inc. and
FriendCo Restaurants, Inc.
10.8 Management Agreement between Friendly Ice Cream Corporation and FriendCo
Restaurants, Inc.
10.9 Purchase and Sale Agreement between Friendly Ice Cream Corporation and
FriendCo Restaurants, Inc.
10.10 Software License Agreement between Friendly's Restaurants Franchise, Inc. and
FriendCo Restaurants, Inc. (Exhibits 10.6 through 10.10, collectively, the
"DavCo Agreement")
**10.11 Sublease between SSP Company, Inc. and the Company, as amended, for the
Chicopee, Massachusetts Distribution Center.
**10.12 Master License and Distribution Agreement for the Territory of Korea between
Friendly's International, Inc. and Hansung Enterprise Co., Ltd.
10.13 TRC Management Contract between the Company and The Restaurant Company.
10.14 License Agreement between the Company and Hershey Foods Corporation for 1988
Non-Friendly Marks.
12.1 Schedule of Computation of Ratio 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).
24.2 Power of Attorney of Charles A. Ledsinger, Jr.
**99.1 Consent of Michael J. Daly, as a person about to become a director.
99.2 Consent of Burton J. Manning, as a person about to become a director.
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
II-3
<PAGE>
(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.
(5) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement, or amendment thereto, to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Wilbraham, State of Massachusetts, on the 17th day of October, 1997.
<TABLE>
<S> <C> <C>
FRIENDLY ICE CREAM CORPORATION
By: /s/ GEORGE G. ROLLER
-----------------------------------------
Name: George G. Roller
Title:Vice President, Finance,
Chief Financial Officer
and Treasurer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement, or amendment thereto, has been signed by the following
persons in the capacities and on the date indicated.
SIGNATURES TITLE (CAPACITY) DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board,
* Chief Executive Officer
- ------------------------------ and President (Principal October 17, 1997
Donald N. Smith Executive Officer and
Director)
Vice President, Finance,
/s/ GEORGE G. ROLLER Chief Financial Officer
- ------------------------------ and Treasurer October 17, 1997
George G. Roller (Principal Financial and
Accounting Officer)
*
- ------------------------------ Director October 17, 1997
Charles A. Ledsinger, Jr.
*
- ------------------------------ Director October 17, 1997
Steven L. Ezzes
- ------------------------------ Director
Gregory L. Segall
*/s/ GEORGE G. ROLLER
-------------------------
George G. Roller
ATTORNEY-IN-FACT
II-5
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
- ---------- William Francis Galvin
Examiner Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
RESTATED ARTICLES OF ORGANIZATION
(General Laws, Chapter 156B, Section 74)
- ----------
Name
Approved
We, Donald N. Smith, *President
-----------------------------------------------------------,
and Aaron B. Parker, *Clerk
-----------------------------------------------------------,
of Friendly Ice Cream Corporation
-----------------------------------------------------------,
(EXACT NAME OF CORPORATION)
located at 1855 Boston Road, Wilbraham, Massachusetts 01095
-----------------------------------------------------------,
(STREET ADDRESS OF CORPORATION MASSACHUSETTS)
do hereby certify that the following Restatement of the
Articles of Organization was duly adopted at a meeting held on
_____________, 19____ by a vote of the directors/or:
_______ shares of ______________ of _________ shares outstanding,
(TYPE, CLASS & SERIES, IF ANY)
_______ shares of ______________ of _________ shares outstanding, and
(TYPE, CLASS & SERIES, IF ANY)
_______ shares of ______________ of _________ shares outstanding,
(TYPE, CLASS & SERIES, IF ANY)
**being at least a majority of each type, class or series
outstanding and entitled to vote thereon: /**being at least
two-thirds of each type, class or series outstanding and
entitled to vote thereon and of each type, class or series of
stock whose rights are adversely affected thereby:
C / /
P / / ARTICLE I
M / / The name of the corporation is:
R.A. / / Friendly Ice Cream Corporation
ARTICLE II
The purpose of the corporation is to engage in the following
business activities:
(See Attachment 2)
*DELETE THE INAPPLICABLE WORDS. **DELETE THE INAPPLICABLE CLAUSE.
NOTE: IF THE SPACE PROVIDED UNDER ANY ARTICLE OR ITEM ON THIS
FORM IS INSUFFICIENT, ADDITIONS SHALL BE SET FORTH ON SEPARATE
8-1/2 x 11 SHEETS OF PAPER WITH A LEFT MARGIN OF AT LEAST 1 INCH.
ADDITIONS TO MORE THAN ONE ARTICLE MAY BE MADE ON A SINGLE SHEET
SO LONG AS EACH ARTICLE REQUIRING EACH ADDITION IS CLEARLY
INDICATED.
- ----------
P.C.
<PAGE>
ARTICLE III
State the total number of shares and par value, if any, of each class of
stock which the corporation is authorized to issue:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
WITHOUT PAR VALUE WITH PAR VALUE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- -------------------------------------------------------------------------------------------
Common: Common: 50,000,000 $.01
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
Preferred: Preferred: 1,000,000 $.01
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
ARTICLE IV
If more than one class of stock is authorized, state a distinguishing
designation for each class. Prior to the issuance of any shares of a class,
if shares of another class are outstanding, the corporation must provide a
description of the preferences, voting powers, qualifications, and special or
relative rights or privileges of that class and of each other class of which
shares are outstanding and of each series then established within any class.
(See Attachment 4)
ARTICLE V
The restrictions, if any, imposed by the Articles of Organization upon the
transfer of shares of stock of any class are:
N/A
ARTICLE VI
**Other lawful provisions, if any, for the conduct and regulation of the
business and affairs of the corporation, for its voluntary dissolution, or
for limiting, defining, or regulating the powers of the corporation, or of
its directors or stockholders, or of any class of stockholders:
(See Attachment 6)
**IF THERE ARE NO PROVISIONS STATE "NONE".
NOTE: THE PRECEDING SIX (6) ARTICLES ARE CONSIDERED TO BE PERMANENT AND MAY
ONLY BE CHANGED BY FILING APPROPRIATE ARTICLES OF AMENDMENT.
<PAGE>
ARTICLE VII
The effective date of the restated Articles of Organization of the
corporation shall be the date approved and filed by the Secretary of the
Commonwealth. If a later effective date is desired, specify such date which
shall not be more than thirty days after the date of filing.
ARTICLE VIII
The information contained in Article VIII is not a permanent part of the
Articles of Organization.
a. The street address (post office boxes are not acceptable) of the principal
office of the corporation in Massachusetts is:
1855 Boston Road, Wilbraham, Massachusetts 01095
b. The name, residential address and post office address of each director and
officer of the corporation is as follows:
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS
President: Donald N. Smith 90 Hawthorne Road, Barrington Hills, IL 60010 SAME
Treasurer: George G. Roller 2304 Bigelow Commons, Enfield, CT 06082 SAME
Clerk: Aaron B. Parker 93 Elmwood Avenue, Longmeadow, MA 01106 SAME
Directors: Donald N. Smith SEE ABOVE SAME
Steven L. Ezzes 7 Sipperlays Hill Road, Westport, CT 06680 SAME
Charles L. Atwood 2980 Gardens Way, Memphis, TN 38111 SAME
Barry Krantz 11 Ironwood Court, Irvine, CA 92714 SAME
Gregory L. Segall 1022 Barberry Road, Bryn Mawr, PA 19010 SAME
c. The fiscal year (i.e., tax year) of the corporation shall end on the last
day of the month of:
d. The name and business address of the resident agent, if any, of the
corporation is:
CT Corporation System, 2 Oliver Street, Boston, MA 02109
**We further certify that the foregoing Restated Articles of Organization
affect no amendments to the Articles of Organization of the corporation as
heretofore amended, except amendments to the following articles. Briefly
describe amendments below:
(See Attachment A)
SIGNED UNDER THE PENALTIES OF PERJURY, this day of , 19
------- ------------ --,
Donald N. Smith, *President,
- --------------------------------------------------------------
Aaron B. Parker, *Clerk.
- --------------------------------------------------------------
*Delete the inapplicable words. **If there are no amendments, state "None".
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
RESTATED ARTICLES OF ORGANIZATION
(General Laws, Chapter 156B, Section 74)
------------------------------------------------------
------------------------------------------------------
I hereby approve the within Restated Articles of
Organization and, the filing fee in the amount of
$_________ having been paid, said articles are deemed
to have been filed with me this ________day of
_____________, 19___.
Effective Date:__________________________________________
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
Telephone:
--------------------------------------------
<PAGE>
ATTACHMENT 2
ARTICLE II
1. To manufacture, store, buy, sell, handle, preserve, can, export,
import, market, distribute, dispose of in any manner and generally trade and
deal in and with, at wholesale or retail, as principal or agent, ice cream,
dairy foods and food products of every class, kind and description.
2. To carry on any manufacturing, mercantile, selling, management,
service or other business, operation or activity which may be lawfully
carried on by a corporation organized under the Business Corporation Law of
The Commonwealth of Massachusetts, whether or not related to those referred
to in the foregoing paragraph.
3. To carry on any business, operation or activity through a wholly or
partly owned subsidiary.
4. To carry on any business, operation or activity referred to in the
foregoing paragraphs to the same extent as might an individual, whether as
principal, agent, contractor or otherwise, and either alone or in conjunction
or a joint venture or other arrangement with any corporation, association,
trust, firm or individual.
5. To have as additional purposes all powers granted to business
corporations under Chapter 156B, as amended from time to time, of the General
Laws of The Commonwealth of Massachusetts.
<PAGE>
ATTACHMENT 4
ARTICLE IV
Upon the effectiveness of these Restated Articles of Organization, each
outstanding share of the Corporation's issued and outstanding Class A Common
Stock, Class B Common Stock and Class C Common Stock shall be automatically
converted into one share of Common Stock, whereupon each certificate
evidencing shares of Class A Common Stock, Class B Common Stock and Class C
Common Stock shall thereafter evidence the number of whole shares of Common
Stock into which they have been converted, without need to exchange such
certificate for a new certificate.
A. DESCRIPTION OF STOCK
Section 1. Common Stock. The holders of shares of Common Stock shall
have the following rights:
(a) Voting. The holders of shares of Common Stock shall be
entitled to one vote per share on all matters to be voted by stockholders of
the Corporation.
(b) Dividends and Distributions. Dividends may be declared upon
and paid to the holders of Common Stock as the Board of Directors shall
determine.
(c) Liquidation. On dissolution and liquidation of the
Corporation, whether voluntary or involuntary, after paying or setting aside
for the holders of all shares of Preferred Stock then outstanding the full
preferential amounts to which they are entitled pursuant to the terms
thereof, the net assets of the Corporation remaining shall be divided ratably
among the holders of shares of Common Stock.
(d) Conversion. The holders of shares of Common Stock shall not
have any conversion rights whatsoever with respect to such shares of Common
Stock.
Section 2. Preferred Stock. The Board of Directors is authorized,
subject to the limitations prescribed by law and by the provisions of this
Article IV, to provide for the issuance of shares of Preferred Stock in
series, to establish from time to time the number of shares to be included in
each series, and to determine the designations, relative rights, preferences
and limitations of the shares of each series. The authority of the Board of
Directors with respect to each series includes determination of the following:
(a) The number of shares in and the distinguishing designation of
that series;
(b) Whether shares of that series shall have full, special,
conditional, limited or no voting rights, except to the extent otherwise
provided by law;
<PAGE>
(c) Whether shares of that series shall be convertible into other
securities of the Corporation and the terms and conditions of the conversion,
including provision for adjustment of the conversion rate in circumstances
determined by the Board of Directors;
(d) Whether or not shares of that series shall be redeemable and
the terms and conditions of redemption, including the date or dates upon or
after which they shall be redeemable and the amount per share payable in case
of redemption, which amount may vary under different conditions or at
different redemption dates;
(e) The dividend rate, if any, on shares of that series, the manner
of calculating any dividends and the preferences of any dividends;
(f) The right of shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation and the
rights of priority of that series relative to the Common Stock and any other
series of Preferred Stock on the distribution of assets on dissolution; and
(g) Any other relative rights, preferences and limitations of that
series that are permitted by law to vary.
Section 3. Preemptive Rights. Holders of Common Stock and Preferred
Stock of the Corporation shall have no preemptive rights to purchase stock of
the Corporation or securities convertible into or carrying a right to
subscribe for or acquire stock of the Corporation.
<PAGE>
ATTACHMENT 6
ARTICLE VI
A. CLASSIFICATION OF BOARD OF DIRECTORS
Section 1. Number of Directors. Subject to the restriction that the
number of directors shall not be less than the number required by law, the
number of directors of the Corporation shall be fixed from time to time by
the vote of a majority of the directors then in office, but such number shall
in no case be less than three. Any such determination made by the Board of
Directors shall continue in effect unless and until changed by the Board of
Directors, but no such changes shall affect the term of any director then in
office.
Section 2. Classification of Directors. This Article VI, Part A,
Section 2 shall be effective only from and after the pricing of the
Corporation's initial public offering of shares of Common Stock pursuant to
the Securities Act of 1933, as amended (the "Effective Date"). The
directors shall be divided into three classes, designated Class I, Class II
and Class III. Each class shall consist, as nearly as may be possible, of
one-third of the total number of directors constituting the entire Board of
Directors. The term of office of the initial Class I directors shall
continue until the first annual meeting following the Effective Date
and until their successors are chosen and qualified, the term of office of
the initial Class II directors shall continue until the second annual meeting
following the Effective Date and until their successors are chosen and
qualified and the term of office of the initial Class III directors shall
continue until the third annual meeting following the Effective Date
and until their successors are chosen and qualified. At each annual meeting
of stockholders, successors to the class of directors whose term expires at
that annual meeting shall be elected for a three-year term. If the
authorized number of directors is changed, any increase or decrease shall be
apportioned among the classes so as to maintain the number of directors in
each class as nearly equal as possible, and any additional director of any
class elected to fill a vacancy resulting from an increase in such class
shall hold office for a term that shall coincide with the remaining term of
that class, but in no case will a decrease in the number of directors shorten
the term of any incumbent director. A director shall hold office until the
annual meeting for the year in which his or her term expires and until his or
her successor shall be elected and shall qualify, subject, however, to prior
death, resignation, retirement, disqualification or removal from office. A
majority of the directors then in office shall constitute a quorum for the
transaction of business. Any vacancy on the Board of Directors that results
from an increase in the number of directors shall be filled by a majority of
the directors then in office, even if less than a quorum, or by a sole
remaining director. Any director elected to fill a vacancy not resulting
from an increase in the number of directors shall have the same remaining
term as that of his or her predecessor. Any director elected by the
stockholders, or by the Board of Directors to fill a vacancy, may be removed
only for cause by the affirmative vote of (i) the holders of not less than a
majority of the voting power represented by all the shares of stock of the
Corporation outstanding and entitled to vote for the election of directors,
given at a duly called annual or special meeting of stockholders, or (ii) a
majority of the directors then in office.
<PAGE>
B. LIMITATION OF LIABILITY OF DIRECTORS
No director of this Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director notwithstanding any provision of law imposing such
liability; provided, however, that this Article shall not eliminate or limit
any liability of a director (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 61 or 62 of the Massachusetts Business
Corporation Law, or (iv) with respect to any transaction from which the
director derived an improper personal benefit.
No amendment or repeal of this Article shall adversely affect the rights
and protection afforded to a director of this Corporation under this Article
for acts or omissions occurring prior to such amendment or repeal.
C. INDEMNIFICATION
Section 6.1 Right to Indemnification. The Corporation shall indemnify
and hold harmless each person who was or is a party or is threatened to be
made a party to or is otherwise involved in any threatened, pending or
completed action, suit, proceeding or investigation, whether civil, criminal
or administrative (a "Proceeding"), by reason of being, having been or having
agreed to become, a director or officer of the Corporation, or serving,
having served or having agreed to serve, at the request of the Corporation,
as a director or officer of, or in a similar capacity with, another
organization or in any capacity with respect to any employee benefit plan
(any such person being referred to hereafter as an "Indemnitee"), or by
reason of any action alleged to have been taken or omitted in such capacity,
against all expense, liability and loss (including without limitation
reasonable attorneys' fees, judgments, fines, "ERISA" excise taxes or
penalties) incurred or suffered by the Indemnitee or on behalf of the
Indemnitee in connection with such Proceeding and any appeal therefrom,
unless the Indemnitee shall have been adjudicated in such Proceeding not to
have acted in good faith in the reasonable belief that his or her action was
in the best interest of the Corporation or, to the extent such matter relates
to service with respect to an employee benefit plan, in the best interests of
the participants or beneficiaries of such employee benefit plan.
Notwithstanding anything to the contrary in these Articles of Organization,
except as set forth in Section 6.6 below, the Corporation shall not indemnify
or advance expenses to an Indemnitee seeking indemnification in connection
with a Proceeding (or part thereof) initiated by the Indemnitee, unless the
initiation thereof was approved by the Board of Directors of the Corporation.
Section 6.2 Settlements. Subject to compliance by the Indemnitee with
the applicable provisions of Section 6.5 below, the right to indemnification
conferred in these Articles of Organization shall include the right to be
paid by the Corporation for amounts paid in settlement of any such Proceeding
and any appeal therefrom, and all expenses (including attorneys' fees)
incurred in connection with such settlement, pursuant to a consent decree or
otherwise, unless it is held or determined pursuant to Section 6.5 below that
the Indemnitee did not act in good faith in the reasonable belief that his or
her action was in the
<PAGE>
best interest of the Corporation or, to the extent such matter relates to
service with respect to an employee benefit plan, in the best interests of
the participants or beneficiaries of such employee benefit plan.
Section 6.3 Notification and Defense of Proceedings. The Indemnitee
shall notify the Corporation in writing as soon as reasonably practicable of
any Proceeding involving the Indemnitee for which indemnity or advancement of
expenses is intended to be sought. Any omission to so notify the Corporation
shall not relieve it from any liability that it may have to the Indemnitee
under these Articles of Organization unless, and only to the extent that,
such omission results in the forfeiture of substantive rights or defenses by
the Corporation. With respect to any Proceeding of which the Corporation is
so notified, the Corporation shall be entitled but not obligated, to
participate therein at its own expense and/or to assume the defense thereof
at its own expense, with legal counsel reasonably acceptable to the
Indemnitee, except as provided in the last sentence of this Section 6.3.
After notice from the Corporation to the Indemnitee of its election so to
assume such defense (subject to the limitations in the last sentence of this
Section 6.3), the Corporation shall not be liable to the Indemnitee for any
fees and expenses of counsel subsequently incurred by the Indemnitee in
connection with such Proceeding, other than as provided below in this Section
6.3. The Indemnitee shall have the right to employ his or her own counsel in
connection with such Proceeding, but the fees and expenses of such counsel
incurred after notice from the Corporation of its assumption of the defense
thereof at its expense with counsel reasonably acceptable to Indemnitee shall
be at the expense of the Indemnitee unless (i) the employment of counsel by
the Indemnitee at the Corporation's expense has been authorized by the
Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded
that there may be a conflict of interest or position on any significant issue
between the Corporation and the Indemnitee in the conduct of the defense of
such action or (iii) the Corporation shall not in fact have employed counsel
reasonably acceptable to the Indemnitee to assume the defense of such
Proceeding within a reasonable time after receiving notice thereof, in each
of which cases the fees and expenses of counsel for the Indemnitee shall be
at the expense of the Corporation, except as otherwise expressly provided in
these Articles of Organization. The Corporation shall not be entitled,
without the consent of the Indemnitee, to assume the defense of any
Proceeding brought by or in the right of the Corporation or as to which
counsel for the Indemnitee shall have reasonably made the conclusion provided
for in clause (ii) above.
Section 6.4 Advance of Expenses. Except as provided in Section 6.3 of
these Articles of Organization, as part of the right to indemnification
granted by these Articles of Organization, any expenses (including attorneys'
fees) incurred by an Indemnitee in defending any Proceeding within the scope
of Section 6.1 of these Articles of Organization or any appeal therefrom
shall be paid by the Corporation in advance of the final disposition of such
matter, provided, however, that the payment of such expenses incurred by an
Indemnitee in advance of the final disposition of such matter shall be made
only upon receipt of a written undertaking by or on behalf of the Indemnitee
to repay all amounts so advanced in the event that it shall ultimately be
determined that the Indemnitee is not entitled to be indemnified by the
Corporation as authorized by Section 6.1 or Section 6.2 of these Articles of
Organization. Such undertaking need not be secured and shall be accepted
without
<PAGE>
reference to the financial ability of the Indemnitee to make such repayment.
Such advancement of expenses shall be made by the Corporation promptly
following its receipt of written requests therefor by the Indemnitee,
accompanied by reasonably detailed documentation, and of the foregoing
undertaking.
Section 6.5 Certain Presumptions and Determinations. If, in a
Proceeding brought by or in the right of the Corporation, a director or
officer of the Corporation is held not liable for monetary damages, whether
because that director or officer is relieved of personal liability under the
provisions of Article VI, Part B of these Articles of Organization of the
Corporation or otherwise, that director or officer shall be deemed to have
met the standard of conduct set forth in Section 6.1 and thus to be entitled
to be indemnified by the Corporation thereunder. In any adjudicated
Proceeding against an Indemnitee brought by reason of the Indemnitee's
serving, having served or agreed to serve, at the request of the Corporation,
for an organization other than the Corporation in one or more of the
capacities indicated in Section 6.1, if the Indemnitee shall not have been
adjudicated not to have acted in good faith in the reasonable belief that the
Indemnitee's action was in the best interest of such other organization, the
Indemnitee shall be deemed to have met the standard of conduct set forth in
Section 6.1 and thus be entitled to be indemnified thereunder. An
adjudication in such a Proceeding that the Indemnitee did not act in good
faith in the reasonable belief that the Indemnitee's action was in the best
interest of such other organization shall not create a presumption that the
Indemnitee has not met the standard of conduct set forth in Section 6.1. In
order to obtain indemnification of amounts paid in settlement pursuant to
Section 6.2 of these Articles of Organization, the Indemnitee shall submit to
the Corporation a written request, including in such request such
documentation and information as is reasonably available to the Indemnitee
and is reasonably necessary to determine whether and to what extent the
Indemnitee is entitled to such indemnification. Any such indemnification
under Section 6.2 shall be made promptly, and in any event within 60 days
after receipt by the Corporation of the written request of the Indemnitee,
unless a court of competent jurisdiction holds within such 60-day period that
the Indemnitee did not meet the standard of conduct set forth in Section 6.2
or the Corporation determines, by clear and convincing evidence, within such
60-day period that the Indemnitee did not meet such standard. Such
determination shall be made by the Board of Directors of the Corporation,
based on advice of independent legal counsel (who may, with the consent of
the Indemnitee, be regular legal counsel to the Corporation). The
Corporation and the directors shall be under no obligation to undertake any
such determination or to seek any ruling from any court.
Section 6.6 Remedies. The right to indemnification or advances as
granted by these Articles of Organization shall be enforceable by the
Indemnitee in any court of competent jurisdiction if the Corporation denies
such a request, in whole or in part, or, with respect to indemnification
pursuant to Section 6.2, if no disposition thereof is made within the 60-day
period referred to above in Section 6.5. Unless otherwise provided by law,
the burden of proving that the Indemnitee is not entitled to indemnification
or advancement of expenses under these Articles of Organization shall be on
the Corporation. Neither absence of any determination prior to the
commencement of such action that indemnification is proper in the
circumstances because the Indemnitee has met any applicable standard of
conduct, nor an actual determination by the Corporation pursuant to Section
6.5 that the Indemnitee has not
<PAGE>
met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the Indemnitee has not met the applicable standard
of conduct. The Indemnitee's expenses (including reasonable attorneys' fees)
incurred in connection with successfully establishing his or her right to
indemnification, in whole or in part, in any such Proceeding shall also be
paid by the Corporation.
Section 6.7 Contract Right; Subsequent Amendment. The right to
indemnification and advancement of expenses conferred in these Articles of
Organization shall be a contract right. No amendment, termination or repeal
of these Articles of Organization or of the relevant provisions of Chapter
156B of the Massachusetts General Laws or any other applicable laws shall
affect or diminish in any way the rights of any Indemnitee to indemnification
or advancement of expenses under the provisions hereof with respect to any
Proceeding arising out of or relating to any action, omission, transaction or
facts occurring prior to the final adoption of such amendment, termination or
repeal, except with the consent of the Indemnitee.
Section 6.8 Other Rights. The indemnification and advancement of
expenses provided by these Articles of Organization shall not be deemed
exclusive of any other rights to which an Indemnitee seeking indemnification
or advancement of expenses may be entitled under any law (common or
statutory), agreement or vote of stockholders or directors or otherwise, both
as to action in his or her official capacity and as to action in any other
capacity while holding office for the Corporation, and shall continue as to
an Indemnitee who has ceased to be a director or officer, and shall inure to
the benefit of the estate, heirs, executors and administrators of the
Indemnitee. Nothing contained in these Articles of Organization shall be
deemed to prohibit, and the Corporation is specifically authorized to enter
into, agreements with any Indemnitee providing indemnification rights and
procedures different from those set forth in these Articles of Organization.
Section 6.9 Partial Indemnification. If an Indemnitee is entitled
under any provision of these Articles of Organization to indemnification by
the Corporation for some or a portion of the expenses (including attorneys'
fees), judgments, fines or amounts paid in settlement actually and reasonably
incurred by the Indemnitee or on his or her behalf in connection with any
Proceeding and any appeal therefrom but not, however, for the total amount
thereof, the Corporation shall nevertheless indemnify the Indemnitee for the
portion of such expenses (including reasonable attorneys' fees), judgments,
fines or amounts paid in settlement to which the Indemnitee is entitled.
Section 6.10 Insurance. The Corporation may purchase and maintain
insurance, at its expense, to protect itself and any director, officer,
employee or agent of the Corporation or another organization or employee
benefit plan against any expense, liability or loss incurred by such person
in any such capacity, or arising out of such person's status as such, whether
or not the Corporation would have the power to indemnify such person against
such expense, liability or loss under Chapter 156B of the Massachusetts
General Laws.
Section 6.11 Merger or Consolidation. If the Corporation is merged
into or consolidated with another corporation and the Corporation is not the
surviving corporation,
<PAGE>
the surviving corporation shall assume the obligations of the Corporation
under these Articles of Organization with respect to any Proceeding arising
out of or relating to any action, omission, transaction or facts occurring on
or prior to the date of such merger or consolidation.
Section 6.12 Savings Clause. If these Articles of Organization or any
portion hereof shall be invalidated on any ground by any court of competent
jurisdiction, then the Corporation shall nevertheless indemnify and advance
expenses to each Indemnitee as to any expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in connection with any
Proceeding, including an action by or in the right of the Corporation, to the
fullest extent permitted by any applicable portion of these Articles of
Organization that shall not have been invalidated and to the fullest extent
permitted by applicable law.
Section 6.13 Subsequent Legislation. If the Massachusetts General Laws
are amended after adoption of these Articles of Organization to expand
further the indemnification permitted to Indemnitees, then the Corporation
shall indemnify such persons to the fullest extent permitted by the
Massachusetts General Laws as so amended.
Section 6.14 Indemnification of Others. The Corporation may, to the
extent authorized from time to time by its Board of Directors, grant
indemnification rights to employees or agents of the Corporation or other
persons serving the Corporation who are not Indemnitees, and such rights may
be equivalent to, or greater or less than, those set forth in these Articles
of Organization.
D. TRANSACTIONS WITH INTERESTED PERSONS
1. Unless entered into in bad faith, no contract or transaction by this
Corporation shall be void, voidable or in any way affected by reason of the
fact that it is with an Interested Person.
2. For the purposes of this Article, "Interested Person" means any
person or organization in any way interested in this Corporation whether as
an officer, director, stockholder, employee or otherwise, and any other
entity in which any such person or organization this Corporation is in any
way interested.
3. Unless such contract or transaction was entered into in bad faith,
no Interested Person, because of such interest, shall be liable to this
Corporation or to any other person or organization for any loss or expense
incurred by reason of such contract or transaction or shall be accountable
for any gain or profit realized from such contract or transaction.
4. The provisions of this Article shall be operative notwithstanding
the fact that the presence of an Interested Person was necessary to
constitute a quorum at a meeting of directors or stockholders of this
Corporation at which such contract or transaction was authorized or that the
vote of an Interested Person was necessary for the authorization of such
contract or transaction.
<PAGE>
E. ENFORCEMENT
If the Corporation shall fail to perform, observe or pay any of its
obligations set forth in this Articles of Organization, then in each and
every such case any holder of capital stock affected thereby may proceed to
enforce performance of such obligations in such manner as it may elect and
may proceed to protect and enforce its rights by suit in equity, action at
law and/or other appropriate proceeding for performance of such obligations.
F. STOCKHOLDERS' MEETINGS
Meetings of stockholders of this Corporation may be held anywhere in the
United States.
G. AMENDMENT OF BY-LAWS
The By-Laws may provide that the Board of Directors as well as the
stockholders may make, amend or repeal the By-Laws of this Corporation,
except with respect to any provision thereof which by law, by these Articles
of Organization or by the By-Laws requires action by the stockholders.
H. ACTING AS A PARTNER
This Corporation may be a partner in any business enterprise which it
would have power to conduct by itself.
<PAGE>
ATTACHMENT A
Article III is hereby amended by changing the presently authorized 4,000
shares of Class A Common Stock, $.01 par value, 2,000 shares of Class B
Common Stock, $.01 par value, and 2,000 shares of Class C Common Stock, $.01
par value, into the classes and shares of stock set forth in Article III.
Article IV is hereby amended by deleting Article IV in its entirety and
by replacing it with a new Article IV as set forth on Attachment 4.
Article VI is hereby amended by deleting Article VI in its entirety and
be replacing it with a new Article VI as set forth on Attachment 6.
<PAGE>
Exhibit 4.1
FORM OF STOCKHOLDER AND
REGISTRATION RIGHTS AGREEMENT
This STOCKHOLDER AND REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"),
dated as of March ___, 1996, is among (a) Friendly Ice Cream Corporation, a
Massachusetts corporation (the "COMPANY"), (b) the Lenders listed on the
signature pages hereto and any other Lender who becomes a party to this
Agreement by executing an Assignment and Acceptance (an "ASSIGNMENT AND
ACCEPTANCE") in the form of EXHIBIT H to the Lender Subscription Agreement (as
defined herein) or an Instrument of Accession in the form of EXHIBIT I to the
Lender Subscription Agreement (collectively, the "LENDERS"), (c) Harrah's
Operating Company, Inc., a Delaware corporation ("HARRAH'S"), (d) Investment
Limited Partnership, a Delaware limited partnership ("ILP"), (e) Donald N. Smith
("SMITH"), (f) Peter M. Joost ("JOOST"), (g) Larry W. Browne ("BROWNE";
Harrah's, ILP, Smith, Joost and Browne being referred to herein collectively as
the "CLASS A STOCKHOLDERS"), (h) Quidnet Partners, a Texas general partnership
("QUIDNET"), (i) Bedrock Asset Trust I, a Delaware business trust, and ML Life
Insurance Company of New York, a New York life insurance company (collectively,
the "EXISTING WARRANTHOLDERS"), and (j) each other Person who becomes a party to
this Agreement by executing an Instrument of Accession (an "INSTRUMENT OF
ACCESSION") in the form of SCHEDULE I hereto.
WHEREAS, the parties hereto wish to set forth their relative rights with
regard to the transfer of the Company's securities and certain other matters:
NOW, THEREFORE, the parties to this Agreement hereby agree as follows:
Section 1. DEFINITIONS. For all purposes of this Agreement, the
following terms shall have the meanings set forth below:
AFFILIATE. Affiliate means, with respect to any Stockholder, any Person
directly or indirectly controlling, controlled by or under direct or indirect
common control with such Stockholder and shall include (a) any Person who is a
director or beneficial holder of at least 10% of the then outstanding capital
stock (or partnership interests or other shares of beneficial interest) of such
Stockholder and Family Members of any such Person, (b) any Person of which such
Stockholder or an Affiliate (as defined in clause (a) above) of such Stockholder
directly or indirectly, either beneficially owns at least 10% of the then
outstanding capital stock (or partnership interests or other shares of
beneficial interest) or constitutes at least a 10% equity participant, (c) any
Person of which an Affiliate (as defined in clause (a) above) of such
Stockholder is a partner, director, officer or
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executive employee, and (d) in the case of a specified Person who is an
individual, Family Members of such Person.
AGENT means The First National Bank of Boston, as Agent under the Agency
Agreement, and any successor Agent thereunder.
AGENCY AGREEMENT has the meaning set forth in the Subscription Agreement.
ASSIGNMENT AND ACCEPTANCE. See preamble.
CHARTER. Charter means the Company's Restated Articles of Organization and
all additional restatements or amendments thereto.
CLASS A COMMON STOCK. See definition of "COMMON STOCK."
CLASS A STOCKHOLDERS. Class A Stockholders means Harrah's, ILP, Smith,
Joost and Browne and any other person or entity who holds any capital stock of
the Company subject to the Class A Stockholder's Agreement.
CLASS A STOCKHOLDERS' AGREEMENT. Class A Stockholders' Agreement shall
mean the FICC Stockholders Agreement dated as of March ___, 1996 by and among
the Company, Harrah's, ILP, Smith, Joost and Browne, as in effect from time to
time.
CLASS B COMMON STOCK. See definition of "COMMON STOCK."
CLASS C COMMON STOCK. See definition of "COMMON STOCK."
CLASS H STOCK. Class H Stock has the meaning specified in the Class A
Stockholders Agreement.
CLASS I STOCK. Class I Stock has the meaning specified in the Class A
Stockholders Agreement.
CLASS S STOCK. Class S Stock has the meaning specified in the Class A
Stockholders Agreement.
COMMON STOCK. Common Stock means (a) the Company's Class A Voting Common
Stock, $.01 par value per share (the "CLASS A COMMON STOCK"), (b) the Company
Class B Voting Common Stock, $.01 par value per share (the "CLASS B COMMON
STOCK"), (c) the Company's Class C Non-Voting Common Stock, $.01 par value per
share (the "CLASS C COMMON STOCK"), and (d) any shares of any other class of
capital stock of the Company hereafter issued which are (i) not preferred as to
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dividends or assets over any class of stock of the Company, (ii) not subject to
redemption pursuant to the terms thereof, or (iii) issued to the holders of
shares of Common Stock upon any reclassification thereof.
COMPANY. See preamble.
CREDIT AGREEMENT. Credit Agreement means that certain Second Amended and
Restated Revolving Credit and Term Loan Agreement dated as of January 1, 1996,
by and among the Company, as borrower, Dogwood II, Inc., Family Restaurants
Franchise, Inc., Friendly's International, Inc., and Dogwood Restaurants, Inc.,
as guarantors, The First National Bank of Boston, as administrative agent and as
collateral agent for itself and the other Lenders referred to therein and as
issuing bank with respect to letter of credit, and the Lenders referred to
therein, as amended and in effect from time to time.
EVENT OF DEFAULT. Event of Default has the meaning specified in the Credit
Agreement.
EXISTING STOCKHOLDERS. Existing Stockholders means Quidnet, the Class A
Stockholders and the Existing Warrantholders, collectively.
EXISTING WARRANTHOLDERS. See preamble.
EXISTING WARRANTS. Existing Warrants means the following:
(a) Warrant in favor of Smith for 70.68 shares of Class A Common Stock;
(b) Warrant in favor of Browne for 6.76 shares of Class A Common Stock;
(c) Warrant in favor of ML Life Insurance Company of New York for
0.68480 shares of Class A Common Stock; and
(d) Warrant in favor of Bedrock Asset Trust I for 14.29520 shares of
Class A Common Stock;
in each case in the form attached as part of SCHEDULE 3.2(B)(I) of the Lender
Subscription Agreement, and any warrant or warrants issued upon transfer,
exchange or replacement thereof.
FAMILY MEMBERS. Family Members means, with respect to any individual, any
Related Person or Family Trust of such individual.
FAMILY TRUST. Family Trust means, with respect to any individual, any
trust created for the benefit of one or more of such individual's Related
Persons and controlled by such individual.
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INSTRUMENT OF ACCESSION. See preamble.
LENDER. See preamble.
LENDER SECURITIES. Lender Securities means (a) the shares of Common Stock
issued to the Lenders pursuant to the Lender Subscription Agreement, (b) all
shares of Common Stock issued or issuable upon conversion of such shares of
Common Stock, (c) the Lender Warrants and the shares of Common Stock issued or
issuable upon exercise of the Lender Warrants in accordance with their terms,
(d) all shares of Common Stock issued or issuable upon conversion of such shares
of Common Stock, (e) [intentionally omitted], (f) all shares of the Company's
capital stock issued with respect to such shares by way of stock dividend or
stock split or in connection with any merger, consolidation, recapitalization or
other reorganization affecting the Company's capital stock. Lender Securities
will continue to be Lender Securities in the hands of any holder and each
transferee thereof will succeed to the rights and obligations of a holder of
Lender Securities hereunder, PROVIDED that shares of Lender Securities will
cease to be Lender Securities when transferred (i) to the Company, (ii) pursuant
to a Public Sale or (iii) to a holder of Other Securities.
LENDER STOCKHOLDERS. Lender Stockholders means the Lenders for so long as
the Lenders hold Lender Securities and any other Person to whom Lender
Securities are transferred and who has executed either (A) prior to the Loan
Repayment Date, and Assignment and Acceptance or (B) thereafter, an Instrument
of Accession, for so long as such Person holds any Lender Securities.
LENDER SUBSCRIPTION AGREEMENT. Lender Subscription Agreement means the
Subscription Agreement, dated as of the date hereof, among the Company, the
Lenders named therein, and The First National Bank of Boston, as agent for the
Lenders, as in effect from time to time.
LENDER WARRANTS. Lender Warrants means the Common Stock Purchase Warrant
issued to The First National Bank of Boston, as agent for the Lenders, pursuant
to the Lender Subscription Agreement, and any warrant or warrants issued upon
transfer, exchange or replacement thereof.
LOAN REPAYMENT DATE. Loan Repayment Date has the meaning specified in the
Charter.
MAJORITY LENDER STOCKHOLDERS. Majority Lender Stockholders means the
holders at any time of 51% of the aggregate issued and outstanding shares of
Class B Common Stock and Class C Common Stock that at the time constitute Lender
Securities for purposes of this Agreement (or, in the event that all of the
shares of Class B Common Stock and Class C Common Stock have been automatically
converted into Class A Common Stock pursuant to the Charter, the holders of a
majority of the Class A Common Stock that at the time constitute Lender
Securities for purposes of this Agreement), taken together as a class.
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MANAGEMENT SECURITIES. Management Securities means (a) all shares of
Common Stock issued to participants in the Management Stock Plan or the Old
Option Plan and (b) all shares of the Company's capital stock issued with
respect to such shares by way of stock dividend or stock split or in connection
with any merger, consolidation, recapitalization or other reorganization
affecting the Company's capital stock. Management Securities will continue to
be Management Securities in the hands of any holder and each transferee thereof
will succeed to the rights and obligations of a holder of Management Securities
hereunder, provided that shares of Management Securities will cease to be
Management Securities when transferred (i) to the Company (unless such shares
are reissued pursuant to the Management Stock Plan), (ii) pursuant to a Public
Sale or (iii) to a holder of Other Securities or Lender Securities.
MANAGEMENT STOCK PLAN. Management Stock Plan has the meaning set forth in
the Lender Subscription Agreement.
MANAGEMENT STOCKHOLDERS. Management Stockholders means the participants in
the Management Stock Plan or Old Option Plan for so long as such Persons hold
Management Securities and any other Person to whom Management Securities are
transferred in compliance with the provisions of the Management Stock Plan and
who has executed an Instrument of Accession, for so long as such Person holds
any Management Securities.
OLD OPTION PLAN. Old Option Plan has the meaning set forth in the Lender
Subscription Agreement.
OTHER SECURITIES. Other Securities means (a) the shares of Common Stock
held by any of the Existing Stockholders on the date hereof, (b) [intentionally
omitted], (c) the Existing Warrants and the shares of Common Stock issued or
issuable upon exercise of the Existing Warrants in accordance with their terms,
(d) all shares of Common Stock issued or issuable upon conversion of such shares
of Common Stock, (e) [intentionally omitted] and (f) all shares of the Company's
capital stock issued with respect to such shares by way of stock dividend or
stock split or in connection with any merger, consolidation, recapitalization or
other reorganization affecting the Company's capital stock. Other Securities
will continue to be Other Securities in the hands of any holder and each
transferee thereof will succeed to the rights and obligations of a holder of
Other Securities hereunder, PROVIDED that shares of Other Securities will cease
to be Other Securities when transferred (i) to the Company, (ii) pursuant to a
Public Sale or (iii) to a holder of Lender Securities.
OTHER STOCKHOLDERS. Other Stockholders means the Existing Stockholders for
so long as such Person holds Other Securities and any other Person to whom Other
Securities are transferred and who has executed an Instrument of Accession, for
so long as such Person holds any Other Securities.
OFFER NOTICE. See Section 2.2.
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PERSON. Person means an individual, partnership, corporation, limited
liability company, association, trust, joint venture, unincorporated
organization, or any government, government department or agency or political
subdivision thereof.
PUBLIC OFFERING. Public Offering means any sale of Common Stock pursuant
to a public offering registered under the Securities Act.
PUBLIC SALE. Public Sale means any sale of Common Stock pursuant to a
Public Offering or to the public pursuant to the provisions of Rule 144 (or any
successor rule) adopted under the Securities Act.
QUALIFIED PUBLIC OFFERING. Qualified Public Offering has the meaning
specified in the Charter.
QUIDNET. See preamble.
REGISTRATION PERIOD. Registration Period means a period of time equal to
eighteen months from and after the end of the period of time the Stockholders
have agreed not to sell stock of the Company pursuant to lockup agreements
entered into in connection with the Company's initial Public Offering; PROVIDED,
HOWEVER, that such eighteen-month period shall be tolled during any period in
which the Company has elected to delay filing a Registration Statement under
Section 5.2(c) hereof.
RELATED PERSONS. Related Persons means, with respect to any individual,
such individual's parents, spouse, children and grandchildren.
SECURITIES. Securities means the Lender Securities and the Other
Securities.
SECURITIES ACT. Securities Act means the Securities Act of 1933, as
amended.
SPECIAL EVENT OF DEFAULT. Special Event of Default has the meaning
specified in the Charter.
STOCKHOLDERS. Stockholders means, collectively, the Lender Stockholders,
the Other Stockholders and Management Stockholders.
SUBSIDIARY. Subsidiary means any corporation, association, trust, or other
business entity, of which the designated parent shall at any time own or control
directly or indirectly through a Subsidiary or Subsidiaries at least a majority
(by number of votes) of the outstanding shares of capital stock (or other shares
of beneficial interest) entitled ordinarily to vote for the election of such
business entity's directors (or in the case of a business entity that is not a
corporation, for those Persons exercising functions similar to directors of a
corporation).
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TRANSFER. See Section 2.1.
VOTING SECURITIES. Voting Securities means, collectively, the Class A
Common Stock and the Class B Common Stock.
Section 2. [intentionally omitted]
Section 3. [intentionally omitted]
Section 4. [intentionally omitted]
Section 5. REGISTRATION RIGHTS.
5.1 PIGGYBACK REGISTRATION RIGHTS.
(a) If, at any time during the Registration Period, the Company
proposes to file a Registration Statement in connection with a Public Offering
(other than a Public Offering initiated pursuant to the demand registration
provisions of Section 5.2) other than its initial Public Offering, the Company
will provide written notice thereof to the Stockholders at least sixty (60) days
prior to the filing of the first such Registration Statement. For purposes of
this Agreement, "REGISTRATION STATEMENT" shall mean a registration statement on
the appropriate form in order to register shares of Common Stock under the
Securities Act (otherwise than in connection with the registration of shares of
Common Stock issuable pursuant to an employee stock option, stock purchase or
similar plan or pursuant to a merger, exchange offer or in a transaction of the
type specified in Rule 145(a) under the Securities Act); "UNDERWRITER" or
"UNDERWRITERS" shall mean, in the case of a Public Offering under Section 5.1,
an underwriter selected by the Company or, in the case of a Public Offering
initiated under Section 5.2, an underwriter selected by the Company and approved
by Stockholders owning a majority of the Registration Shares to be included in
such registration (which approval shall not be unreasonably withheld); and
"UNDERWRITERS' MAXIMUM NUMBER" means (for any registration which is an
underwritten registration) that number of securities to which such registration
should, in the written opinion of the managing Underwriters of such registration
in the light of marketing factors, be limited. At the written request of any
Stockholder delivered to the Company within fifteen (15) days after the receipt
of such notice from the Company, which request shall state the number of shares
of Common Stock held by such Stockholder that such Stockholder wishes to sell
under the Registration Statement (shares of Common Stock held by any Stockholder
<PAGE>
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that are requested to be offered and sold pursuant to this Section 5.1 together
with shares of Common Stock that are requested to be offered and sold pursuant
to Section 5.2 are herein referred to as "REGISTRATION SHARES"), the Company
agrees, subject to Section 5.1(b), to use its best efforts to cause all of the
Registration Shares to be registered under the Securities Act on such
Registration Statement to the extent and under the conditions such registration
is permissible under the Securities Act and the rules and regulations of the
Securities and Exchange Commission (the "COMMISSION") thereunder.
(b) The number of Registration Shares to be registered pursuant to
Section 5.1(a) for the benefit of any particular Stockholder is subject to
mandatory reduction as follows: if, in an underwritten Public Offering, the
managing Underwriter(s) thereof advise the Company in writing of an
Underwriters' Maximum Number, the Company will include in such registration:
(i) first, that number of shares that the Company proposes to
sell for its own account, and which does not exceed the
Underwriters' Maximum Number;
(ii) second, if the Underwriters' Maximum Number exceeds the
number of securities which the Company proposes to offer and
sell for its own account (with such excess referred to as
the "FIRST AVAILABLE AMOUNT"), that number of Registration
Shares requested to be included in such registration by the
Management Stockholders, Lender Stockholders and Other
Stockholders up to the lesser of (A) the First Available
Amount and (B) the total number of Registration Shares
requested to be included in such registration by the other
Stockholders, Lender Stockholders and Management
Stockholders.
The number of shares to be registered pursuant to clause (ii) above with respect
to any Stockholder shall be based on the number of Registration Shares requested
to be included in such registration by such Stockholder as compared to the total
number of Registration Shares requested to be included in such registration by
all of the Stockholders referred to in such clause.
5.2 DEMAND REGISTRATION RIGHTS.
(a) At any time during the Registration Period either (x) the
Stockholders holding a majority of the aggregate number of all outstanding
Lender Securities, Management Securities and Other Securities or (y) the
Majority Lender Stockholders may by written notice (a "DEMAND") request the
Company to file a Registration Statement in order to register all (or any
portion as determined by such Stockholders) of the shares of Common Stock owned
by such Stockholders. In the event that the Company receives a Demand, the
Company will give prompt written notice thereof to all other Stockholders.
Subject to paragraph (b) below, the Company will be required to include in such
registration all Registration Shares requested to be included in such
registration by any other Stockholder responding in writing fifteen (15) days of
the Company's notice.
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(b) The number of Registration Shares to be registered pursuant to
Section 5.2(a) for the benefit of any particular Stockholder is subject to
mandatory reduction, in the event that the managing Underwriter(s) advise the
Company of an Underwriter's Maximum Number, as follows: the Company will
include in such registration:
(i) first, the total number of Registration Shares requested to
be included in such registration by all Stockholders up to
the Underwriter's Maximum Number, with the amount to be
registered for the account of any Stockholder not to exceed
such Stockholder's PRO RATA portion of the Underwriter's
Maximum Number; and
(ii) in the event the number of shares to be registered pursuant
to clause (i) above is less than the Underwriter's Maximum
Number, the number of shares the Company wishes to register
for its own account.
(c) Upon receipt of a Demand, the Company shall promptly (and in any
event within ninety (90) days) use its best efforts to file such Registration
Statement under the Securities Act with respect to the applicable Registration
Shares subject to the following
(i) If the Company has commenced taking action with respect to
any financing, acquisition, reorganization or other
transaction or development material to the Company, and in
the reasonable and good faith opinion of the Company Board,
filing a Registration Statement would not be in the best
interests of the Company, the Company may delay filing the
Registration Statement until the earlier of (A) the
termination of activities with respect to any such
transaction or development, (B) the consummation or
abandonment of any agreement with respect to such
transaction or development or (C) ninety (90) days following
the Company's receipt of the Stockholder's notice of a
Demand pursuant to this Section 5.2.
(ii) If filing a Registration Statement could require the Company
to undergo a special interim audit, and in the reasonable
and good faith opinion of the Board of Directors, the cost
of such special interim audit would exceed $50,000, the
Company may delay filing a Registration Statement until
ninety (90) days after the close of the fiscal year in which
the request by the applicable Stockholder for registration
of shares of Common Stock is made, unless the Stockholders
making such Demand agree to reimburse the Company for the
cost of such special interim audit.
In the event that the Company elects to delay filing a Registration
Statement in accordance with this Section 5.2, it will promptly notify the
Stockholders thereof. The Stockholders responsible
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for the applicable Demand may, within twenty (20) days following receipt of such
notice, decide to withdraw its request that the Company file a Registration
Statement, in which case the withdrawn request will not count as an exercise of
Stockholder's right to request the Company to file a Registration Statement
pursuant to this Section 5.2.
(d) If the Company so requests, it shall not be required to effect a
Public Offering under Section 5.2 for a period not to exceed six (6) months
immediately following the date any other Public Offering was commenced and
consummated.
(e) The Stockholders will not be entitled to submit more than one (1)
Demand to the Company. No party may require the Company to file any
Registration Statement on Form S-1 (or other comparable form adopted by the
Commission) unless Form S-3 (or any comparable form adopted by the Commission)
is not available for such filing. Any registration initiated by a group of
Stockholders pursuant to a Demand pursuant to Section 5.2(a) above shall not,
for purposes of this paragraph (e), count as a Demand unless and until such
registration shall have become effective and, if such registration is an
underwritten offering, at least 80% of the Registration Shares included in such
registration (other than any Registration Shares included in any over-allotment
option granted to the underwriters) shall have been actually sold. No party may
require the Company to file a Registration Statement pursuant to a Demand unless
the Registration Statement is one for the registration of Registration Shares
having an expected price to the public (determined in accordance with Rule 457
promulgated under the Securities Act) of at least $5,000,000.
(f) Any registration initiated by Stockholders pursuant to a Demand may
be revoked by such Stockholders by giving written notice thereof to the Company
at any time before such registration shall have become effective; PROVIDED,
HOWEVER, that in the event of such a revocation either such Stockholders shall
pay all expenses of such registration required to be paid by the Company
pursuant to Section 5, in which case such registration shall not, for purposes
of this Section 5.2(a), count as a Demand, or if such Stockholders fail to pay
such expenses within a reasonable period of time after receipt of appropriate
documentation for such expenses, such registration shall count as a Demand for
purposes of this Section 5.2(a).
5.3 PROCEDURES
Whenever the Company shall include Registration Shares owned by a
Stockholder ("SELLING STOCKHOLDER") in a Registration Statement, the Company
shall:
(i) prepare and file with the Commission a Registration Statement with
respect to such Registration Shares and use its best efforts to
cause such Registration Statement to become promptly effective and
furnish to each Selling Stockholder copies of the Registration
Statement and any amendments or supplements thereto and any
Prospectus included therein prior to filing;
<PAGE>
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(ii) prepare and file with the Commission such amendments and
supplements to such Registration Statement and the Prospectus used
in connection therewith as may be necessary to keep such
Registration Statement effective for the lesser of (A) a period of
time necessary to permit each Selling Stockholder to dispose of all
of such Registration Shares and (B) six (6) months (as
appropriately extended to reflect any periods when a Selling
Stockholder is not permitted to sell Registration Shares pursuant
to such Registration Statement), and comply with the provisions of
the Securities Act with respect to the disposition of all
securities covered by such Registration Statement during such
effective period in accordance with the intended methods of
disposition by the Selling Stockholders set forth in such
Registration Statement and cause the Prospectus to be supplemented
by any required prospectus supplement, and as so supplemented to be
filed pursuant to Rule 424 under the Securities Act;
(iii) Upon request, furnish to each Selling Stockholder such number of
copies of such Registration Statement, each amendment and
supplement thereto, the Prospectus included in such Registration
Statement (including each a preliminary Prospectus and each
Prospectus filed under Rule 424 of the Securities Act) and such
other documents as each such Selling Stockholder may reasonably
request in order to facilitate the disposition of the Registration
Shares owned by each such Selling Stockholder (it being understood
that the Company consents to the use of the Prospectus and any
amendment or supplement thereto by such Selling Stockholder in
connection with the offering and Sale of the Registration Shares
covered by the Prospectus or any amendment or supplement thereto);
(iv) use its best efforts to register or quality such Registration
Shares under such other securities or blue sky laws of such
jurisdictions as determined by the managing Underwriter after
consultation with the Company (or, if there is no managing
Underwriter, as determined by the Company), use its best efforts to
keep such registration or qualification effective, including
through new filings, amendments or renewals, during the period such
Registration Statement is required to be kept effective, and do any
and all other acts and things which may be reasonably necessary or
advisable to enable such Selling Stockholder to consummate the
disposition in such jurisdictions of the Registration Shares;
PROVIDED that the Company will not be required (A) to qualify
generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this subparagraph (iv),
(B) to subject itself to taxation in any such jurisdiction, (C) to
consent to general service of process in any such jurisdiction, (D)
register or qualify as a broker-dealer in any such jurisdiction or
(E) to qualify or register in any particular state if such state
refuses to permit such registration or qualification because of the
expense allocation provisions set forth in Section 5.5;
<PAGE>
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(v) notify the Selling Stockholders, at any time when a Prospectus
relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which the
Prospectus included in such Registration Statement contains an
untrue statement of a material fact or omits any fact necessary to
make the statements therein not misleading, and, at the request of
any Selling Stockholder, the Company will promptly prepare (and,
when completed, give notice to each Selling Stockholder) a
supplement or amendment to such Prospectus so that, as thereafter
delivered to the purchasers of such Registration Shares, such
Prospectus will not contain an untrue statement of a material fact
or omit to state any fact necessary to make the statements therein
not misleading; PROVIDED that upon such notification by the
Company, each Selling Stockholder will not offer to sell such
Registration Shares until the Company has notified such Selling
Stockholder that it has prepared a supplement or amendment to such
Prospectus and delivered copies of such supplement or amendment to
such Selling Stockholder;
(vi) use its best efforts to cause all such Registration Shares to be
listed, prior to the date of the first sale of such Registration
Shares pursuant to such registration, on each securities exchange
on which similar securities issued by the Company are then listed,
and, if not so listed, to be listed with The NASDAQ Stock Market;
(vii) enter into all such customary agreements (including underwriting
agreements in customary form) and take all such other actions as
the holders of a majority of the Registration Shares being sold or
the Underwriters, if any, reasonably request in order to expedite
or facilitate the disposition of such Registration Shares
(including, without limitation, effecting a stock split or a
combination of shares);
(viii) make available for inspection on a confidential basis by any
Selling Stockholder, any Underwriter participating in any
disposition pursuant to such Registration Statement, and any
attorney, accountant or other agent retained by any such Selling
Stockholder or Underwriter (in each case after reasonable prior
notice), all financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's
officers, directors, employees and independent accountants to
supply on a confidential basis all information reasonably requested
by any such Selling Stockholder, Underwriter, attorney, accountant
or agent in connection with such Registration Statement;
(ix) use its best efforts to cause the Registration Shares to be
registered with or approved by such other governmental agencies or
authorities within the United States and having jurisdiction over
the Company as may reasonably be necessary to enable the Selling
Stockholders or the Underwriter or Underwriters, if any, to
consummate the disposition of such Registration Shares;
<PAGE>
-13-
(x) obtain a cold comfort letter from the Company's independent public
accountants in customary form and covering such matters of the type
customarily covered by cold comfort letters; and
(xi) cause the Company's counsel to provide customary legal opinions in
connection with such Registration Statement.
5.4 INDEMNIFICATION
(a) The Company will indemnify and hold harmless each Stockholder, the
officers, directors, partners, and partners of partners of such Stockholder, and
each Underwriter of shares of Common Stock sold pursuant to Section 5.1 or 5.2
(and any person who controls such Stockholder or any such Underwriter within the
meaning of Section 15 of the Securities Act) against all claims, losses,
damages, liabilities and expenses resulting from any untrue statement or alleged
untrue statement of a material fact contained in a Registration Statement or in
any related prospectus, notification or the like and from any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar (i)
as the same may have been based on information furnished in writing to the
Company by such Stockholder or such Underwriter expressly for use therein and
used in accordance with such writing or (ii) as such claims, losses, damages,
liabilities and expenses result from a breach by a Stockholder of its
obligations under Section 5.3(v).
(b) Each Stockholder, by acceptance of the registration provisions
provided herein, agrees to furnish to the Company such information concerning
such Stockholder and the proposed sale or distribution as shall, in the opinion
of counsel for the Company, be necessary in connection with any such
registration or qualification of any shares of stock proposed to be made
pursuant to Section 5.1 or 5.2 and to indemnify and hold harmless the Company,
its officers and directors, each of its Underwriters and the other Stockholders
(and any person who controls the Company or such Underwriters or such other
Stockholders within the meaning of Section 15 of the Securities Act and the
officers, directors, partners and partners of partners of such Stockholders)
against all claims, losses, damages, liabilities and expenses resulting from any
untrue statement or alleged untrue statement of a material fact furnished in
writing to the Company by such Stockholder expressly for use in connection with
such registration or qualification and used in accordance with such writing and
from any omission therefrom or alleged omission therefrom of a material fact
needed to be furnished or necessary to make the information furnished not
misleading; PROVIDED, HOWEVER, that no Stockholder shall have liability under
this paragraph (b) in excess of the net proceeds received by such Stockholder
from the sale of Registration Shares.
(c) If any party (the "INDEMNITEE") receives notice of any claim or the
commencement of any action or proceeding with respect to which any other party
(or parties) is obligated to provide indemnification (the "INDEMNIFYING PARTY")
pursuant to this Section 5.4, the Indemnitee shall
<PAGE>
-14-
promptly give the Indemnifying Party notice thereof. If the Indemnitee does not
promptly give this notice, the Indemnifying Party shall not be obligated to
provide indemnification hereunder to the extent that the liability for which
such indemnification is claimed could have been avoided or mitigated if the
Indemnitee had promptly given notice to the Indemnifying Party. The
Indemnifying Party may compromise, defend or settle, at such Indemnifying
Party's own expense and by such Indemnifying Party's own counsel, any such
matter involving the asserted liability of the Indemnitee. If the Indemnifying
Party chooses to defend any claim, the Indemnitee shall make available to the
Indemnifying Party any books, records or other documents within its control that
are necessary or appropriate for such defense.
5.5 EXPENSES
Subject to Section 5.2(f), the Company shall pay all of the expenses in
connection with a Public Offering in which a Selling Stockholder participates in
accordance with Section 5.1 or 5.2, including, without limitation, costs of
complying with federal and state securities laws and regulations, attorneys' and
accounting fees of the Company, printing expenses and federal and state filing
fees, except that transfer taxes, underwriting commissions, fees and expenses
incurred by the Selling Stockholders and fees and disbursements of counsel (if
any) to the Selling Stockholders will be borne by the Selling Stockholders.
5.6 RESTRICTIONS ON PUBLIC SALE BY HOLDERS OF REGISTRATION SHARES.
(a) Each Stockholder, if the Company or the managing underwriters so
request in connection with any underwritten offering subject to the provisions
of this Section 5 other than the Company's initial Public Offering, will not,
without the prior written consent of the Company or such underwriters, effect
any public sale or other distribution of any equity securities of the Company,
including any sale pursuant to Rule 144, during the seven (7) days prior to, and
during the ninety-day period commencing on, the effective date of such
underwritten registration, except in connection with such underwritten
registration; PROVIDED that each executive officer and director of the Company
and each other person who is also an Affiliate of the Company who, in either
case, is a holder of securities of the Company, shall enter into similar
agreements; and PROVIDED, FURTHER, that such Stockholder is permitted to include
in such registration at least 80% of the Registration Shares requested to be
included in such registration by such Selling Stockholder.
(b) In connection with the Company's initial Public Offering, each
Stockholder will not, without the prior written consent of the Company's
underwriters in such Public Offering (which consent may be withheld in the sole
discretion of such underwriters), directly or indirectly, sell, offer, contract
or grant any option to sell (including without limitation any short sale),
pledge, transfer, establish an open "put equivalent position" within the meaning
of Rule 16a-1(h) of the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock, or securities
<PAGE>
-15-
exchangeable or exercisable for or convertible into shares of Common Stock
currently or hereafter owned either of record or beneficially (as defined in
Rule 13d-3 under the Exchange Act), other than shares purchased in or after such
initial Public Offering that are not "restricted securities" within the meaning
of Rule 144 of the Securities Act, or publicly announce such Stockholder's
intention to do any of the foregoing during the three hundred sixty-day period
commencing on the date of the prospectus relating to such initial Public
Offering; PROVIDED that each executive officer and director of the Company and
each other person who is also an Affiliate of the Company who, in either case,
is a holder of securities of the Company, shall enter into an agreement
substantially similar to this Section 5.6(b); and PROVIDED, FURTHER, that,
notwithstanding this Section 5.6(b), the Lender Stockholders may, for so long
as the restrictions on transfer on Lender Securities set forth in Section
11.1(a) of the Lender Subscription Agreement are in effect, transfer Lender
Securities along with a proportional amount of Obligations (as defined in the
Credit Agreement) in the manner prescribed in the Credit Agreement and the
Lender Subscription Agreement .
(c) Notwithstanding anything to the contrary in Sections 5.6(a) and
(b), any Stockholder (other than a Management Stockholder) may transfer equity
securities of the Company to any Person that was a Stockholder immediately
prior to the sale of Common Stock by the Company in consummation of the
Company's initial Public Offering.
Section 6. NO INCONSISTENT AGREEMENTS. The Company will not enter into
any registration rights or other agreement that conflicts with its obligations
under this Agreement.
Section 7. SEVERABILITY. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
Section 8. ENTIRE AGREEMENT. Except as otherwise expressly set forth
herein, this document embodies the complete agreement and understanding among
the parties hereto with respect to the subject matter hereof and thereof and
supersedes and preempts any prior understandings, agreements or representations
by or among the parties, written or oral, which may have related to the subject
matter hereof in any way.
Section 9. SUCCESSORS AND ASSIGNS. This Agreement will bind and inure
to the benefit of and be enforceable by the Company and the Stockholders and
their respective successors and assigns.
<PAGE>
-16-
Section 10. COUNTERPARTS. This Agreement may be executed in separate
counterparts each of which will be an original and all of which taken together
will constitute one and the same agreement.
Section 11. REMEDIES. The Stockholders will be entitled to enforce
their rights under this Agreement specifically (without posting a bond or other
security), to recover damages by reason of any breach of any provision of this
Agreement and to exercise all other rights existing in their favor. The parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach of the provisions of this Agreement and that any Stockholder may
in its sole discretion apply to any court of law or equity of competent
jurisdiction for specific performance and/or injunctive relief in order to
enforce or prevent any violation of the provisions of this Agreement. In the
event of any dispute involving the terms of this Agreement, the prevailing party
shall be entitled to collect reasonable fees and expenses incurred by the
prevailing party in connection with such dispute from the other parties to such
dispute.
Section 12. NOTICES. Any notice provided for in this Agreement will be
in writing and will be deemed properly delivered if either personally delivered
or sent by telecopier, overnight courier or mailed certified or registered mail,
return receipt requested, postage prepaid to the recipient (a) if to any
Stockholder, at the address listed for such Stockholder in the stock records of
the Company and (b) if to the Company, to 1855 Boston Road, Wilbraham,
Massachusetts 01095, Attention: Larry W. Browne. Any such notice shall be
effective (i) if delivered personally or by telecopier, when received, (ii) if
sent by overnight courier, when receipted for, and (iii) if mailed, 3 days after
being mailed as described above. The Company agrees to make available to each
Stockholder upon request an address list of all Stockholders to ensure correct
delivery of all notices hereunder.
Section 13. AMENDMENT AND WAIVER. No modification, amendment or waiver
of any provision of this Agreement will be effective against the Company or the
Stockholders unless such modification, amendment or waiver is approved in
writing by the Majority Lender Stockholders and holders of a majority of the
Other Securities then outstanding. The failure of any party to enforce any of
the provisions of this Agreement will in no way be construed as a waiver of such
provisions and will not affect the right of such party thereafter to enforce
each and every provision of this Agreement in accordance with its terms.
Section 14. TERMINATION. The provisions of Section 2 of this Agreement
will terminate upon the earliest to occur of (a) the completion of any voluntary
or involuntary liquidation or dissolution of the Company or (b) the completion
of a Qualified Public Offering. As noted in Section 3.9, the provisions of
Section 3 shall terminate upon the Loan Repayment Date.
Section 15. GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY AND INTERPRETATION OF THIS AGREEMENT WILL
<PAGE>
-17-
BE GOVERNED BY THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.
Section 16. DESCRIPTIVE HEADINGS. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
Section 17. CONSTRUCTION. The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rule of strict construction will be applied against any party.
<PAGE>
Exhibit 4.3
CH&S DRAFT 9/04/97
FRIENDLY ICE CREAM CORPORATION
and
THE BANK OF NEW YORK
Rights Agent
RIGHTS AGREEMENT
Dated as of _______, 1997
<PAGE>
TABLE OF CONTENTS
Page
Section 1. Certain Definitions........................................... 1
Section 2. Appointment of Rights Agent................................... 6
Section 3. Issuance of Rights Certificates............................... 6
Section 4. Form of Rights Certificates................................... 8
Section 5. Countersignature and Registration............................. 9
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights
Certificates.................................................. 10
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights........................................................ 11
Section 8. Cancellation and Destruction of Rights Certificates........... 13
Section 9. Reservation and Availability of Preferred Shares.............. 13
Section 10. Preferred Shares Record Date.................................. 15
Section 11. Adjustment of Purchase Price; Number of Shares or Number of
Rights........................................................ 15
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.... 25
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning
Power......................................................... 25
Section 14. Fractional Rights and Fractional Shares....................... 28
Section 15. Rights of Action.............................................. 29
Section 16. Agreement of Rights Holders................................... 30
Section 17. Rights Certificate Holder Not Deemed a Stockholder............ 30
Section 18. Concerning the Rights Agent................................... 30
Section 19. Merger or Consolidation or Change of Name of Rights Agent..... 31
i
<PAGE>
Section 20. Duties of Rights Agent........................................ 32
Section 21. Change of Rights Agent........................................ 34
Section 22. Issuance of New Rights Certificate............................ 35
Section 23. Redemption.................................................... 36
Section 24. Exchange...................................................... 37
Section 25. Notice of Certain Events...................................... 39
Section 26. Notices....................................................... 39
Section 27. Supplements and Amendments.................................... 40
Section 28. Successors.................................................... 41
Section 29. Determinations and Actions by the Board of Directors, etc..... 41
Section 30. Benefits of this Agreement.................................... 41
Section 31. Severability.................................................. 41
Section 32. Governing Law................................................. 42
Section 33. Counterparts.................................................. 42
Section 34. Descriptive Headings.......................................... 42
EXHIBITS
Exhibit A Form of Certificate of Designations
Exhibit B Form of Rights Certificate
Exhibit C Summary of Rights
ii
<PAGE>
RIGHTS AGREEMENT
Rights Agreement, dated as of ________, 1997 (this "Agreement"), between
FRIENDLY ICE CREAM CORPORATION, a Massachusetts corporation (the "Company"), and
THE BANK OF NEW YORK (the "Rights Agent").
As of __________, 1997 (the "Rights Dividend Declaration Date"), the Board
of Directors of the Company authorized and declared a dividend of one Preferred
Share purchase right (a "Right") for each Common Share (as hereinafter defined)
of the Company outstanding as of the Close of Business (as hereinafter defined)
on ___________, 1997 (the "Record Date"), each right representing the right to
purchase one one-thousandth of a share of Series A Junior Preferred Stock (as
such number may be adjusted pursuant to the provisions of this Agreement),
having the rights, preferences and privileges set forth in the form of
Certificate of Vote of Directors Establishing a Series of a Class of Stock, with
respect to the Series A Junior Preferred Stock of the Company, attached hereto
as Exhibit A, upon the terms and subject to the conditions herein set forth, and
further authorized and directed the issuance of one Right (as such number may be
adjusted pursuant to the provisions of this Agreement) with respect to each
Common Share that shall become outstanding between the Record Date and the
earlier of the Distribution Date and the Expiration Date (as such terms are
hereinafter defined), and in certain circumstances after the Distribution Date.
NOW, THEREFORE, in consideration of the promises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or which, together
with all Affiliates and Associates of such Person, shall be the Beneficial Owner
of 15% or more of the Common Shares then outstanding, but shall not include (i)
the Company, (ii) any Subsidiary of the Company, (iii) any employee benefit plan
of the Company or of any Subsidiary of the Company, (iv) any entity holding
Common Shares for or pursuant to the terms of any such plan or (v) Donald N.
Smith, Harrah's Operating Company, Inc., The Equitable Life Assurance Society of
the United States and members of senior management of the Company, as determined
by the Company's Board of Directors from time to time (collectively, the
"Excluded Persons"). Notwithstanding the foregoing, no Affiliate or Associate
of the Excluded Persons shall be treated as the Beneficial Owner of the Common
Shares held by the Excluded Persons, and no Person shall be deemed to be an
Acquiring Person either (i) as the result of an acquisition of Common Shares by
the Company which, by reducing the number of shares outstanding, increases the
proportionate number of shares beneficially owned by such Person to 15% or more
of the Common Shares of the Company then outstanding; provided, however, that
if a Person shall become the Beneficial Owner of 15% of more of the Common
Shares of the Company then
<PAGE>
outstanding by reason of share purchases by the Company and shall, after such
share purchases by the Company, become the Beneficial Owner of any additional
Common Shares of the Company, then such Person shall be deemed to be an
Acquiring Person, or (ii) if within eight Business Days after such Person would
otherwise become an Acquiring Person (but for the operation of this clause
(ii)), such Person notifies the Board of Directors that such Person did so
inadvertently and within two Business Days after such notification, such Person
is the Beneficial Owner of less than 15% of the outstanding Common Shares.
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in
effect on the date of this Agreement.
(c) A Person shall be deemed the "Beneficial Owner" of and shall be
deemed to "beneficially own" any securities:
(i) which such Person or any of such Person's Affiliates or
Associates beneficially owns, directly or indirectly, for purposes of Section
13(d) of the Exchange Act and Rule 13d-3 thereunder (or any comparable or
successor law or regulation);
(ii) which such Person or any of such Person's Affiliates or
Associates has (A) the right to acquire (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement,
arrangement or understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities), or upon the exercise of conversion rights, exchange
rights, rights (other than the Rights), warrants or options, or otherwise;
provided, however, that a Person shall not be deemed pursuant to this Section
1(c)(ii)(A) the Beneficial Owner of, or to beneficially own, (1) securities
tendered pursuant to a tender or exchange offer made by or on behalf of such
Person or any of such Person's Affiliates or Associates until such tendered
securities are accepted for purchase or exchange or (2) securities which a
Person or any of such Person's Affiliates or Associates may be deemed to have
the right to acquire pursuant to any merger or other acquisition agreement
between the Company and such Person (or one or more of its Affiliates or
Associates) if such agreement has been approved by the Board of Directors of the
Company prior to there being an Acquiring Person; or (B) the right to vote
pursuant to any agreement, arrangement or understanding; provided, however, that
a Person shall not be deemed the Beneficial Owner of, or to beneficially own,
any security under this Section 1(c)(ii)(B) if the agreement, arrangement or
understanding to vote such security (1) arises solely from a revocable proxy or
consent given to such Person in response to a public proxy or consent
solicitation made pursuant to, and in accordance with, the applicable rules and
regulations of the Exchange Act and (2) is not also then reportable on Schedule
13D under the Exchange Act (or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly,
by any other Person (or any Affiliate or Associate thereof) with which such
Person or any of such Person's
2
<PAGE>
Affiliates or Associates has any agreement, arrangement or understanding
(whether or not in writing) (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide public
offering of securities) for the purpose of acquiring, holding, voting (except to
the extent contemplated by the proviso to Section 1(c)(ii)(B)) or disposing of
any securities of the Company; provided, however, that in no case shall an
officer or director of the Company be deemed (x) the Beneficial Owner of any
securities beneficially owned by another officer or director of the Company
solely by reason of actions undertaken by such persons in their capacity as
officers or directors of the Company or (y) the Beneficial Owner of securities
held of record by the trustee of any employee benefit plan of the Company or any
Subsidiary of the Company for the benefit of any employee of the Company or any
Subsidiary of the Company, other than the officer or director, by reason of any
influence that such officer or director may have over the voting of the
securities held in the plan.
(d) "Business Day" shall mean any day other than a Saturday, Sunday
or a day on which banking institutions in Massachusetts are authorized or
obligated by law or executive order to close.
(e) "Close of Business" on any given date shall mean 5:00 P.M.,
Massachusetts time, on such date; provided, however, that if such date is not a
Business Day it shall mean 5:00 P.M., Massachusetts time, on the next succeeding
Business Day.
(f) "Common Shares" when used with reference to the Company shall
mean the shares of Common Stock of the Company, $.01 par value. "Common Shares"
when used with reference to any Person other than the Company shall mean the
capital stock (or equity interest) with the greatest voting power of such other
Person or, if such other Person is a Subsidiary of another Person, the Person or
Persons which ultimately control such first-mentioned Person.
(g) "Continuing Director" shall mean (i) any member of the Board of
Directors of the Company, while a member of the Board, who is not an Acquiring
Person, or an Affiliate or Associate of an Acquiring Person, or a representative
of an Acquiring Person or of any such Affiliate or Associate, and who was a
member of the Board prior to the date of this Agreement, or (ii) any Person who
subsequently becomes a member of the Board, while a member of the Board, who is
not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or
a representative of an Acquiring Person or of any such Affiliate or Associate,
if such Person's nomination for election or election to the Board is recommended
or approved by a majority of the Continuing Directors.
(h) "Distribution Date" shall mean the earlier of (i) the Close of
Business on the tenth Business Day (or such later date as
3
<PAGE>
may be determined by action of a majority of Continuing Directors then in
office) after the Shares Acquisition Date (or, if the tenth Business Day after
the Shares Acquisition Date occurs before the Record Date, the Close of Business
on the Record Date) or (ii) the Close of Business on the tenth Business Day (or
such later date as may be determined by action of a majority of Continuing
Directors then in office) after the date that a tender or exchange offer by any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or of any Subsidiary of the Company, or any Person
or entity organized, appointed or established by the Company for or pursuant to
the terms of any such plan) is first published or sent or given within the
meaning of Rule 14d-2(a) of the General Rules and Regulations under the Exchange
Act, if, assuming the successful consummation thereof, such person would be the
Beneficial Owner of 15% or more of the shares of Common Stock then outstanding.
(i) "Equivalent Shares" shall mean Preferred Shares and any other
class or series of capital stock of the Company which is entitled to participate
in dividends and other distributions, including distributions upon the
liquidation, dissolution or winding up of the Company, on a proportional basis
with the Common Shares. In calculating the number of any class or series of
Equivalent Shares for purposes of Section 11 of this Agreement, the number of
shares, or fractions of a share, of such class or series of capital stock that
is entitled to the same dividend or distribution as a whole Common Share shall
be deemed to be one share.
(j) "Expiration Date" shall mean the earliest of (i) the Close of
Business on the Final Expiration Date, (ii) the Redemption Date, (iii) the time
at which the Board of Directors orders the exchange of the Rights as provided in
Section 24 hereof or (iv) the consummation of a transaction contemplated by
Section 13(d) hereof.
(k) "Final Expiration Date" shall mean ______________, 2007.
(l) "Permitted Offer" shall mean a tender offer for all outstanding
Common Shares made in the manner prescribed by Section 14(d) of the Exchange Act
and the rules and regulations promulgated thereunder; provided, however, that
such tender offer occurs at a time when Continuing Directors are in office and a
majority of the Continuing Directors then in office has determined that the
offer is both adequate and otherwise in the best interests of the Company and
its stockholders (taking into account all factors that such Continuing Directors
deem relevant, including without limitation prices that could reasonably be
achieved if the Company or its assets were sold on an orderly basis designed to
realize maximum value).
(m) "Person" shall mean any individual, firm, corporation or other
entity, and shall include any successor (by merger or otherwise) of such entity.
(n) "Preferred Shares" shall mean shares of Series A Junior
Preferred Stock of the Company.
(o) "Purchase Price" shall have the meaning set forth in Section 4(a)
hereof.
(p) "Record Date" shall have the meaning set forth in the recitals at
the beginning of this Agreement.
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(q) "Redemption Date" shall mean the time at which the Board of
Directors of the Company orders redemption of the Rights as provided in Section
23 hereof.
(r) "Redemption Price" shall have the meaning set forth in Section
23(a) hereof.
(s) "Rights Dividend Declaration Date" shall have the meaning set
forth in the recitals at the beginning of this Agreement.
(t) "Section 13 Event" shall mean any event described in clause (i),
(ii) or (iii) of Section 13(a) hereof.
(u) "Shares Acquisition Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by
the Company or an Acquiring Person that an Acquiring Person has become such;
provided that, if such person is determined not to have become an Acquiring
Person pursuant to Section 1(a)(ii) hereof, then no Shares Acquisition Date
shall be deemed to have occurred.
(v) "Subsidiary" of any Person shall mean any corporation or other
entity of which an amount of voting securities sufficient to elect a majority of
the directors or Persons having similar authority of such corporation or other
entity is beneficially owned, directly or indirectly, by such Person, or any
corporation or other entity otherwise controlled by such Person.
(w) "Total Exercise Price" shall have the meaning set forth in
Section 4(a) hereof.
(x) "Trading Day" shall have the meaning set forth in Section 11(d)
hereof.
(y) A "Triggering Event" shall be deemed to have occurred upon any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or any Subsidiary of the Company, or any entity
holding Common Shares for or pursuant to the terms of any such plan), together
with all Affiliates and Associates of such Person, becoming an Acquiring Person.
Section 2. Appointment of Rights Agent. The Company hereby appoints
the Rights Agent to act as agent for the Company and the holders of the Rights
(who, in accordance with Section 3 hereof, shall, prior to the Distribution
Date, also be the holders of the Common Shares) in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such co-Rights Agents as it may deem
necessary or desirable upon ten (10) days' prior written notice to the Rights
Agent.
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The Rights Agent shall have no duty to supervise, and shall in no event be
liable for, the acts or omissions of any such co-Rights Agent.
Section 3. Issuance of Rights Certificates.
(a) Until the Distribution Date, (i) the Rights will be evidenced
(subject to the provisions of Section 3(b) and 3(c) hereof) by the certificates
for Common Shares registered in the names of the holders thereof (which
certificates shall also be deemed to be Rights Certificates) and not by separate
Rights Certificates and (ii) the right to receive Rights Certificates will be
transferable only in connection with the transfer of Common Shares. Until the
earlier of the Distribution Date or the Expiration Date, the surrender for
transfer of such certificates for Common Shares shall also constitute the
surrender for transfer of the Rights associated with the Common Shares
represented thereby. As soon as practicable after the Distribution Date, the
Company will prepare and execute, the Rights Agent will countersign, and the
Company will send or cause to be sent (and the Rights Agent will, if requested,
send) by first-class, postage-prepaid mail, to each record holder of Common
Shares as of the close of business on the Distribution Date, at the address of
such holder shown on the records of the Company, a Rights Certificate in
substantially the form of Exhibit B hereto (a "Rights Certificate"), evidencing
one Right for each Common Share so held, subject to adjustment as provided
herein. In the event that an adjustment in the number of Rights per Common
Share has been made pursuant to Section 11(a)(i), Section 11(i) or Section 11(p)
hereof, then at the time of distribution of the Rights Certificates, the Company
shall make the necessary and appropriate rounding adjustments (in accordance
with Section 14(a) hereof) so that Rights Certificates representing only whole
numbers of Rights are distributed and cash is paid in lieu of any fractional
Rights. As of the Distribution Date, the Rights will be evidenced solely by
such Rights Certificates and may be transferred by the transfer of the Rights
Certificates as permitted hereby, separated and apart from any transfer of one
or more Common Shares, and the holders of such Rights Certificates as listed in
the records of the Company or any transfer agent or registrar for the Rights
shall be the record holders thereof.
(b) On the Record Date or as soon as practicable thereafter, the
Company will send a copy of a Summary of Rights in substantially the form of
Exhibit C hereto (the "Summary of Rights"), by first-class, postage-prepaid
mail, to each record holder of Common Shares as of the close of business on the
Record Date, at the address of such holder shown on the records of the Company.
(c) Unless the Board of Directors, by resolution adopted at or before
the time of the issuance (including pursuant to the exercise of rights under the
Company's benefit plans) of any Common Shares, specifies to the contrary, Rights
shall be issued in respect of all Common Shares that are issued after the Record
Date but prior to the earlier of the Distribution Date or the Expiration Date
or, in certain circumstances provided in Section 22 hereof, after the
Distribution Date. Certificates representing such Common Shares shall also be
deemed to be certificates for Rights, and shall bear the following legend:
This certificate also evidences and entitles the holder hereof to
certain rights as set forth in a Rights Agreement between FRIENDLY ICE
CREAM
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CORPORATION and THE BANK OF NEW YORK, as the Rights Agent, dated as of
______________, 1997 (the "Rights Agreement"), the terms of which are
hereby incorporated herein by reference and a copy of which is on file at
the principal executive offices of FRIENDLY ICE CREAM CORPORATION. Under
certain circumstances, as set forth in the Rights Agreement, such Rights
will be evidenced by separate certificates and will no longer be evidenced
by this certificate. FRIENDLY ICE CREAM CORPORATION will mail to the
holder of this certificate a copy of the Rights Agreement without charge
after receipt of a written request therefor. Under certain circumstances
set forth in the Rights Agreement, Rights issued to, or held by, any Person
who is, was or becomes an Acquiring Person or any Affiliate or Associate
thereof (as such terms are defined in the Rights Agreement), whether
currently held by or on behalf of such Person or by any subsequent holder,
may become null and void.
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights
associated with the Common Shares represented by such certificates shall be
evidenced by such certificates alone, and the surrender for transfer of any such
certificate shall also constitute the transfer of the Rights associated with the
Common Shares represented thereby. In the event that the Company purchases or
acquires any Common Shares after the Record Date but prior to the Distribution
Date, any Rights associated with such Common Shares shall be deemed cancelled
and retired so that the Company shall not be entitled to exercise any Rights
associated with the Common Shares which are no longer outstanding.
Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of election to purchase
Common Shares and of assignment to be printed on the reverse thereof) shall be
substantially in the form of Exhibit B hereto and may have such marks of
identification or designation and such legends, summaries or endorsements
printed thereon as the Company may deem appropriate and as are not inconsistent
with the provisions of this Agreement, or as may be required to comply with any
applicable law or with any rule or regulation made pursuant thereto or with any
rule or regulation of any stock exchange on which the Rights may from time to
time be listed, or to conform to usage. Subject to the provisions of Section 11
and Section 22 hereof, the Rights Certificates, whenever distributed, shall be
dated as of the Record Date (or in the case of Rights issued with respect to
Common Shares issued by the Company after the Record Date, as of the date of
issuance of such Common Shares) and on their face shall entitle the holders
thereof to purchase such number of one-thousandths of a Preferred Share as shall
be set forth therein at the price set forth therein (such exercise price per one
one-thousandth of a Preferred Share being hereinafter referred to as the
"Purchase Price" and the aggregate exercise price of all Preferred Shares
issuable upon exercise of one Right being hereinafter referred to as the "Total
Exercise Price"), but the number and type of securities purchasable upon the
exercise of each Right and the Purchase Price shall be subject to adjustment as
provided herein.
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(b) Any Rights Certificate issued pursuant to Section 3(a) or Section
22 hereof that represents Rights beneficially owned by: (i) an Acquiring Person
or any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee after the Acquiring Person becomes such or (iii) a transferee of an
Acquiring Person (or of any such Associate or Affiliate) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in such
Acquiring Person or to any Person with whom such Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights or (B) a transfer which the Board of Directors of the Company has
determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect avoidance of Section 7(e) hereof, and any Rights
Certificate issued pursuant to Section 6 or Section 11 hereof upon transfer,
exchange, replacement or adjustment of any other Rights Certificate referred to
in this sentence, shall contain (to the extent feasible) the following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person
or an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement). Accordingly, this Rights
Certificate and the Rights represented hereby may become null and void
in the circumstances specified in Section 7(e) of the Rights
Agreement.
Section 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on behalf of the
Company by its President or any Vice President, either manually or by facsimile
signature, and by the Treasurer or an Assistant Treasurer of the Company, either
manually or by facsimile signature, and shall have affixed thereto the Company's
seal (if any) or a facsimile thereof. The Rights Certificates shall be manually
countersigned by the Rights Agent and shall not be valid for any purpose unless
countersigned. In case any officer of the Company who shall have signed any of
the Rights Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Rights Certificates nevertheless may be countersigned by the Rights Agent
and issued and delivered by the Company with the same force and effect as
through the person who signed such Rights Certificates had not ceased to be such
officer of the Company; and any Rights Certificate may be signed on behalf of
the Company by any person who, at the actual date of the execution of such
Rights Certificate, shall be a proper officer of the Company to sign such Rights
Certificate, although at the date of the execution of this Rights Agreement any
such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its office designated for such purposes, books for
registration and transfer of the Rights Certificates issued hereunder. Such
books shall show the names and addresses of the
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<PAGE>
respective holders of the Rights Certificates, the number of Rights evidenced on
its face by each of the Rights Certificates and the date of each of the Rights
Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Rights
Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
(a) Subject to the provisions of Sections 7(e), 14 and 24 hereof, at
any time after the Close of Business on the Distribution Date, and at or prior
to the Close of Business on the Expiration Date, any Rights Certificate or
Rights Certificates may be transferred, split up, combined or exchanged for
another Rights Certificate or Rights Certificates, entitling the registered
holder to purchase a like number of one-thousandths of a Preferred Share (or,
following a Triggering Event, other securities, cash or other assets, as the
case may be) as the Rights Certificate or Rights Certificates surrendered then
entitled such holder to purchase. Any registered holder desiring to transfer,
split up, combine or exchange any Rights Certificate or Rights Certificates
shall make such request in writing delivered to the Rights Agent, and shall
surrender the Rights Certificate or Rights Certificates to be transferred, split
up, combined or exchanged at the office of the Rights Agent designated for such
purpose. Neither the Rights Agent nor the Company shall be obligated to take
any action whatsoever with respect to the transfer of any such surrendered
Rights Certificate until the registered holder shall have completed and signed
the certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request. Thereupon the
Rights Agent shall, subject to Sections 7(e), 14 and 24 hereof, countersign and
deliver to the Person entitled thereto a Rights Certificate or Rights
Certificates, as the case may be, as so requested. The Company may require
payment of a sum sufficient to cover any tax or governmental charge that may be
imposed in connection with any transfer, split up, combination or exchange of
Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Rights Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent and cancellation of the Rights
Certificate if mutilated, the Company will make and deliver a new Rights
Certificate of like tenor to the Rights Agent for delivery to the registered
holder in lieu of the Rights Certificate so lost, stolen, destroyed or
mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date of
Rights.
(a) Subject to Section 7(e) hereof, the registered holder of any
Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein) in whole or in part at any time after the
Distribution Date upon surrender of the Rights Certificate, with the form of
election to purchase on the reverse side thereof duly executed, to the Rights
Agent at the office of the Rights Agent designated for such purpose, together
with payment of
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<PAGE>
the Purchase Price for each one-thousandth of a Preferred Share as to which the
Rights are exercised, at or prior to the Expiration Date.
(b) The Purchase Price for each one-thousandth of a Preferred Share
issuable pursuant to the exercise of a Right shall initially be $______, shall
be subject to adjustment from time to time as provided in Sections 11 and 13
hereof and shall be payable in lawful money of the United States of America in
accordance with paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing exercisable
Rights, with the form of election to purchase duly executed, accompanied by
payment of the Purchase Price for the number of one-thousandths of a Preferred
Share (or other securities or property, as the case may be) to be purchased and
an amount equal to any applicable transfer tax required to be paid by the holder
of such Rights Certificate in accordance with Section 9 hereof in cash, or by
certified check or cashier's check payable to the order of the Company, the
Rights Agent shall, subject to Section 20(k) hereof, thereupon promptly (i) (A)
requisition from any transfer agent of the Preferred Shares (or make available,
if the Rights Agent is the transfer agent for the Preferred Shares) a
certificate or certificates for the number of one-thousandths of a Preferred
Share to be purchased and the Company hereby irrevocably authorizes its transfer
agent to comply with all such requests or (B) if the Company shall have elected
to deposit the total number of one-thousandths of a Preferred Share issuable
upon exercise of the Rights hereunder with a depositary agent, requisition from
the depositary agent of depositary receipts representing such number of
one-thousandths of a Preferred Share as are to be purchased (in which case
certificates for the Preferred Shares represented by such receipts shall be
deposited by the transfer agent with the depositary agent) and the Company
hereby directs the depositary agent to comply with such request, (ii) when
appropriate, requisition from the Company the amount of cash to be paid in lieu
of issuance of fractional shares in accordance with Section 14 hereof, (iii)
after receipt of such certificates or depositary receipts, cause the same to be
delivered to or upon the order of the registered holder of such Rights
Certificate, registered in such name or names as may be designated by such
holder and (iv) when appropriate, after receipt thereof, deliver such cash to or
upon the order of the registered holder of such Rights Certificate. The payment
of the Purchase Price (as such amount may be reduced (including to zero)
pursuant to Section 11(a)(iv) hereof) may be made in cash or by certified bank
check or bank draft payable to the order of the Company. In the event that the
Company is obligated to issue other securities of the Company, pay cash and/or
distribute other property pursuant to Section 11(a) hereof, the Company will
make all arrangements necessary so that such other securities, cash and/or other
property are available for distribution by the Rights Agent, if and when
appropriate.
(d) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent to the registered holder of such Rights Certificate or to
his or her duly authorized assigns, subject to the provisions of Section 14
hereof.
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(e) Notwithstanding anything in this Agreement to the contrary, from
and after the first occurrence of a Triggering Event or a Section 13 Event, any
Rights beneficially owned by (i) an Acquiring Person or an Associate or
Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or
of any such Associate or Affiliate) who becomes a transferee after the Acquiring
Person becomes such (a "Post Transferee"), (iii) a transferee of an Acquiring
Person (or of any such Associate or Affiliate) who becomes a transferee prior to
or concurrently with the Acquiring Person becoming such and receives such Rights
pursuant to either (A) a transfer (whether or not for consideration) from the
Acquiring Person to holders of equity interests in such Acquiring Person or to
any Person with whom the Acquiring Person has any continuing agreement,
arrangement or understanding regarding the transferred Rights or (B) a transfer
which the Board of Directors of the Company has determined is part of a plan,
arrangement or understanding which has as a primary purpose or effect the
avoidance of this Section 7(e) (a "Prior Transferee") or (iv) any subsequent
transferee receiving transferred Rights from a Post Transferee or a Prior
Transferee, either directly or through one or more intermediate transferees,
shall become null and void without any further action and no holder of such
Rights shall have any rights whatsoever with respect to such Rights, whether
under any provision of this Agreement or otherwise. The Company shall use all
reasonable efforts to ensure that the provisions of this Section 7(e) and
Section 4(b) hereof are complied with, but shall have no liability to any holder
of Rights Certificates or to any other Person as a result of its failure to make
any determinations with respect to an Acquiring Person or any of such Acquiring
Person's Affiliates, Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder upon the occurrence of any purported
exercise as set forth in this Section 7 unless such registered holder shall have
(i) completed and signed the certificate contained in the form of election to
purchase set forth on the reverse side of the Rights Certificate surrendered for
such exercise and (ii) provided such additional evidence of the identity of the
Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates
thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights Certificates. All
Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or to any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights
Certificates shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Agreement. The Company shall deliver to the
Rights Agent for cancellation and retirement, and the Rights Agent shall so
cancel and retire, any other Rights Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall
deliver all cancelled Rights Certificates to the Company, or shall, at the
written request of the Company, destroy such cancelled Rights Certificates, and
in such case shall deliver a certificate of destruction thereof to the Company.
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Section 9. Reservation and Availability of Preferred Shares.
(a) The Company covenants and agrees that it will use its best
efforts to cause to be reserved and kept available out of and to the extent of
its authorized and unissued shares of preferred stock not reserved for another
purpose (and, following the occurrence of a Triggering Event, out of its
authorized and unissued shares of Common Shares and/or other securities), the
number of Preferred Shares (and, following the occurrence of the Triggering
Event, Common Shares and/or other securities) that will be sufficient to permit
the exercise in full of all outstanding Rights.
(b) If the Company shall hereafter list any of its Preferred Shares
on a national securities exchange, then so long as the Preferred Shares (and,
following the occurrence of a Triggering Event, Common Shares and/or other
securities) issuable and deliverable upon exercise of the Rights may be listed
on a national securities exchange, the Company shall use its best efforts to
cause, from and after such time as the Rights become exercisable (but only to
the extent that it is reasonably likely that the Rights will be exercised), all
shares reserved for such issuance to be listed on such exchange upon official
notice of issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the first occurrence of a
Triggering Event in which the consideration to be delivered by the Company upon
exercise of the Rights has been determined in accordance with Section 11(a)(iv)
hereof, or as soon as is required by law following the Distribution Date, as the
case may be, a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the securities purchasable upon
exercise of the Rights on an appropriate form, (ii) cause such registration
statement to become effective as soon as practicable after such filing, and
(iii) cause such registration statement to remain effective (with a prospectus
at all times meeting the requirements of the Securities Act) until the earlier
of (A) the date as of which the Rights are no longer exercisable for such
securities and (B) the date of expiration of the Rights. The Company may
temporarily suspend, for a period not to exceed ninety (90) days after the date
set forth in clause (i) of the first sentence of this Section 9(c), the
exercisability of the Rights in order to prepare and file such registration
statement and permit it to become effective. Upon any such suspension, the
Company shall issue a public announcement stating, and notify the Rights Agent,
that the exercisability of the Rights has been temporarily suspended, as well as
a public announcement and notification to the Rights Agent at such time as the
suspension is no longer in effect. The Company will also take such action as
may be appropriate under, or to ensure compliance with, the securities or "blue
sky" laws of the various states in connection with the exercisability of the
Rights. Notwithstanding any provision of this Agreement to the contrary, the
Rights shall not be exercisable in any jurisdiction, unless the requisite
qualification in such jurisdiction shall have been obtained, or an exemption
therefrom shall be available, and until a registration statement has been
declared effective.
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(d) The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all Preferred Shares delivered upon
exercise of Rights shall, at the time of delivery of the certificates for such
Preferred Shares (subject to payment of the Purchase Price), be duly and validly
authorized and issued and fully paid and nonassessable shares.
(e) The Company further covenants and agrees that it will pay when
due and payable any and all federal and state transfer taxes and charges which
may be payable in respect of the original issuance or delivery of the Rights
Certificates or of any Preferred Shares upon the exercise of Rights. The
Company shall not, however, be required to pay any transfer tax which may be
payable in respect of any transfer or delivery of Rights Certificates to a
person other than, or the issuance or delivery of certificates or depositary
receipts for the Preferred Shares in a name other than that of, the registered
holder of the Rights Certificate evidencing Rights surrendered for exercise or
to issue or to deliver any certificates or depositary receipts for Preferred
Shares upon the exercise of any Rights until any such tax shall have been paid
(any such tax being payable by the holder of such Rights Certificate at the time
of surrender) or until it has been established to the Company's satisfaction
that no such tax is due.
Section 10. Preferred Shares Record Date. Each Person in whose name any
certificate for a number of one-thousandths of a Preferred Share is issued upon
the exercise of Rights shall for all purposes be deemed to have become the
holder of record of Preferred Shares represented thereby on, and such
certificate shall be dated, the date upon which the Rights Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
multiplied by the number of one-thousandths of a Preferred Share with respect to
which the Rights have been exercised (and any applicable transfer taxes) was
made; provided, however, that if the date of such surrender and payment is a
date upon which the Preferred Shares transfer books of the Company are closed,
such person shall be deemed to have become the record holder of such shares on,
and such certificate shall be dated, the next succeeding Business Day on which
the Preferred Shares transfer books of the Company are open. Prior to the
exercise of the Rights evidenced thereby, the holder of a Rights Certificate
shall not be entitled to any rights of a holder of Preferred Shares for which
the Rights shall be exercisable, including, without limitation, the right to
vote, to receive dividends or other distributions or to exercise any preemptive
rights, and shall not be entitled to receive any notice of any proceedings of
the Company, except as provided herein.
Section 11. Adjustment of Purchase Price; Number of Shares or Number of
Rights. The Purchase Price, the number and kind of shares or other property
covered by each Right and the number of Rights outstanding are subject to
adjustment from time to time as provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Common Shares payable in Common
Shares, (B) subdivide the outstanding Common Shares, (C) combine the outstanding
Common Shares (by reverse stock split or otherwise) into a smaller number of
Common Shares, or (D) issue any
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shares of its capital stock in a reclassification of the Common Shares
(including any such reclassification in connection with a consolidation or
merger in which the Company is the continuing or surviving corporation), then,
in each such event, except as otherwise provided in this Section 11(a) and
Section 7(e) hereof: (1) each of the Rights outstanding at the time of the
record date for such dividend or the effective date of such subdivision,
combination or reclassification shall be proportionately adjusted to that number
of Rights (calculated to the nearest one ten-thousandth (1/10,000) of a Right)
equal to a fraction (the "Exchange Ratio"), the numerator of which shall be the
total number of Common Shares or shares of capital stock issued in such
reclassification of the Common Shares outstanding immediately following such
time and the denominator of which shall be the total number of Common Shares
outstanding immediately prior to such time, and the number of Rights that shall
thereafter be issued with respect to each Common Share or share of such other
capital stock that shall become outstanding thereafter prior to the Distribution
Date shall be equal to the total number of outstanding Rights immediately after
such event (as adjusted pursuant to this clause (1)) divided by the total number
of outstanding Common Shares or shares of such other capital stock immediately
after such event (subject to further adjustment pursuant to the provisions of
this Agreement); (2) the Purchase Price in effect at the time of the record date
for such dividend or of the effective date of such subdivision, combination or
reclassification shall be adjusted so that the Purchase Price thereafter shall
equal the result obtained by dividing the Purchase Price in effect immediately
prior to such time by the Exchange Ratio; provided, however, that in no event
shall the consideration to be paid upon the exercise of one Right be less than
the aggregate par value of the shares of capital stock of the Company issuable
upon exercise of such Right; and (3) the number of Common Shares or shares of
such other capital stock issuable upon the exercise of each Right shall remain
unchanged immediately after such event, but, in the event of a reclassification,
the kind of shares issuable upon the exercise of each Right immediately after
such reclassification shall be adjusted to be the kind of shares of such other
capital stock issued in such reclassification, rather than Common Shares. If an
event occurs which would require an adjustment under both this Section 11(a)(i)
and Section 11(a)(ii) hereof, the adjustment provided for in this Section
11(a)(i) shall be in addition to, and shall be made prior to, any adjustment
required pursuant to Section 11(a)(ii) hereof.
(ii) Subject to Section 24 of this Agreement, in the event a
Triggering Event shall have occurred, then promptly following such Triggering
Event, proper provision shall be made so that each holder of a Right, except as
provided in Section 7(e) hereof, shall thereafter have the right to receive for
each Right, upon exercise thereof in accordance with the terms of this Agreement
and payment of the then-current Total Exercise Price, in lieu of a number of
one-thousandths of a Preferred Share, such number of Common Shares of the
Company as shall equal the result obtained by multiplying the then-current
Purchase Price by the then number of one-thousandths of a Preferred Share for
which a Right was exercisable (or would have been exercisable if the
Distribution Date had occurred) immediately prior to the first occurrence of a
Triggering Event, and dividing that product by 50% of the current per share
market price (determined pursuant to Section 11(d) hereof) for Common Shares on
the date of
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occurrence of the Triggering Event (such number of shares being hereinafter
referred to as the "Adjustment Shares").
(iii) The right to buy Common Shares of the Company pursuant to
Section 11(a)(ii) hereof shall not arise as a result of any Person becoming an
Acquiring Person through an acquisition of Common Shares pursuant to a Permitted
Offer.
(iv) In lieu of issuing Common Shares in accordance with Section
11(a)(ii) hereof, the Company may, if the Board of Directors determines that
such action is necessary or appropriate and not contrary to the interest of
holders of Rights (and, in the event that the number of Common Shares which are
authorized by the Company's Articles of Organization but not outstanding or
reserved for issuance for purposes other than upon exercise of the Rights are
not sufficient to permit the exercise in full of the Rights, or if any necessary
regulatory approval for such issuance has not been obtained by the Company, the
Company shall): (A) determine the excess of (1) the value of the Common Shares
issuable upon the exercise of a Right (the "Current Value") over (2) the
Purchase Price (such excess, the "Spread") and (B) with respect to each Right
make adequate provision to substitute for such Common Shares, upon exercise of
the Rights (1) cash, (2) a reduction in the Purchase Price, (3) other equity
securities of the Company (including, without limitation, shares or units of
shares of any series of preferred stock which the Board of Directors of the
Company has deemed to have the same value as Common Shares (such shares or units
of shares of preferred stock are herein called "common stock equivalents"),
except to the extent that the Company has not obtained any necessary stockholder
or regulatory approval for such issuance, (4) debt securities of the Company
except to the extent that the Company has not obtained any necessary stockholder
or regulatory approval for such issuance, (5) other assets or (6) any
combination of the foregoing, having an aggregate value equal to the Current
Value, where such aggregate value has been determined by the Board of Directors
of the Company based upon the advice of a nationally recognized investment
banking firm selected by the Board of Directors of the Company; provided,
however, if the Company shall not have made adequate provision to deliver value
pursuant to clause (B) above within thirty (30) days following the later of (x)
the first occurrence of a Triggering Event and (y) the date on which the
Company's right of redemption pursuant to Section 23(a) expires (the later of
(x) and (y) being referred to herein as the "Section 11(a)(ii) Trigger Date"),
then the Company shall be obligated to deliver, upon the surrender for exercise
of a Right and without requiring payment of the Purchase Price, Common Shares
(to the extent available), except to the extent that the Company has not
obtained any necessary stockholder or regulatory approval for such issuance, and
then, if necessary, cash, which shares and/or cash have an aggregate value equal
to the Spread. If the Board of Directors of the Company shall determine in good
faith that it is likely that sufficient additional Common Shares could be
authorized for issuance upon exercise in full of the Rights or that any
necessary regulatory approval for such issuance will be obtained, the thirty
(30) day period set forth above may be extended to the extent necessary, but not
more than ninety (90) days after the Section 11(a)(ii) Trigger Date, in order
that the Company may seek stockholder approval for the authorization of such
additional shares or take action to obtain such regulatory approval (such
period, as it may be extended, the "Substitution
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Period"). To the extent that the Company determines that some action need be
taken pursuant to the first and/or second sentences of this Section 11(a)(iv),
the Company (x) shall provide, subject to Section 7(e) hereof, that such action
shall apply uniformly to all outstanding Rights and (y) may suspend the
exercisability of the Rights until the expiration of the Substitution Period in
order to seek any authorization of additional shares, to take any action to
obtain any required regulatory approval and/or to decide the appropriate form of
distribution to be made pursuant to such first sentence and to determine the
value thereof. In the event of any such suspension, the Company shall issue a
public announcement stating that the exercisability of the Rights has been
temporarily suspended, as well as a public announcement at such time as the
suspension is no longer in effect. For purposes of this Section 11(a)(iv), the
value of the Common Shares shall be the current per share market price (as
determined pursuant to Section 11(d) hereof) of the Common Shares on the Section
11(a)(ii) Trigger Date and the value of any "common stock equivalent" shall be
deemed to have the same value as the Common Shares on such date.
(b) In case the Company shall, at any time after the date of this
Agreement, fix a record date for the issuance of rights, options or warrants to
all holders of Common Shares or of any class or series of Equivalent Shares
entitling such holders (for a period expiring within forty-five (45) calendar
days after such record date) to subscribe for or purchase Common Shares or
Equivalent Shares or securities convertible into Common Shares or Equivalent
Shares at a price per share (or having a conversion price per share, if a
security convertible into Common Shares or Equivalent Shares) less than the then
current per share market price of the Common Shares or Equivalent Shares (as
defined in Section 11(d)) on such record date, then, in each such case, the
Purchase Price to be in effect after such record date shall be determined by
multiplying the Purchase Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the number of Common Shares and
Equivalent Shares (if any) outstanding on such record date, plus the number of
Common Shares or Equivalent Shares, as the case may be, which the aggregate
offering price of the total number of Common Shares or Equivalent Shares, as the
case may be, so to be offered (and/or the aggregate initial conversion price of
the convertible securities so to be offered) would purchase at such current
market price, and the denominator of which shall be the number of Common Shares
and Equivalent Shares (if any) outstanding on such record date, plus the number
of additional Common Shares or Equivalent Shares, as the case may be, to be
offered for subscription or purchase (or into which the convertible securities
so to be offered are initially convertible). In case such subscription price
may be paid in a consideration part or all of which shall be in a form other
than cash, the value of such consideration shall be as determined in good faith
by the Board of Directors of the Company, whose determination shall be described
in a statement filed with the Rights Agent and shall be binding on the Rights
Agent and the holders of the Rights. Common Shares and Equivalent Shares owned
by or held for the account of the Company shall not be deemed outstanding for
the purpose of any such computation. Such adjustment shall be made successively
whenever such a record date is fixed, and in the event that such rights, options
or warrants are not so issued, the Purchase Price shall be adjusted to be the
Purchase Price which would then be in effect if such record date had not been
fixed.
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(c) In case the Company shall, at any time after the date of this
Agreement, fix a record date for the making of a distribution to all holders of
the Common Shares or of any class or series of Equivalent Shares (including any
such distribution made in connection with a consolidation or merger in which the
Company is the continuing or surviving corporation) or evidences of indebtedness
or assets (other than a regular quarterly cash dividend, if any, or a dividend
payable in Common Shares) or subscription rights, options or warrants (excluding
those referred to in Section 11(b)), then, in each such case, the Purchase Price
to be in effect after such record date shall be determined by multiplying the
Purchase Price in effect immediately prior to such record date by a fraction,
the numerator of which shall be the current market price (as determined pursuant
to Section 11(d) hereof) of a Common Share or an Equivalent Share on such record
date, less the fair market value (as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent) of the portion of the cash, assets or evidences of
indebtedness so to be distributed or of such subscription rights or warrants
applicable to a Common Share or Equivalent Share, as the case may be, and the
denominator of which shall be such current market price (as determined pursuant
to Section 11(d) hereof) of a Common Share or Equivalent Share on such record
date. Such adjustments shall be made successively whenever such a record date
is fixed, and in the event that such distribution is not so made, the Purchase
Price shall be adjusted to be the Purchase Price which would have been in effect
if such record date had not been fixed.
(d) For the purpose of any computation hereunder, other than
computations made pursuant to Section 11(a)(iv) hereof, the "current per share
market price" of any security (a "Security" for the purpose of this Section
11(d)) on any date shall be deemed to be the average of the daily closing prices
per share of such Security for the thirty (30) consecutive Trading Days (as such
term is hereinafter defined) immediately prior to such date, and for purposes of
computations made pursuant to Section 11(a)(iv) hereof, the "current per share
market price" of any Security on any date shall be deemed to be the average of
the daily closing prices per share of such Security for the ten (10) consecutive
Trading Days immediately prior to such date; provided, however, that in the
event that the current per share market price of the Security is determined
during a period following the announcement by the issuer of such Security of (i)
a dividend or distribution on such Security payable in shares of such Security
or securities convertible into such shares or (ii) any subdivision, combination
or reclassification of such Security, and prior to the expiration of the
requisite thirty (30) Trading Days or ten (10) Trading Day period, after the
ex-dividend date for such dividend or distribution, or the record date for such
subdivision, combination or reclassification, then, and in each such case, the
current per share market price shall be appropriately adjusted to reflect the
current market price per share equivalent of such Security. The closing price
for each day shall be the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Security is not listed or
admitted to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Security is listed or
17
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admitted to trading or, if the Security is not listed or admitted to trading on
any national securities exchange, the last sale price or, if such last sale
price is not reported, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotations System ("Nasdaq") or such other system then
in use, or, if on any such date the Security is not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Security selected by the Board
of Directors of the Company. If on any such date no market maker is making a
market in the Common Shares, the fair value of such shares on such date as
determined in good faith by the Board of Directors of the Company shall be
used. The term "Trading Day" shall mean a day on which the principal national
securities exchange on which the Security is listed or admitted to trading is
open for the transaction of business or, if the Security is not listed or
admitted to trading on any national securities exchange, a Business Day. If
the Common Shares are not publicly held or so listed or traded, "current per
share market price" shall mean the fair value per share as determined in good
faith by the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent and shall be conclusive
for all purposes.
(e) Anything herein to the contrary notwithstanding, no adjustment in
the Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Purchase Price; provided, however,
that any adjustments which by reason of this Section 11(e) are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 11 shall be made to the nearest
cent or to the nearest ten-thousandth of a Common Share or other share or one
hundred-thousandth of a Preferred Share, as the case may be. Notwithstanding
the first sentence of this Section 11(e), any adjustment required by this
Section 11 shall be made no later than the earlier of (i) three (3) years from
the date of the transaction which requires such adjustment or (ii) the
Expiration Date.
(f) If as a result of an adjustment made pursuant to Section 11(a) or
13(a) hereof, the holder of any Right thereafter exercised shall become entitled
to receive any shares of capital stock other than Preferred Shares, thereafter
the number of such other shares so receivable upon exercise of any Right and if
required, the Purchase Price thereof, shall be subject to adjustment from time
to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Shares contained in sections 11(a), (b),
(c), (e), (h), (i), (j), (k), (l) and (m), and the provisions of Sections 7, 9,
10, 13 and 14 with respect to the Preferred Shares shall apply on like terms to
any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Purchase Price hereunder shall evidence the right to
purchase, at the adjusted Purchase Price, the number of one-thousandths of a
Preferred Share purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
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(h) Unless the Company shall have exercised its election as provided
in Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Section 11(b), each Right outstanding immediately prior to
the making of such adjustment shall thereafter evidence the right to purchase,
at the adjusted Purchase Price, that number of Preferred Shares (calculated to
the nearest one hundred-thousandth of a share) obtained by (i) multiplying (x)
the number of Preferred Shares covered by a Right immediately prior to this
adjustment, by (y) the Purchase Price in effect immediately prior to such
adjustment of the Purchase Price, and (ii) dividing the product so obtained by
the Purchase Price in effect immediately after such adjustment of the Purchase
Price.
(i) The Company may elect on or after the date of any adjustment of
the Purchase Price as a result of the calculations made in Section 11(b) to
adjust the number of Rights, in substitution for any adjustment in the number of
Preferred Shares purchasable upon the exercise of a Right. Each of the Rights
outstanding after such adjustment of the number of Rights shall be exercisable
for the number of one-thousandths of a Preferred Share for which a Right was
exercisable immediately prior to such adjustment. Each Right held of record
prior to such adjustment of the number of Rights shall become that number of
Rights (calculated to the nearest ten-thousandth) obtained by dividing the
Purchase Price in effect immediately prior to adjustment of the Purchase Price
by the Purchase Price in effect immediately after adjustment of the Purchase
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date
may be the date on which the Purchase Price is adjusted or any day thereafter,
but, if the Rights Certificates have been issued, shall be at least ten (10)
days later than the date of the public announcement. If Rights Certificates
have been issued, upon each adjustment of the number of Rights pursuant to this
Section 11(i), the Company shall, as promptly as practicable, cause to be
distributed to holders of record of Rights Certificates on such record date
Rights Certificates evidencing, subject to Section 14 hereof, the additional
Rights to which such holders shall be entitled as a result of such adjustment,
or, at the option of the Company, shall cause to be distributed to such holders
of record in substitution and replacement for the Rights Certificates held by
such holders prior to the date of adjustment, and upon surrender thereof, if
required by the Company, new Rights Certificates evidencing all the Rights to
which such holders shall be entitled after such adjustment. Rights Certificates
so to be distributed shall be issued, executed and countersigned in the manner
provided for herein (and may bear, at the option of the Company, the adjusted
Purchase Price) and shall be registered in the names of the holders of record of
Rights Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of Preferred Shares issuable upon the exercise of the Rights, the
Rights Certificates theretofore and thereafter issued may continue to express
the Purchase Price per one one-thousandth of a Preferred Share and the number of
one-thousandths of a Preferred Share which were expressed in the initial Rights
Certificates issued hereunder.
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(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below the par or stated value, if any, of the number of
one-thousandths of a Preferred Share issuable upon exercise of the Rights, the
Company shall take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue as
fully paid and nonassessable shares such number of one-thousandths of a
Preferred Share at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date of
the number of one-thousandths of a Preferred Share and other capital stock or
securities of the Company, if any, issuable upon such exercise over and above
the number of one-thousandths of a Preferred Share and other capital stock or
securities of the Company, if any, issuable upon such exercise on the basis of
the Purchase Price in effect prior to such adjustment; provided, however, that
the Company shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional shares
(fractional or otherwise) upon the occurrence of the event requiring such
adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding,
prior to the Distribution Date, the Company shall be entitled to make such
reductions in the Purchase Price, in addition to those adjustments expressly
required by this Section 11, as and to the extent that it in its sole discretion
shall determine to be advisable in order that any (i) consolidation or
subdivision of the Preferred or Common Shares, (ii) issuance wholly for cash of
any Preferred or Common Shares at less than the current market price, (iii)
issuance wholly for cash of Preferred or Common Shares or securities which by
their terms are convertible into or exchangeable for Preferred or Common Shares,
(iv) stock dividends or (v) issuance of rights, options or warrants referred to
in this Section 11, hereafter made by the Company to holders of its Preferred or
Common Shares shall not be taxable to such stockholders.
(n) The Company covenants and agrees that it shall not, at any time
after the Distribution Date, effect or permit to occur any Triggering Event or
Section 13 Event, if (i) at the time or immediately after such Triggering Event
or Section 13 Event there are any rights, warrants or other instruments or
securities outstanding or agreements in effect which would substantially
diminish or otherwise eliminate the benefits intended to be afforded by the
Rights or (ii) prior to, simultaneously with or immediately after such Section
13 Event, the stockholders of the Person who constitutes, or would constitute,
the "Principal Party" for purposes of Section 13(b) hereof shall have received a
distribution of Rights previously owned by such Person or any of its Affiliates
and Associates.
(o) The Company covenants and agrees that, after the Distribution
Date, it will not, except as permitted by Sections 23, 24 or 27 hereof, take (or
permit to be taken) any action if at the time such action is taken it is
reasonably foreseeable that such action will diminish substantially or otherwise
eliminate the benefits intended to be afforded by the Rights.
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(p) Anything in this Agreement to the contrary notwithstanding, in
the event the Company shall at any time after the date of this Agreement (A)
declare a dividend on the Preferred Shares payable in Preferred Shares, (B)
subdivide the outstanding Preferred Shares, (C) combine the outstanding
Preferred Shares (by reverse stock split or otherwise) into a smaller number of
Preferred Shares, or (D) issue any shares of its capital stock in a
reclassification of the Preferred Shares (including any such reclassification in
connection with a consolidation or merger in which the Company is the continuing
or surviving corporation), then, in each such event, except as otherwise
provided in this Section 11 and Section 7(e) hereof: (1) each of the Rights
outstanding at the time of the record date for such dividend or the effective
date of such subdivision, combination or reclassification shall be
proportionately adjusted to that number of Rights (calculated to the nearest one
ten-thousandth (1/10,000) of a Right) equal to a fraction (the "Exchange
Fraction"), the numerator of which shall be the total number of Preferred Shares
or shares of capital stock issued in such reclassification of the Preferred
Shares outstanding immediately following such time and the denominator of which
shall be the total number of Preferred Shares outstanding immediately prior to
such time, and the number of Rights that shall thereafter be issued with respect
to each Common Share or share of other capital stock that shall be issued in a
reclassification of the Common Shares prior to the Distribution Date shall be
equal to the total number of outstanding Rights immediately after such event (as
adjusted pursuant to this clause(1)) divided by the total number of outstanding
Common Shares or shares of such other capital stock immediately after such event
(subject to further adjustment pursuant to the provisions of this Agreement);
(2) the Purchase Price in effect at the time of the record date for such
dividend or of the effective date of such subdivision, combination or
reclassification shall be adjusted so that the Purchase Price thereafter shall
equal the result obtained by dividing the Purchase Price in effect immediately
prior to such time by the Exchange Fraction; provided, however, that in no event
shall the consideration to be paid upon the exercise of one Right be less than
the aggregate par value of the shares of capital stock of the Company issuable
upon exercise of such Right; and (3) the number of one-thousandths of a
Preferred Share or share of such other capital stock issuable upon the exercise
of each Right shall remain unchanged immediately after such event, but, in the
event of a reclassification, the kind of shares issuable upon the exercise of
each Right immediately after such reclassification shall be adjusted to be the
kind of shares of such other capital stock issued in such reclassification,
rather than Preferred Shares.
Section 12. Certificate of Adjusted Purchase Price or Number of Shares.
Whenever an adjustment is made as provided in Sections 11 and 13 hereof, the
Company shall promptly (a) prepare a certificate setting forth such adjustment
and a brief statement of the facts accounting for such adjustment, (b) file with
the Rights Agent and with each transfer agent for the Preferred Shares a copy of
such certificate and (c) mail a brief summary thereof to each holder of a Rights
Certificate in accordance with Section 26 hereof. Notwithstanding the foregoing
sentence, the failure of the Company to make such certification or give such
notice shall not affect the validity of such adjustment or the force or effect
of the requirement for such adjustment. The Rights Agent shall be fully
protected in relying on any such certificate and on
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any adjustment contained therein and shall not be deemed to have knowledge of
such adjustment unless and until it shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
(a) In the event that, following the Shares Acquisition Date,
directly or indirectly:
(i) the Company shall consolidate with, or merge with and into,
any other Person (other than a Subsidiary of the Company in a transaction the
principal purpose of which is to change the state of incorporation of the
Company or which complies with Section 11(o) hereof);
(ii) any Person (other than a Subsidiary of the Company in a
transaction that complies with Section 11(o) hereof) shall consolidate with the
Company, or merge with and into the Company and the Company shall be the
continuing or surviving corporation of such consolidation or merger; or
(iii) the Company shall sell or otherwise transfer (or one or
more of its Subsidiaries shall sell or otherwise transfer), in one or more
transactions, assets or earning power aggregating 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person or Persons (other than the Company or one or more of its wholly
owned Subsidiaries in one or more transactions, each of which complies with
Section 11(o) hereof);
then, and in each such case, proper provision shall be made so
that
(A) each holder of a Right (except as otherwise provided herein)
shall thereafter have the right to receive, upon the exercise thereof in
accordance with the terms of this Agreement, such number of validly authorized
and issued, fully paid and nonassessable Common Shares of the Principal Party
(as hereinafter defined), free of any liens, encumbrances, rights of first
refusal or other adverse claims, as shall be equal to the result obtained by (1)
multiplying the then current Purchase Price by the number of one-thousandths of
a Preferred Share for which a Right was exercisable immediately prior to the
first occurrence of a Section 13 Event (or, if a Triggering Event has occurred
prior to the first occurrence of a Section 13 Event, multiplying the number of
such one-thousandths of a Preferred Share for which a Right was exercisable
immediately prior to the first occurrence of a Triggering Event by the Purchase
Price in effect immediately prior to such first occurrence) and (2) dividing
that product (which, following the first occurrence of a Section 13 Event, shall
be referred to as the "Total Exercise Price" for each Right and for all purposes
of this Agreement) by 50% of the current per share market price (determined
pursuant to Section 11(d) hereof) of the Common Shares of such Principal Party
on the date of consummation of such Section 13 Event;
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(B) such Principal Party shall thereafter be liable for, and
shall assume, by virtue of such Section 13 Event, all the obligations and duties
of the Company pursuant to this Agreement;
(C) the term "Company" shall thereafter be deemed to refer to
such Principal Party, it being specifically intended that the provisions of
Section 11 hereof shall apply only to such Principal Party following the first
occurrence of a Section 13 Event;
(D) such Principal Party shall take such steps (including, but
not limited to, the reservation of a sufficient number of its Common Shares) in
connection with the consummation of any such transaction as may be necessary to
assure that the provisions hereof shall thereafter be applicable, as nearly as
reasonably may be, in relation to its Common Shares thereafter deliverable upon
the exercise of the Rights.
(b) "Principal Party" shall mean, in the case of any transaction
described in clause (i), (ii) or (iii) of Section 13(a), the Person or Acquiring
Person referred to therein (or such Person's or Acquiring Person's successor,
including, if applicable, the Company, if it is the surviving corporation),
provided, however, that in any such case, (i) if such Person is a direct or
indirect Subsidiary of another Person, "Principal Party" shall refer to such
other Person and (ii) in case such Person is a Subsidiary, directly or
indirectly, of more than one Person, "Principal Party" shall refer to whichever
of such Persons is the issuer of the Common Shares having the greatest aggregate
value, and provided, further, that for purposes of transactions described in
clause (iii) hereof, "Principal Party" shall refer to that Person receiving the
greatest portion of the assets or earning power transferred pursuant to such
transaction or transactions.
(c) If, for any reason, the Rights cannot be exercised for Common
Shares of such Principal Party as provided in Section 13(a), then each holder of
Rights shall have the right to exchange its Rights for cash from such Principal
Party in an amount equal to the number of Common Shares that it would otherwise
be entitled to purchase times 50% of the current per share market price, as
determined pursuant to Section 11(d) hereof, of such Common Shares of such
Principal Party. If, for any reason, the foregoing formulation cannot be
applied to determine the cash amount into which the Rights are exchangeable,
then the Board of Directors, based upon the advice of one or more nationally
recognized investment banking firms, and based upon the total value of the
Company, shall determine such amount reasonably and with good faith to the
holders of Rights. Any such determination shall be final and binding on the
Rights Agent.
(d) Notwithstanding anything in this Agreement to the contrary,
Section 13 shall not be applicable to a transaction described in clauses (i) and
(ii) of Section 13(a) if: (i) such transaction is consummated with a Person or
Persons who acquired Common Shares pursuant to a Permitted Offer (or a
wholly-owned Subsidiary of any such Person or Persons); (ii) the price per share
of Common Shares offered in such transaction is not less than the price per
share of Common Shares paid to all holders of Common Shares whose shares were
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purchased pursuant to such Permitted Offer; and (iii) the form of consideration
being offered to the remaining holders of Common Shares pursuant to such
transaction is the same form as the form of consideration paid pursuant to such
Permitted Offer. Upon consummation of any such transaction contemplated by this
Section 13(d), all rights hereunder shall expire.
(e) The Company shall not consummate any Section 13 Event unless the
Principal Party shall have a sufficient number of authorized Common Shares that
have not been issued or reserved for issuance to permit the exercise in full of
the Rights in accordance with this Section 13 and unless prior thereto the
Company and such issuer shall have executed and delivered to the Rights Agent a
supplemental agreement confirming that such Principal Party shall, upon
consummation of such Section 13 Event, assume this Agreement in accordance with
Sections 13(a) and (b) hereof, that all rights of first refusal or preemptive
rights in respect of the issuance of Common Shares of such Principal Party upon
exercise of outstanding Rights have been waived, that there are no rights,
warrants, instruments or securities outstanding or any agreements or
arrangements which, as a result of the consummation of such transaction, would
eliminate or substantially diminish the benefits intended to be afforded by the
Rights and that such transaction shall not result in a default by such Principal
Party under this Agreement, and further providing that, as soon as practicable
after the date of such Section 13 Event, such Principal Party will:
(i) prepare and file a registration statement under the
Securities Act with respect to the Rights and the securities purchasable upon
exercise of the Rights on an appropriate form, use its best efforts to cause
such registration statement to become effective as soon as practicable after
such filing and use its best efforts to cause such registration statement to
remain effective (with a prospectus at all times meeting the requirements of the
Securities Act) until the Expiration Date, and similarly comply with applicable
state securities laws;
(ii) use its best efforts to list (or continue the listing of)
the Rights and the securities purchasable upon exercise of the Rights on a
national securities exchange or to meet the eligibility requirements for
quotation on Nasdaq; and
(iii) deliver to holders of the Rights historical financial
statements for such Principal Party which comply in all respects with the
requirements for registration on Form 10 (or any successor form) under the
Exchange Act.
In the event that at any time after the occurrence of a
Triggering Event some or all of the Rights shall not have been exercised at the
time of a transaction described in this Section 13, the Rights which have not
theretofore been exercised shall thereafter be exercisable in the manner
described in Section 13(a) (without taking into account any prior adjustment
required by Section 11(a)(ii)).
(f) The provisions of this Section 13 shall similarly apply to
successive mergers or consolidations or sales or other transfers.
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Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue fractions of Rights or
to distribute Rights Certificates which evidence fractional Rights. In lieu of
such fractional Rights, there shall be paid to the registered holders of the
Rights Certificates with regard to which such fractional Rights would otherwise
be issuable, an amount in cash equal to the same fraction of the current market
value of a whole Right. For the purposes of this Section 14(a), the current
market value of a whole Right shall be the closing price of the Rights for the
Trading Day immediately prior to the date on which such fractional Rights would
have been otherwise issuable, as determined pursuant to the second sentence of
Section 11(d) hereof.
(b) The Company shall not be required to issue fractions of Preferred
Shares (other than fractions that are integral multiples of one one-thousandth
of a Preferred Share) upon exercise of the Rights or to distribute certificates
which evidence fractional Preferred Shares (other than fractions that are
integral multiples of one one-thousandth of a Preferred Share). In lieu of
fractional Preferred Shares that are not integral multiples of one
one-thousandth of a Preferred Share, the Company shall pay to the registered
holders of Rights Certificates at the time such Rights are exercised as herein
provided an amount in cash equal to the same fraction of the current market
value of a Common Share. For purposes of this Section 14(b), the current market
value of a Common Share shall be the closing price of a Common Share (as
determined pursuant to the second sentence of Section 11(d) hereof) for the
Trading Day immediately prior to the date of such exercise.
(c) The holder of a Right by the acceptance of the Right expressly
waives his or her right to receive any fractional Rights or any fractional
shares upon exercise of a Right.
Section 15. Rights of Action. All rights of action in respect of this
Agreement, excepting the rights of action given to the Rights Agent under
Section 18 hereof, are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Rights Certificate (or, prior
to the Distribution Date, of the Common Shares), without the consent of the
Rights Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in his or her own behalf and for
his or her own benefit, enforce, and may institute and maintain any suit, action
or proceeding against the Company to enforce, or otherwise act in respect of,
his or her right to exercise the Rights evidenced by such Rights Certificate in
the manner provided in such Rights Certificate and in this Agreement. Without
limiting the foregoing or any remedies available to the holders of Rights, it is
specifically acknowledged that the holders of Rights would not have an adequate
remedy at law for any breach of this Agreement and will be entitled to specific
performance of the obligations under and injunctive relief against actual or
threatened violators of, the obligations of any Person subject to this
Agreement.
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Section 16. Agreement of Rights Holders. Every holder of a Right, by
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of the Common Shares;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office or offices of the Rights Agent designated for such purposes
duly endorsed or accompanied by a proper instrument of transfer and with the
appropriate forms and certificates fully executed; and
(c) subject to Sections 6(a) and 7(f) hereof, the Company and the
Rights Agent may deem and treat the person in whose name the Rights Certificate
(or, prior to the Distribution Date, the associated Common Shares certificate)
is registered as the absolute owner thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or writing on the Rights
Certificates or the associated Common Shares certificate made by anyone other
than the Company or the Rights Agent) for all purposes whatsoever, and neither
the Company nor the Rights Agent shall be affected by any notice to the
contrary.
Section 17. Rights Certificate Holder Not Deemed a Stockholder. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the Preferred Shares or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Rights Certificate be construed to confer upon the holder of any
Rights Certificate, as such, any of the rights of a stockholder of the Company
or any right to vote for the election of directors or upon any matter submitted
to stockholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
stockholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Rights Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent reasonable
compensation for all services rendered by it hereunder and, from time to time,
on demand of the Rights Agent, its reasonable expenses and counsel fees and
other disbursements incurred in the administration and execution of this
Agreement and the exercise and performance of its duties hereunder. The Company
also agrees to indemnify the Rights Agent for, and to hold it harmless against
any loss, liability or expense, incurred without gross negligence, bad faith or
willful misconduct on the part of the Rights Agent, for anything done or omitted
by the Rights Agent in connection with the acceptance and administration of this
Agreement, including the costs and expenses of defending against any claim of
liability in the premises.
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(b) The Rights Agent shall be protected and shall incur no liability
for, or in respect of any action taken, suffered or omitted by it in connection
with, its administration of this Agreement in reliance upon any Rights
Certificate or certificate for the Common Shares or for other securities of the
Company, instrument of assignment or transfer, power of attorney, endorsement,
affidavit, letter, notice, direction, consent, certificate, statement or other
paper or document believed by it to be genuine and to be signed, executed and,
where necessary, verified or acknowledged, by the proper Person or Persons, or
otherwise upon the advice of counsel as set forth in Section 20 hereof.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the corporate trust business of the Rights Agent or any successor Rights Agent,
shall be the successor to the Rights Agent under this Agreement without the
execution or filing of any paper or any further act on the part of any of the
parties hereto; provided, however, that such corporation would be eligible for
appointment as a successor Rights Agent under the provisions of Section 21
hereof. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Rights Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
counter-signature of the predecessor Rights Agent and deliver such Rights
Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor
Rights Agent or in the name of the successor Rights Agent; and in all such cases
such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed
and at such time any of the Rights Certificates shall have been countersigned
but not delivered, the Rights Agent may adopt the countersignature under its
prior name and deliver Rights Certificates so countersigned; and in case at that
time any of the Rights Certificates shall not have been countersigned, the
Rights Agent may countersign such Rights Certificates either in its prior name
or in its changed name; and in all such cases such Rights Certificates shall
have the full force provided in the Rights Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion or advice of such counsel shall be
full and complete
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<PAGE>
authorization and protection to the Rights Agent as to any action taken or
omitted by it in good faith and in accordance with such opinion or advice.
(b) Whenever in the performance of its duties under this Agreement
the Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person and the
determination of "current per share market price") be proved or established by
the Company prior to taking or suffering any action hereunder, such fact or
matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by any one of the President, any Vice President, the Chief
Financial Officer, the Clerk or any Assistant Clerk of the Company and delivered
to the Rights Agent; and such certificate shall be full authorization to the
Rights Agent for any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the Company and any
other Person only for its own gross negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Rights
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Rights Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Rights Certificate; nor shall it
be responsible for any change in the exercisability of the Rights or any
adjustment in the terms of the Rights (including the manner, method or amount
thereof) provided for in Sections 3, 11, 13, 23 or 24, or the ascertaining of
the existence of facts that would require any such change or adjustment (except
with respect to the exercise of Rights evidenced by Rights Certificates after
receipt by the Rights Agent of a certificate furnished pursuant to Section 12
describing such change or adjustment); nor shall it by any act hereunder be
deemed to make any representation or warranty as to the authorization or
reservation of any Preferred Shares to be issued pursuant to this Agreement or
any Rights Certificate or as to whether any Preferred Shares will, when issued,
be validly authorized and issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
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(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from any
one of the Chairman of the Board, the Chief Executive Officer, the President,
any Vice President, the Chief Financial Officer, the Clerk or any Assistant
Clerk of the Company, and to apply to such officers for advice or instructions
in connection with its duties, and it shall not be liable for any action taken
or suffered by it in good faith in accordance with instructions of any such
officer or for any delay in acting while waiting for those instructions. Any
application by the Rights Agent for written instructions from the Company may,
at the option of the Rights Agent, set forth in writing any action proposed to
be taken or omitted by the Rights Agent under this Rights Agreement and the date
on and/or after which such action shall be taken or such omission shall be
effective. The Rights Agent shall not be liable for any action taken by, or
omission of, the Rights Agent in accordance with a proposal included in any such
application on or after the date specified in such application (which date shall
not be less than five (5) Business Days after the date any officer of the
Company actually receives such application, unless any such officer shall have
consented in writing to an earlier date) unless, prior to taking any such action
(or the effective date in the case of an omission), the Rights Agent shall have
received written instructions in response to such application specifying the
action to be taken or omitted.
(h) The Rights Agent and any stockholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not Rights Agent
under this Agreement. Nothing herein shall preclude the Rights Agent from
acting in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company resulting from any such act, default,
neglect or misconduct, provided reasonable care was exercised in the selection
and continued employment thereof.
(j) No provisions of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 and/or 2
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first consulting with the Company.
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Section 21. Change of Rights Agent. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) days' notice in writing mailed to the Company and to each
transfer agent of the Preferred Shares and the Common Shares by registered or
certified mail, and to the holders of the Rights Certificates by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent
upon thirty (30) days' notice in writing, mailed to the Rights Agent or
successor Rights Agent, as the case may be, and to each transfer agent of the
Preferred Shares and the Common Shares by registered or certified mail, and to
the holders of the Rights Certificates by first-class mail. If the Rights Agent
shall resign or be removed or shall otherwise become incapable of acting, the
Company shall appoint a successor to the Rights Agent. If the Company shall
fail to make such appointment within a period of thirty (30) days after giving
notice of such removal or after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Rights Agent or by
the holder of a Rights Certificate (who shall, with such notice, submit his or
her Rights Certificate for inspection by the Company), then the registered
holder of any Rights Certificate may apply to any court of competent
jurisdiction for the appointment of a new Rights Agent. Any successor Rights
Agent, whether appointed by the Company or by such a court shall be a
corporation organized and doing business under the laws of the United States or
of any state of the United States, in good standing, which is authorized under
such laws to exercise corporate trust or stockholder services powers and is
subject to supervision or examination by federal or state authority and which
has at the time of its appointment as Rights Agent a combined capital and
surplus of at least $50,000,000. After appointment, the successor Rights Agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named as Rights Agent without further act or deed; but
the predecessor Rights Agent shall deliver and transfer to the successor Rights
Agent any property at the time held by it hereunder, and execute and deliver any
further assurance, conveyance, act or deed necessary for the purpose. Not later
than the effective date of any such appointment, the Company shall file notice
thereof in writing with the predecessor Rights Agent and each transfer agent of
the Preferred Shares and the Common Shares, and mail a notice thereof in writing
to the registered holders of the Rights Certificates. Failure to give any
notice provided for in this Section 21, however, or any defect therein, shall
not affect the legality or validity of the resignation or removal of the Rights
Agent or the appointment of the successor Rights Agent, as the case may be.
Section 22. Issuance of New Rights Certificate. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing Rights in such form
as may be approved by its Board of Directors to reflect any adjustment or change
in the Purchase Price and the number or kind or class of shares or other
securities or property purchasable under the Rights Certificates made in
accordance with the provisions of this Agreement. In addition, in connection
with the issuance or sale of Common Shares following the Distribution Date and
prior to the redemption or expiration of the Rights, the Company (a) shall, with
respect to Common Shares so issued or sold pursuant to the exercise of stock
options or under any employee plan or arrangement or upon the exercise,
conversion or exchange of securities hereinafter issued by the Company and
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(b) may, in any other case, if deemed necessary or appropriate by the Board of
Directors of the Company, issue Rights Certificates representing the appropriate
number of Rights in connection with such issuance of sale; provided, however,
that (i) no such Rights Certificate shall be issued and this sentence shall be
null and void ab initio if, and to the extent that, such issuance or this
sentence would create a significant risk of or result in material adverse tax
consequences to the Company or the Person to whom such Rights Certificate would
be issued or would create a significant risk of or result in such options' or
employee plans' or arrangements' failing to qualify for otherwise available
special tax treatment and (ii) no such Rights Certificate shall be issued if,
and to the extent that, appropriate adjustment shall otherwise have been made in
lieu of the issuance thereof.
Section 23. Redemption.
(a) The Company may, at its option and with the approval of the Board
of Directors, at any time prior to the Close of Business on the earlier of
(i) the tenth day following the Shares Acquisition Date or such later date as
may be determined by action of a majority of Continuing Directors then in office
and publicly announced by the Company or (ii) the Final Expiration Date, redeem
all but not less than all the then outstanding Rights at a redemption price of
$0.01 per Right, appropriately adjusted to reflect any stock split, stock
dividend or similar transaction occurring after the date hereof (such redemption
price being herein referred to as the "Redemption Price") and the Company may,
at its option, pay the Redemption Price either in Common Shares (based on the
current per share market price thereof (as determined pursuant to Section 11(d)
hereof) at the time of redemption) or cash; provided, however, if the Board of
Directors of the Company authorizes redemption of the Rights on or after the
time a Person becomes an Acquiring Person, then there must be Continuing
Directors then in office and such authorization shall require the concurrence of
a majority of such Continuing Directors.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights, evidence of which shall have been
filed with the Rights Agent, and without any further action and without any
notice, the right to exercise the Rights will terminate and the only right
thereafter of the holders of Rights shall be to receive the Redemption Price.
Within ten (10) days after the action of the Board of Directors ordering the
redemption of the Rights, the Company shall give notice of such redemption to
the Rights Agent and the holders of the then outstanding Rights by mailing such
notice to all such holders at their last addresses as they appear upon the
registry books of the Rights Agent or, prior to the Distribution Date, on the
registry books of the transfer agent for the Common Shares. Any notice which is
mailed in the manner herein provided shall be deemed given, whether or not the
holder receives the notice. Each such notice of redemption will state the
method by which the payment of the Redemption Price will be made. Neither the
Company nor any of its Affiliates or Associates may redeem, acquire or purchase
for value any Rights at any time in any manner other than that specifically set
forth in this Section 23 or in Section 24 hereof, and other than in connection
with the purchase of Common Shares prior to the Distribution Date.
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Section 24. Exchange.
(a) Subject to applicable laws, rules and regulations, and subject to
subsection (c) below, the Company may, at its option, by majority vote of the
Board of Directors and a majority vote of the Continuing Directors, at any time
after the occurrence of a Triggering Event, exchange all or part of the then
outstanding and exercisable Rights (which shall not include Rights that have
become void pursuant to the provisions of Section 7(e) hereof) for Common Shares
at an exchange ratio of one Common Share per Right, appropriately adjusted to
reflect any stock split, stock dividend or similar transaction occurring after
the date hereof (such exchange ratio being hereinafter referred to as the "Ratio
of Exchange"). Notwithstanding the foregoing, the Board of Directors shall not
be empowered to effect such exchange at any time after any Person (other than
the Company, any Subsidiary of the Company, any employee benefit plan of the
Company or any such Subsidiary, or any entity holding Common Shares for or
pursuant to the terms of any such plan), together with all Affiliates and
Associates of such Person, becomes the Beneficial Owner of 50% or more of the
Common Shares then outstanding.
(b) Immediately upon the action of the Board of Directors ordering
the exchange of any Rights pursuant to subsection (a) of this Section 24 and
without any further action and without any notice, the right to exercise such
Rights shall terminate and the only right thereafter of a holder of such Rights
shall be to receive that number of Common Shares equal to the number of such
Rights held by such holder multiplied by the Ratio of Exchange. The Company
shall give public notice of any such exchange; provided, however, that the
failure to give, or any defect in, such notice shall not affect the validity of
such exchange. The Company shall mail a notice of any such exchange to all of
the holders of such Rights at their last addresses as they appear upon the
registry books of the Rights Agent. Any notice which is mailed in the manner
herein provided shall be deemed given, whether or not the holder receives the
notice. Each such notice of exchange will state the method by which the
exchange of the Common Shares for Rights will be effected and, in the event of
any partial exchange, the number of Rights which will be exchanged. Any partial
exchange shall be effected pro rata based on the number of Rights (other than
Rights which have become void pursuant to the provisions of Section 7(e) hereof)
held by each holder of Rights.
(c) In the event that there shall not be sufficient Common Shares
issued but not outstanding or authorized but unissued to permit any exchange of
Rights as contemplated in accordance with Section 24(a), the Company shall
either take such action as may be necessary to authorize additional Common
Shares for issuance upon exchange of the Rights or alternatively, at the option
of a majority of the Board of Directors, with respect to each Right (i) pay cash
in an amount equal to the Current Value (as hereinafter defined), in lieu of
issuing Common Shares in exchange therefor, or (ii) issue debt or equity
securities or a combination thereof, having a value equal to the Current Value,
in lieu of issuing Common Shares in exchange for each such Right, where the
value of such securities shall be determined by a nationally recognized
investment banking firm selected by the Board of Directors by majority vote of
the Board of Directors, or (iii) deliver any combination of cash, property,
Common
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Shares and/or other securities having a value equal to the Current Value in
exchange for each Right. For purposes of this Section 24(c) only, the Current
Value shall mean the product of the current per share market price of Common
Shares (determined pursuant to Section 11(d) on the date of the occurrence of
the event described above in subparagraph 9(a)) multiplied by the number of
Common Shares for which the Right otherwise would be exchangeable if there were
sufficient shares available. To the extent that the Company determines that
some action need be taken pursuant to clauses (i), (ii) or (iii) of this Section
24(c), the Board of Directors may temporarily suspend the exercisability of the
Rights for a period of up to sixty (60) days following the date on which the
event described in Section 24(a) shall have occurred, in order to seek any
authorization of additional Common Shares and/or to decide the appropriate form
of distribution to be made pursuant to the above provision and to determine the
value thereof. In the event of any such suspension, the Company shall issue a
public announcement stating that the exercisability of the Rights has been
temporarily suspended.
(d) The Company shall not be required to issue fractions of Common
Shares or to distribute certificates which evidence fractional Common Shares.
In lieu of such fractional Common Shares, there shall be paid to the registered
holders of the Rights Certificates with regard to which such fractional Common
Shares would otherwise be issuable, an amount in cash equal to the same fraction
of the current per share market value of a whole Common Share (as determined
pursuant to the second sentence of Section 11(d) hereof).
(e) The Company may, at its option, by majority vote of the Board of
Directors, at any time before any Person has become an Acquiring Person,
exchange all or part of the then outstanding Rights for rights of substantially
equivalent value, as determined reasonably and with good faith by the Board of
Directors, based upon the advice of one or more nationally recognized investment
banking firms.
(f) Immediately upon the action of the Board of Directors ordering
the exchange of any Rights pursuant to subsection (e) of this Section 24 and
without any further action and without any notice, the right to exercise such
Rights shall terminate and the only right thereafter of a holder of such Rights
shall be to receive that number of rights in exchange therefor as has been
determined by the Board of Directors in accordance with subsection (e) above.
The Company shall give public notice of any such exchange; provided, however,
that the failure to give, or any defect in, such notice shall not affect the
validity of such exchange. The Company shall mail a notice of any such exchange
to all of the holders of such Rights at their last addresses as they appear upon
the registry books of the transfer agent for the Common Shares of the Company.
Any notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. Each such notice of exchange
will state the method by which the exchange of the Rights will be effected.
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Section 25. Notice of Certain Events.
(a) In case the Company shall propose to effect or permit to occur
any Section 13 Event, the Company shall give notice thereof to each holder of
Rights in accordance with Section 26 hereof at least twenty (20) days prior to
occurrence of such Section 13 Event.
(b) In case any Triggering Event or Section 13 Event shall occur,
then, in any such case, the Company shall as soon as practicable thereafter give
to each holder of a Rights Certificate, in accordance with Section 26 hereof, a
notice of the occurrence of such event, which shall specify the event and the
consequences of the event to holders of Rights under Sections 11(a)(ii) and 13
hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Rights Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, addressed (until another address is filed in writing with
the Rights Agent) as follows:
Friendly Ice Cream Corporation
1855 Boston Road
Wilbraham, Massachusetts 01095
Attention: President
Subject to the provisions of Section 21 hereof, any notice or demand authorized
by this Agreement to be given or made by the Company or by the holder of any
Rights Certificate to or on the Rights Agent shall be sufficiently given or made
if sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Company) as follows:
The Bank of New York
[address]
Attention:
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments. Prior to the Distribution Date,
the Company may supplement or amend this Agreement in any respect without the
approval of any holders of Rights and the Rights Agent shall, if the Company so
directs, execute such supplement or amendment. From and after the Distribution
Date, the Company and the Rights Agent may from time to time supplement or amend
this Agreement without the approval of any holders of Rights in order to
(i) cure any ambiguity, (ii) correct or supplement any provision contained
herein which may be defective or inconsistent with any other provisions herein,
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(iii) shorten or lengthen any time period hereunder (which lengthening or
shortening, following the first occurrence of an event set forth in the proviso
to Section 23(a) hereof, shall be effective only if there are Continuing
Directors and shall require the concurrence of a majority of such Continuing
Directors) or (iv) change or supplement the provisions hereunder in any manner
that the Company may deem necessary or desirable and that shall not adversely
affect the interests of the holders of Rights (other than an Acquiring Person or
an Affiliate or Associate of an Acquiring Person); provided, this Agreement may
not be supplemented or amended to lengthen, pursuant to clause (iii) of this
sentence, (A) a time period relating to when the Rights may be redeemed at such
time as the Rights are not then redeemable or (B) any other time period unless
such lengthening is for the purpose of protecting, enhancing, or clarifying the
rights of, and/or the benefits to, the holders of Rights. Upon the delivery of
a certificate from an appropriate officer of the Company that states that the
proposed supplement or amendment is in compliance with the terms of this
Section 27, the Rights Agent shall execute such supplement or amendment. Prior
to the Distribution Date, the interests of the holders of Rights shall be deemed
coincident with the interests of the holders of Common Shares.
Section 28. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Determinations and Actions by the Board of Directors, etc.
For all purposes of this Agreement, any calculation of the number of Common
Shares outstanding at any particular time, including for purposes of determining
the particular percentage of such outstanding Common Shares of which any Person
is the Beneficial Owner, shall be made in accordance with the last sentence of
Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange
Act. The Board of Directors of the Company (and, where specifically provided
for herein, the Continuing Directors) shall have the exclusive power and
authority to administer this Agreement and to exercise all rights and powers
specifically granted to the Board, or the Company (or, where specifically
provided for herein, the Continuing Directors), or as may be necessary or
advisable in the administration of this Agreement, including, without
limitation, the right and power to (i) interpret the provisions of this
Agreement and (ii) make all determinations deemed necessary or advisable for
the administration of this Agreement (including a determination to redeem or
not redeem the Rights or to amend the Agreement). All such actions,
calculations, interpretations and determinations (including, for purposes of
clause (y) below, all omissions with respect to the foregoing) which are done
or made by the Board (or, where specifically provided for herein, by the
Continuing Directors) in good faith, shall (x) be final, conclusive and
binding on the Company, the Rights Agent, the holders of the Rights
Certificates and all other parties and (y) not subject the Board or the
Continuing Directors to any liability to the holders of the Rights.
Section 30. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any Person other than the Company, the Rights
Agent and the registered holders of the Rights Certificates (and, prior to
the Distribution Date, the Common Shares) any legal or
35
<PAGE>
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Distribution
Date, the Common Shares).
Section 31. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire until the close of business on the
tenth day following the date of such determination by the Board of Directors.
Section 32. Governing Law. This Agreement and each Right and each
Rights Certificate issued hereunder shall be deemed to be a contract made under
the laws of The Commonwealth of Massachusetts and for all purposes shall be
governed by and construed in accordance with the laws of The Commonwealth of
Massachusetts applicable to contracts to be made and performed entirely within
Massachusetts.
Section 33. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
[The remainder of this page is left blank intentionally.]
36
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
Attest: FRIENDLY ICE CREAM CORPORATION
By: By:
------------------------ -----------------------------
[name] [name]
Clerk President
Attest: THE BANK OF NEW YORK
By: By:
------------------------- -------------------------------
Name: Name:
Title: Title:
<PAGE>
EXHIBIT A
The Commonwealth of Massachusetts
Office of the Massachusetts Secretary of State
One Ashburton Place, Boston, Mass. 02108
CERTIFICATE OF VOTE OF DIRECTORS ESTABLISHING
A SERIES OF A CLASS OF STOCK
General Laws, Chapter 156B, Section 26
---------
We, ____________________, President, and _______________, Clerk of Friendly
Ice Cream Corporation, located at 1855 Boston Road, Wilbraham, Massachusetts
01095, do hereby certify that at a meeting of the directors of the corporation
held on ___________, 1997, the following vote establishing and designating a
series of a class of stock and determining the relative rights and preferences
thereof was duly adopted:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Junior Preferred Stock," $.01 par value per share, and
the number of shares constituting such series shall be [15,000].
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior right of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series A Junior Preferred Stock with respect to dividends, the holders of
shares of Series A Junior Preferred Stock shall be entitled to receive when, as
and if declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the last day of March, June,
September and December in each year (each such date being referred to herein as
a "Quarterly Dividend Payment Date") commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Series A Junior Preferred Stock, in an amount per share (rounded to the nearest
cent) equal to, subject to the provision for adjustment hereinafter set forth,
1,000 times the aggregate per share amount of all cash dividends, and 1,000
times the aggregate per share amount (payable in kind) of all non-cash dividends
or other distributions other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock (by reclassification
or otherwise), declared on the Common Stock of the Corporation (the "Common
Stock") since the immediately preceding Quarterly Dividend Payment Date, or,
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Junior Preferred
Stock. In the event the Corporation shall at any time after _____________,
1997 (the "Rights Declaration Date") (i) declare any dividend on Common Stock
payable in shares of Common Stock,
<PAGE>
(ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding
Common Stock into a smaller number of shares, then in each such case the amount
to which holders of shares of Series A Junior Preferred Stock were entitled
immediately prior to such event under the preceding sentence shall be adjusted
by multiplying such amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that ere outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Junior Preferred Stock as provided in paragraph (A) above immediately
after it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock).
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Junior Preferred Stock from the Quarterly Dividend Payment
Date next preceding the date of issue of such shares of Series A Junior
Preferred Stock, unless the date of issue of such shares is prior to the record
date for the first Quarterly Dividend Payment Date, in which case dividends on
such shares shall begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date or is a date after
the record date for the determination of holders of shares of Series A Junior
Preferred Stock entitled to receive a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid on the
shares of Series A Junior Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Series A Junior Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon, which record date shall
be no more than 30 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series A Junior
Preferred Stock shall have the following voting rights.
(A) Subject to the provision for adjustment hereinafter set forth,
each share of Series A Junior Preferred Stock shall entitle the holder thereof
to 1,000 votes on all matters submitted to a vote of the stockholders of the
Corporation. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock to a smaller number of shares, then in each such case
the number of votes per share to which holders of shares of Series A Junior
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after
2
<PAGE>
such event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of
shares of Series A Junior Preferred Stock and the holders of shares of Common
Stock shall vote together as one class on all matters submitted to a vote of
stockholders of the corporation.
(C) Except as required by law, holders of Series A Junior Preferred
Stock shall have no special voting rights and their consent shall not be
required (except to the extent they are entitled to vote with holders of Common
Stock as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) The Corporation shall not declare any dividend on, make any
distribution on, or redeem or purchase or otherwise acquire for consideration
any shares of Common Stock after the first issuance of a share or fraction of a
share of Series A Junior Preferred Stock unless concurrently therewith it shall
declare a dividend on the Series A Junior Preferred Stock as required by Section
2 hereof.
(B) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Preferred Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Junior Preferred
Stock outstanding shall have been paid in full, the Corporation shall not
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Junior Preferred Stock;
(ii) declare or pay dividends on or make any other distributions
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with Series A Junior Preferred Stock,
except dividends paid ratably on the Series A Junior Preferred Stock and all
such parity stock on which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A Junior Preferred
Stock, provided that the Corporation may at any time redeem, purchase or
otherwise acquire shares of any such parity stock in exchange for shares of any
stock of the Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series A Junior Preferred Stock;
3
<PAGE>
(iv) purchase or otherwise acquire for consideration any shares
of Series A Junior Preferred Stock, or any shares of stock ranking on a parity
with the Series A Junior Preferred Stock, except in accordance with a purchase
offer made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and other
relative rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among the
respective series or classes.
(C) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. Reacquired Shares. Any shares of Series A Junior Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to the conditions and restrictions on issuance set forth
herein.
Section 6. Liquidation, Dissolution or Winding Up.
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Junior Preferred Stock unless, prior
thereto, the holders of shares of Series A Junior Preferred Stock shall have
received an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment, plus an amount
equal to the greater of (1) [$_______] per share, provided that in the event the
Corporation does not have sufficient assets, after payment of its liabilities
and distribution to holders of Preferred Stock ranking prior to the Series A
Junior Preferred Stock, available to permit payment in full of the [$_______]
per share amount, the amount required to be paid under this Section 6(A)(1)
shall, subject to Section 6(B) hereof, equal the value of the amount of
available assets divided by the number of outstanding shares of Series A Junior
Preferred Stock or (2) subject to the provisions for adjustment hereinafter set
forth, 1,000 times the aggregate per share amount to be distributed to the
holders of Common Stock (the greater of (1) or (2), the "Series A Liquidation
Preference"). In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the
outstanding Common Stock into a smaller number of shares, then in each such case
the amount to which holders of shares of Series A Junior Preferred Stock were
entitled immediately prior to such event under clause (2) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock that were outstanding
immediately after such event and the
4
<PAGE>
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences of all other series of Preferred Stock, if any,
which rank on a parity with the Series A Junior Preferred Stock, then such
remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences.
Section 7. Consolidation, Merger, etc. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the shares of
Series A Junior Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to 1,000 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time after the Rights Declaration Date
(i) declare any dividend on Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding
Common Stock into a smaller number of shares, then in each such case the amount
set forth in the preceding sentence with respect to the exchange or change of
shares of Series A Junior Preferred Stock shall be adjusted by multiplying such
amount by a fraction the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
Section 8. No Redemption. The shares of Series A Junior Preferred
Stock shall not be redeemable.
Section 9. Ranking. The Series A Junior Preferred Stock shall rank
junior to all other series of the Corporation's Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
Section 10. Amendment. The Articles of Organization of the Corporation
shall not be further amended in any manner which would materially alter or
change the powers, preference or special rights of the Series A Junior Preferred
Stock so as to affect them adversely without the affirmative vote of the holders
of a majority or more of the outstanding shares of Series A Junior Preferred
Stock, voting separately as a class.
Section 11. Fractional Shares. Series A Junior Preferred Stock may be
issued in fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Junior Preferred Stock.
5
<PAGE>
IN WITNESS WHEREOF AND UNDER THE PAINS AND PENALTIES OF PERJURY, we have
hereto signed our names this _____ day of __________, 1997.
________________________________
__________________, President
________________________________
__________________, Clerk
6
<PAGE>
EXHIBIT B
FORM OF RIGHTS CERTIFICATE
Certificate No. ___. ____ Rights
NOT EXERCISABLE AFTER ______________, 2007 OR EARLIER IF TERMINATED BY THE
COMPANY OR IF THE COMPANY EXCHANGES THE RIGHTS PURSUANT TO THE RIGHTS
AGREEMENT. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE
COMPANY, AT $0.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT.
UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON
OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE
DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY
BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE
OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON
OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE
DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND
THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES
SPECIFIED IN SECTION 7(e) OF SUCH RIGHTS AGREEMENT.](1)
Rights Certificate
This certifies that ____________________________________, or registered
assigns, is the registered owner of the number of Rights set forth above, each
of which entitles the owner thereof, subject to the terms, provisions and
conditions of the Rights Agreement, dated as of _____________, 1997 (the "Rights
Agreement"), between FRIENDLY ICE CREAM CORPORATION, a Massachusetts corporation
(the "Company"), and THE BANK OF NEW YORK (the "Rights Agent"), to purchase from
the Company at any time after the Distribution Date (as such term is defined in
the Rights Agreement) and prior to 5:00 P.M., Massachusetts time, on ___________
at the office of the Rights Agent designated for such purpose, or at the office
of its successor as Rights Agent, one one-thousandth of a fully paid
non-assessable share of Series A Junior Preferred Stock, par value $0.01 per
share, (the "Preferred Shares"), of the Company, at a purchase price of $______
per one-thousandth of a Preferred Share (the "Purchase Price"), upon
presentation and surrender of this Rights Certificate with the Form of
- -----------------
(1)The portion of the legend in brackets shall be inserted only if applicable
and shall replace the preceding sentence.
<PAGE>
Election to Purchase and related Certificate duly executed. The number of
Rights evidenced by this Rights Certificate (and the number of one-thousandths
of a Preferred Share which may be purchased upon exercise hereof) set forth
above are the number and Purchase Price as of ____________, 1997 based on the
Preferred Shares as constituted at such date. As provided in the Rights
Agreement, the Purchase Price and the number and kind of Preferred Shares or
other securities which may be purchased upon the exercise of the Rights
evidenced by this Rights Certificate are subject to modification and upon the
happening of certain events.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the principal executive offices of
the Company and the above-mentioned office of the Rights Agent.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Rights Certificate (i) may be redeemed by the Company, at its option, at a
redemption price of $0.01 per Right or (ii) may be exchanged by the Company in
whole or in part for Common Shares, substantially equivalent rights or other
consideration as determined by the Company.
This Rights Certificate, with or without other Rights Certificates, upon
surrender at the office of the Rights Agent designated for such purpose, may be
exchanged for another Rights Certificate or Rights Certificates of like tenor
and date evidencing Rights entitling the holder to purchase a like aggregate
amount of securities as the Rights evidenced by the Rights Certificate or Rights
Certificates surrendered shall have entitled such holders to purchase. If this
Rights Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Rights Certificate or Rights Certificates
for the number of whole Rights not exercised.
No fractional portion of less than one one-thousandth of a Preferred Share
will be issued upon the exercise of any Right or Rights evidenced hereby but in
lieu thereof a cash payment will be made, as provided in the Rights Agreement.
No holder of this Rights Certificate, as such, shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of the Preferred
Shares or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions
2
<PAGE>
affecting stockholders (except as provided in the Rights Agreement), or to
receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by this Rights Certificate shall have been exercised as
provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the Company and
its corporate seal. Dated as of ________ ___, 19__.
Attest: FRIENDLY ICE CREAM CORPORATION
By:
- ------------------------ ----------------------------
Clerk President
Countersigned:
THE BANK OF NEW YORK,
as Rights Agent
By:
-------------------------------
Authorized Signature
3
<PAGE>
Form of Reverse Side of Rights Certificate
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate)
FOR VALUE RECEIVED _________________ hereby sells, assigns and transfers
unto
______________________________________________________________
(Please print name and address of transferee) this Rights
Certificate, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint _______________________________
Attorney, to transfer the within Rights Certificate on the books of the
within-named Company, with full power of substitution.
Dated: ___________, 19___ ___________________________________
Signature
Signature Guaranteed:
The signature(s) should be guaranteed by an eligible guarantor institution
(Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with
membership in an approved signature guarantee medallion program) pursuant to
S.E.C. Rule 17Ad-15.
4
<PAGE>
Form of Reverse Side of Rights Certificate -- continued
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes that:
(1) this Rights Certificate [ ] is [ ] not being sold, assigned and
transferred by or on behalf of a Person who is or was an Acquiring Person, or an
Affiliate or Associate of any such Person (as such terms are defined in the
Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it [
] did [ ] did not acquire the Rights evidenced by this Rights Certificate from
any Person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate of any such Person.
Dated: ______________ , 19__ _________________________________
Signature
Signature Guaranteed:
The signature(s) should be guaranteed by an eligible guarantor institution
(Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with
membership in an approved signature guarantee medallion program) pursuant to
S.E.C. Rule 17Ad-15.
5
<PAGE>
Form of Reverse Side of Rights Certificate -- continued
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise the Rights Certificate)
To:________________________
The undersigned hereby irrevocably elects to exercise
______________________ Rights represented by this Rights Certificate to purchase
the number of one-thousandths of a Preferred Share issuable upon the exercise of
such Rights and requests that certificates for such number of one-thousandths of
a Preferred Share issued in the name of:
Please insert social security or
other identifying number
_________________________________________________________________
(Please print name and address)
_________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by this Rights
Certificate, a new Rights Certificate for the balance remaining of such Rights
shall be registered in the name of and delivered to:
Please insert social security or
other identifying number
_________________________________________________________________
_________________________________________________________________
Dated: ______________ , 19__ _________________________________
Signature
Signature Guaranteed:
The signature(s) should be guaranteed by an eligible guarantor institution
(Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with
membership in an approved signature guarantee medallion program) pursuant to
S.E.C. Rule 17Ad-15.
6
<PAGE>
Form of Reverse Side of Rights Certificate -- continued
CERTIFICATE
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not
being exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Person (as such terms are defined in the
Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it [
] did [ ] did not acquire the Rights evidenced by this Rights Certificate from
any Person who is, was or subsequently became an Acquiring Person or an
Affiliate or Associate of any such Person.
Dated: ________________, 19__ ____________________________
Signature
Signature Guaranteed:
The signature(s) should be guaranteed by an eligible guarantor institution
(Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with
membership in an approved signature guarantee medallion program) pursuant to
S.E.C. Rule 17Ad-15.
7
<PAGE>
Form of Reverse Side of Rights Certificate -- continued
NOTICE
The signature in the foregoing Forms of Assignment and Election and
Certificates must conform to the name as written upon the face of this Rights
Certificate in every particular, without alteration or enlargement or any change
whatsoever.
8
<PAGE>
EXHIBIT C
FRIENDLY ICE CREAM CORPORATION
STOCKHOLDER RIGHTS PLAN
Summary of Rights
Distribution and Transfer The Board of Directors has declared a dividend of
of Rights; Rights one Right for each share of FRIENDLY ICE CREAM
Certificate: CORPORATION Common Stock outstanding. Prior to
the Distribution Date referred to below, the
Rights will be evidenced by and trade with the
certificates for the Common Stock. After the
Distribution Date, FRIENDLY ICE CREAM CORPORATION
(the "Company") will mail Rights certificates to
the Company's stockholders and the Rights will
become transferable apart from the Common Stock.
Distribution Date: Rights will separate from the Common Stock and
become exercisable following the tenth business
day (the "Distribution Date") (or such later date
as may be determined by a majority of the
Directors not affiliated with the acquiring person
or group (the "Continuing Directors")) after a
person or group (a) acquires beneficial ownership
of 15% or more of the Company's Common Stock or
(b) announces a tender or exchange offer, the
consummation of which would result in ownership by
a person or group of 15% or more of the Company's
Common Stock.
Preferred Stock After the Distribution Date, each Right will
Purchasable Upon entitle the holder to purchase, for $_____, a
Exercise of Rights: fraction of a share of the Company's Preferred
Stock with economic terms similar to that of one
share of the Company's Common Stock.
<PAGE>
Flip-In: If an acquiror (an "Acquiring Person") obtains 15%
or more of the Company's Common Stock (other than
pursuant to a tender offer deemed fair by the
Board of Directors (a "Permitted Offer")), then
each Right (other than Rights owned by an
Acquiring Person or its affiliates) will entitle
the holder thereof to purchase, for the exercise
price, a number of shares of the Company's Common
Stock having a then current market value of twice
the exercise price.
Flip-Over: If, after the Shares Acquisition Date (defined
below), (a) the Company merges into another
entity, (b) an acquiring entity merges into the
Company or (c) the Company sells more than 50% of
the Company's assets or earning power, then each
Right (other than Rights owned by an Acquiring
Person or its affiliates) will entitle the holder
thereof to purchase, for the exercise price, a
number of shares of Common Stock of the person
engaging in the transaction having a then current
market value of twice the exercise price (unless
the transaction satisfies certain conditions and
is consummated with a person who acquired shares
pursuant to a Permitted Offer, in which case the
Rights will expire).
Exchange Provision: At any time after an event triggering the flip-in
or flip-over rights and prior to the acquisition
by the Acquiring Person of 50% or more of the
outstanding Common Stock, the Board of Directors
of the Company may exchange the Rights (other than
Rights owned by the Acquiring Person or its
affiliates), in whole or in part, at an exchange
ratio of one Common Share per Right (subject to
adjustment).
Redemption of Rights will be redeemable at the Company's option
the Rights: for $0.01 per Right at any time on or prior to the
tenth day (or such later date as may be determined
by a majority of the Continuing Directors) after
public announcement that a person has acquired
beneficial ownership of 15% or more of the
Company's Common Stock (the "Shares Acquisition
Date").
Expiration of The Rights expire on the earliest of (a) _____
the Rights: ____, 2007, (b) exchange or redemption of the
Right as described above, or (c) consummation
of a merger or consolidation or sale of assets
resulting in expiration of the Rights as described
above.
<PAGE>
Amendment of Terms of The terms of the Rights and the Rights Agreement
Rights: may be amended in any respect without the consent
of the Rightsholders on or prior to the
Distribution Date; thereafter, the terms of the
Rights and the Rights Agreement may be amended
without the consent of the Rights holders in order
to cure any ambiguities or to make changes which
do not adversely affect the interests of Rights
holders (other than the Acquiring Person).
Voting Rights: Rights will not have any voting rights.
Anti-Dilution Provisions: Rights will have the benefit of certain customary
anti-dilution provisions.
Taxes: The Rights distribution should not be taxable for
federal income tax purposes. However, following
an event which renders the Rights exercisable or
upon redemption of the Rights, stockholders may
recognize taxable income.
The foregoing is a summary of certain principal terms of the Stockholder Rights
Plan only and is qualified in its entirety by reference to the detailed terms of
the Rights Agreement, dated as of __________, 1997, between the Company and the
Rights Agent.
<PAGE>
EXHIBIT 10.3
Draft 10/9/97
FRIENDLY ICE CREAM CORPORATION
1997 STOCK OPTION PLAN
<PAGE>
TABLE OF CONTENTS
SECTION 1.................................................................... 1
GENERAL.................................................................. 1
1.1. Purpose.......................................................... 1
1.2. Participation.................................................... 1
SECTION 2.................................................................... 2
OPTIONS.................................................................. 2
2.1. Definition....................................................... 2
2.2. Eligibility...................................................... 2
2.3. Price............................................................ 2
2.4. Exercise......................................................... 3
2.5. Post-Exercise Limitations........................................ 3
2.6. Expiration Date.................................................. 3
2.7. Reload Provision................................................. 4
SECTION 3.................................................................... 5
STOCK APPRECIATION RIGHTS................................................ 5
3.1. Definition....................................................... 5
3.2. Eligibility...................................................... 5
3.3. Exercise......................................................... 5
3.4. Settlement of Award.............................................. 6
3.5. Post-Exercise Limitations........................................ 6
3.6. Expiration Date.................................................. 6
SECTION 4.................................................................... 7
OPERATION OF THE PLAN.................................................... 7
4.1. Effective Date................................................... 7
4.2. Shares Subject to Plan........................................... 7
4.3. Individual Limits on Awards...................................... 7
4.4. Adjustments to Shares............................................ 8
4.5. Limit on Distribution............................................ 8
4.6. Withholding...................................................... 8
4.7. Transferability.................................................. 9
4.8. Notices.......................................................... 9
4.9. Form and Time of Elections....................................... 9
4.10. Agreement With Company........................................... 9
4.11. Limitation of Implied Rights..................................... 9
4.12. Evidence.........................................................10
4.13. Action by Company or Related Company.............................10
4.14. Gender and Number................................................10
SECTION 5....................................................................10
ADMINISTRATION...........................................................10
SECTION 6....................................................................12
CHANGE IN CONTROL........................................................12
<PAGE>
SECTION 7....................................................................13
AMENDMENT AND TERMINATION................................................13
<PAGE>
FRIENDLY ICE CREAM CORPORATION
1997 STOCK OPTION PLAN
SECTION 1
GENERAL
1.1. Purpose. The Friendly Ice Cream Corporation 1997 Stock Option Plan
(the "Plan") has been established by Friendly Ice Cream Corporation (the
"Company") to:
(a) attract and retain employees and other persons providing services to
the Company and the Related Companies (as defined below);
(b) motivate Participants, by means of appropriate incentives, to achieve
long-range goals;
(c) provide incentive compensation opportunities that are competitive with
those of other major corporations; and
(d) further identify Participants' interests with those of the Company's
other stockholders through compensation that is based on the Company's
common stock;
and thereby promote the long-term financial interest of the Company and the
Related Companies, including the growth in value of the Company's equity and
enhancement of long-term stockholder return. The term "Related Company" means
any company during any period in which it is a "subsidiary corporation" (as that
term is defined in section 424(f) of the Internal Revenue Code of 1986, as
amended (the "Code")) with respect to the Company.
1.2. Participation. Subject to the terms and conditions of the Plan, the
Board (as described in Section 5)shall determine and designate, from time to
time, from among the Eligible Individuals, those persons who will be granted one
or more awards under Sections 2 or 3 of the Plan (an "Award"), and thereby
become "Participants" in the Plan. For purposes of the Plan, the term "Eligible
Individual" shall mean any employee of the Company or a Related Company who is
classified as salary grade 107 or 108, and any other person providing material
services to the Company or a Related Company that is designated by the Board as
eligible for participation in the Plan.
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SECTION 2
OPTIONS
2.1. Definitions. The grant of an "Option" under this Section 2 entitles
the Participant to purchase shares of common stock of the Company ("Stock") at a
price fixed at the time the Option is granted, subject to the terms of this
Section. Options granted under this Section may be either Incentive Stock
Options or Non-Qualified Stock Options, as determined in the discretion of the
Board. An "Incentive Stock Option" is an Option that is intended to satisfy the
requirements applicable to an "incentive stock option" described in section 422
of the Code. A "Non-Qualified Stock Option" is an Option that is not intended
to be an Incentive Stock Option.
2.2. Eligibility. The Board shall designate the Participants to whom
Options are to be granted under this Section and shall determine the number of
shares of Stock subject to each such Option. To the extent that the aggregate
fair market value of Stock with respect to which Incentive Stock Options are
exercisable for the first time by any individual during any calendar year (under
all plans of the Company and all Related Companies) exceeds $100,000, such
options shall be treated as Non-Qualified Stock Options, to the extent required
by section 422 of the Code.
2.3. Price. The determination and payment of the purchase price of a share
of Stock under each Option granted under this Section shall be subject to the
following:
(a) The purchase price shall be established by the Board at the time the
Option is granted; provided, however, that in no event shall such
price be less than the greater of (i) the Fair Market Value (defined
below) or (ii) the par value of a share of Stock on such date.
(b) Subject to the following provisions of this subsection, the full
purchase price of each share of Stock purchased upon the exercise of
any Option shall be paid at the time of such exercise and, as soon as
practicable thereafter, a certificate representing the shares so
purchased shall be delivered to the person entitled thereto.
(c) The purchase price shall be payable in cash or in shares of Stock
(valued at Fair Market Value as of the day of exercise) that have been
held by the Participant at least six months, or in any combination
thereof, as determined by the Board.
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(d) A Participant may elect to pay the purchase price upon the exercise of
an Option through a cashless exercise arrangement to the extent
provided by the Board.
(e) The "Fair Market Value" of a share of Stock of the Company as of any
date shall be the closing sales price per share of the Stock on the
New York Stock Exchange for that date as reported in the Wall Street
Journal on the next following business date, or, if there shall have
been no such sale so reported on that date, on the last preceding date
on which such a sale was so reported.
2.4. Exercise. Except as otherwise expressly provided in the Plan, an
Option granted under this Section shall be exercisable in accordance with the
following terms of this subsection:
(a) The terms and conditions relating to exercise of an Option shall be
established by the Board, and may include, without limitation,
conditions relating to completion of a specified period of service,
achievement of performance standards prior to exercise of the Option
or achievement of Stock ownership objectives by the Participant. The
Board, in its sole discretion, may accelerate the vesting of any
Option under circumstances designated by it at the time the Option is
granted or thereafter.
(b) No Option may be exercised by a Participant after the Expiration Date
(as defined in subsection 2.6) applicable to that Option.
(c) The exercise of an Option will result in the surrender of the
corresponding rights under a tandem Stock Appreciation Right (as
described in Section 3), if any.
2.5. Post-Exercise Limitations. The Board, in its discretion, may impose
such restrictions on shares of Stock acquired pursuant to the exercise of an
Option (including stock acquired pursuant to the exercise of a tandem Stock
Appreciation Right) as it determines to be desirable, including, without
limitation, restrictions relating to disposition of the shares and forfeiture
restrictions based on service, performance, Stock ownership by the Participant
and such other factors as the Board determines to be appropriate.
2.6. Expiration Date. Unless determined otherwise by the Board at the time
an Option is granted, the "Expiration Date" with respect to an Option means the
earliest to occur of:
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(a) the ten-year anniversary of the date on which the Option is granted;
(b) if the Participant's Date of Termination occurs by reason of death or
Disability, the one-year anniversary of such Date of Termination;
(c) if the Participant's Date of Termination occurs by reason of
Retirement, the three-year anniversary of such Date of Termination; or
(d) if the Participant's Date of Termination occurs for reasons other than
Retirement, death or Disability, the three-month anniversary of such
Date of Termination, or such earlier date as may be established by the
Board.
For purposes of the Plan, a Participant's "Date of Termination" shall be the
date on which he both ceases to be an employee of the Company and the Related
Companies and ceases to perform material services (including, but not limited
to, consulting services or service as a member of the Board) for the Company and
the Related Companies, regardless of the reason for the cessation; provided that
a "Date of Termination" shall not be considered to have occurred during the
period in which the reason for the cessation of services is a leave of absence
approved by the Company or the Related Company which was the recipient of the
Participant's services. Except as otherwise provided by the Board, a Participant
shall be considered to have a "Disability" during the period in which he is
unable, by reason of a medically determinable physical or mental impairment, to
engage in any substantial gainful activity, which condition, in the opinion of a
physician selected by the Board, is expected to have a duration of not less than
180 days. "Retirement" of a Participant shall mean the occurrence of a
Participant's Date of Termination after providing at least five years of service
to the Company or the Related Companies and attaining age 65.
2.7. Reload Provision. In the event the Participant exercises an Option
and pays all or a portion of the purchase price in Stock in the manner permitted
by subsection 2.3, or satisfies withholding obligations in Stock if permitted
under subsection 4.6, such Participant (either pursuant to the terms of the
Option Award, or pursuant to the exercise of Board discretion at the time the
Option is exercised) may be issued a new Option to purchase additional shares of
Stock equal to the number of shares of Stock surrendered to the Company in such
payment. Such new Option shall have an exercise price equal to the Fair Market
Value per share on the date such new Option is granted, shall first be
exercisable six months from the date of grant of the new Option and shall have
an Expiration Date on the same date as the
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<PAGE>
Expiration Date of the original Option so exercised by payment of the
purchase price or withholding in shares of Stock.
SECTION 3
STOCK APPRECIATION RIGHTS
3.1. Definition. Subject to the terms of this Section, a "Stock
Appreciation Right" granted under the Plan entitles the Participant to receive,
in cash or Stock (as determined in accordance with subsection 3.4), value equal
to all or a portion of the excess of: (a) the Fair Market Value of a specified
number of shares of Stock at the time of exercise over (b) a specified price
designated at the time the Stock Appreciation Right is granted which price shall
not be less than the Fair Market Value of a share of Stock on such date or, if
granted in tandem with an Option, the exercise price with respect to shares
under the tandem Option.
3.2. Eligibility. Subject to the provisions of the Plan, the Board shall
designate the Participants to whom Stock Appreciation Rights are to be granted
under the Plan, shall determine the exercise price or a method by which the
price shall be established with respect to each such Stock Appreciation Right
and shall determine the number of shares of Stock on which each Stock
Appreciation Right is based. A Stock Appreciation Right may be granted in
connection with all or any portion of a previously or contemporaneously-granted
Option or not in connection with an Option. If a Stock Appreciation Right is
granted in connection with an Option then, in the discretion of the Board, the
Stock Appreciation Right may, but need not, be granted in tandem with the
Option.
3.3. Exercise. The exercise of Stock Appreciation Rights shall be subject
to the following:
(a) If a Stock Appreciation Right is not in tandem with an Option, then
the Stock Appreciation Right shall be exercisable in accordance with
the terms established by the Board in connection with such rights; and
may include, without limitation, conditions relating to completion of
a specified period of service, achievement of performance standards
prior to exercise of the Stock Appreciation Rights or achievement of
objectives relating to Stock ownership by the Participant. The Board,
in its sole discretion, may accelerate the vesting of any Stock
Appreciation Right under circumstances designated by it at the time
the Stock Appreciation Right is granted or thereafter. No Stock
Appreciation Right subject to this paragraph may
5
<PAGE>
be exercised by a Participant after the Expiration Date (as defined
in subsection 3.6) applicable to that Stock Appreciation Right.
(b) If a Stock Appreciation Right is in tandem with an Option, then the
Stock Appreciation Right shall be exercisable at the time the tandem
Option is exercisable. The exercise of a Stock Appreciation Right
will result in the surrender of the corresponding rights under the
tandem Option.
3.4. Settlement of Award. Upon the exercise of a Stock Appreciation Right,
the value to be distributed to the Participant, in accordance with subsection
3.1, shall be distributed in shares of Stock (valued at their Fair Market Value
at the time of exercise), in cash or in a combination thereof, in the discretion
of the Board.
3.5. Post-Exercise Limitations. The Board, in its discretion, may impose
such restrictions on shares of Stock acquired pursuant to the exercise of a
Stock Appreciation Right as it determines to be desirable, including, without
limitation, restrictions relating to disposition of the shares and forfeiture
restrictions based on service, performance, ownership of Stock by the
Participant and such other factors as the Board determines to be appropriate.
3.6. Expiration Date. If a Stock Appreciation Right is in tandem with an
Option, then the "Expiration Date" for the Stock Appreciation Right shall be the
Expiration Date for the related Option. If a Stock Appreciation Right is not in
tandem with an Option, then unless determined otherwise by the Board, the
"Expiration Date" for the Stock Appreciation Right shall be the earliest to
occur of:
(a) the ten-year anniversary of the date on which the Stock Appreciation
Right is granted;
(b) if the Participant's Date of Termination occurs by reason of death or
Disability, the one-year anniversary of such Date of Termination; or
(c) if the Participant's Date of Termination occurs by reason of
Retirement, the three-year anniversary of such Date of Termination; or
(d) if the Participant's Date of Termination occurs by reason other than
Retirement, death or Disability, the three-month anniversary of such
Date of Termination.
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SECTION 4
OPERATION OF PLAN
4.1. Effective Date. The Plan shall be effective as of the date it is
adopted by the Board; provided, however, that Awards granted under the Plan
prior to its approval by stockholders will be contingent on approval of the Plan
by the Company's stockholders. The Plan shall be unlimited in duration and, in
the event of Plan termination, shall remain in effect as long as any shares of
Stock awarded under it are outstanding and not fully vested; provided, however,
that no new Awards shall be made under the Plan on or after the tenth
anniversary of the date on which the Plan is adopted by the Board.
4.2. Shares Subject to Plan. The shares of Stock with respect to which
Awards may be made under the Plan shall be shares currently authorized but
unissued or currently held or subsequently acquired by the Company as treasury
shares, including shares purchased in the open market or in private
transactions. Subject to the provisions of subsection 4.4, the number of shares
of Stock which may be issued with respect to Awards under the Plan shall not
exceed 400,000 shares in the aggregate. Except as otherwise provided herein,
any shares subject to an Award which for any reason expires or is terminated
without issuance of shares (whether or not cash or other consideration is paid
to a Participant in respect of such shares) shall again be available under the
Plan.
4.3. Individual Limits on Awards. Notwithstanding any other provision of
the Plan to the contrary, no Participant shall receive any Award of an Option or
Stock Appreciation Right under the Plan to the extent that the sum of:
(a) the number of shares of Stock subject to such Award;
(b) the number of shares of Stock subject to all other prior Awards of
Options and Stock Appreciation Rights under the Plan during the
one-year period ending on the date of the Award; and
(c) the number of shares of Stock subject to all other prior stock options
and stock appreciation rights granted to the Participant under other
plans or arrangements of the Company and Related Companies during the
one-year period ending on the date of the Award;
would exceed the Participant's Individual Limit under the Plan. The
determination made under the foregoing provisions of this subsection shall be
based on the shares subject to the awards at
7
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the time of grant, regardless of when the awards become exercisable. Subject
to the provisions of subsection 4.4, a Participant's "Individual Limit" shall
be 100,000 shares.
4.4. Adjustments to Shares. In the event of any merger, consolidation,
reorganization, recapitalization, spinoff, stock dividend, stock split, reverse
stock split, exchange or other distribution with respect to shares of Stock or
other change in the corporate structure or capitalization affecting the Stock,
the type and number of shares of stock which are or may be subject to awards
under the Plan and the terms of any outstanding awards (including the price at
which shares of stock may be issued pursuant to an outstanding award) shall be
equitably adjusted by the Board, in its sole discretion, to preserve the value
of benefits awarded or to be awarded to Participants under the Plan; provided,
however, in the event of a merger or sale of substantially all of the assets of
the Company, the Board, in its sole discretion, may substitute awards of equal
value for awards under the Plan or cancel outstanding awards, provided that the
Participant receives an amount that the Board believes is reasonable payment
therefor.
4.5. Limit on Distribution. Distribution of shares of Stock or other
amounts under the Plan shall be subject to the following:
(a) Notwithstanding any other provision of the Plan, the Company shall
have no liability to deliver any shares of Stock under the Plan or
make any other distribution of benefits under the Plan unless such
delivery or distribution would comply with all applicable laws and the
applicable requirements of any securities exchange or similar entity.
(b) In the case of a Participant who is subject to Section 16(a) and 16(b)
of the Securities Exchange Act of 1934, the Board may, at any time,
add such conditions and limitations to any Award to such Participant,
or any feature of any such Award, as the Board, in its sole
discretion, deems necessary or desirable to comply with Section 16(a)
or 16(b) and the rules and regulations thereunder or to obtain any
exemption therefrom.
(c) To the extent that the Plan provides for issuance of certificates to
reflect the transfer of shares of Stock, the transfer of such shares
may be effected on a non-certificated basis, to the extent not
prohibited by applicable law or the rules of any stock exchange.
4.6. Withholding. All Awards under the Plan are subject to withholding of
all applicable taxes, which withholding
8
<PAGE>
obligations may be satisfied, with the consent of the Board, through the
surrender of shares of Stock which the Participant already owns or to which a
Participant is otherwise entitled under the Plan.
4.7. Transferability. Awards under the Plan are not transferable except as
designated by the Participant by will or by the laws of descent and
distribution. To the extent that the Participant who receives an Award under
the Plan has the right to exercise such Award, the Award may be exercised during
the lifetime of the Participant only by the Participant. Notwithstanding the
foregoing provisions of this subsection, the Board may permit Awards under the
Plan to be transferred to or for the benefit of the Participant's family
(including, without limitation, to a trust for the benefit of a Participant's
family), subject to such limits as the Board may establish.
4.8. Notices. Any notice or document required to be filed with the Board
under the Plan will be properly filed if delivered or mailed by registered mail,
postage prepaid, to the Board, in care of the Company, at its principal
executive offices. The Board may, by advance written notice to affected
persons, revise such notice procedure from time to time. Any notice required
under the Plan (other than a notice of election) may be waived by the person
entitled to notice.
4.9. Form and Time of Elections. Unless otherwise specified herein, each
election required or permitted to be made by any Participant or other person
entitled to benefits under the Plan, and any permitted modification or
revocation thereof, shall be in writing filed with the Board at such times, in
such form, and subject to such restrictions and limitations, not inconsistent
with the terms of the Plan, as the Board shall require.
4.10. Agreement With Company. At the time of an Award to a Participant
under the Plan, the Board may require a Participant to enter into an agreement
with the Company (the "Agreement") in a form specified by the Board, agreeing to
the terms and conditions of the Plan and to such additional terms and
conditions, not inconsistent with the Plan, as the Board may, in its sole
discretion, prescribe.
4.11. Limitation of Implied Rights.
(a) Neither a Participant nor any other person shall, by reason of the
Plan, acquire any right in or title to any assets, funds or property
of the Company or any Related Company whatsoever, including, without
limitation, any specific funds, assets, or other property which the
Company or any Related Company, in
9
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its sole discretion, may set aside in anticipation of a liability
under the Plan. A Participant shall have only a contractual right
to the amounts, if any, payable under the Plan, unsecured by any
assets of the Company and any Related Company. Nothing contained
in the Plan shall constitute a guarantee by the Company or any
Related Company that the assets of such companies shall be
sufficient to pay any benefits to any person.
(b) The Plan does not constitute a contract of employment, and selection
as a Participant will not give any employee the right to be retained
in the employ of the Company or any Related Company, nor any right or
claim to any benefit under the Plan, unless such right or claim has
specifically accrued under the terms of the Plan. Except as otherwise
provided in the Plan, no Award under the Plan shall confer upon the
holder thereof any right as a stockholder of the Company prior to the
date on which he fulfills all service requirements and other
conditions for receipt of such rights and shares of Stock are
registered in his name.
4.12. Evidence. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person acting on
it considers pertinent and reliable, and signed, made or presented by the proper
party or parties.
4.13. Action by Company or Related Company. Any action required or
permitted to be taken by the Company or any Related Company shall be by
resolution of its board of directors, or by action of one or more members of the
board (including a committee of the board) who are duly authorized to act for
the board or (except to the extent prohibited by applicable law or the rules of
any stock exchange) by a duly authorized officer of the company.
4.14. Gender and Number. Where the context admits, words in any gender
shall include any other gender, words in the singular shall include the plural
and the plural shall include the singular.
SECTION 5
Administration
The authority to control and manage the operation and administration of the
Plan shall be vested in the Board of Directors of the Company (the "Board"),
subject to the following:
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(a) Subject to the provisions of the Plan, the Board will have the
authority and discretion to select employees to receive Awards, to
determine the time or times of receipt, to determine the types of
Awards and the number of shares covered by the Awards, to establish
the terms, conditions, performance criteria, restrictions, and other
provisions of such Awards, and to cancel or suspend Awards. In making
such Award determinations, the Board may take into account the nature
of services rendered by the respective employee, his present and
potential contribution to the Company's success and such other factors
as the Board deems relevant.
(b) The Board will have the authority and discretion to interpret the
Plan, to establish, amend and rescind any rules and regulations
relating to the Plan, to determine the terms and provisions of any
agreements made pursuant to the Plan and to make all other
determinations that may be necessary or advisable for the
administration of the Plan.
(c) Any interpretation of the Plan by the Board and any decision made by
it under the Plan is final and binding on all persons.
(d) Except as otherwise expressly provided in the Plan, where the Board is
authorized to make a determination with respect to any Award, such
determination shall be made at the time the Award is made, except that
the Board may reserve the authority to have such determination made by
the Board in the future (but only if such reservation is made at the
time the Award is granted and is expressly stated in the Agreement
reflecting the Award);
provided, however, the Board, in its sole discretion, may delegate any or all of
its authority under the Plan to a committee of the Board and, to the extent so
delegated, references to the Board hereunder shall be deemed to refer such
committee. Except to the extent prohibited by applicable law or the rules of any
stock exchange, the Board or, if applicable, the committee of the Board, may
allocate all or any portion of its responsibilities and powers to any one or
more of its members and may delegate all or any part of its responsibilities and
powers to any person or persons selected by it. Any such allocation or
delegation may be revoked by the Board or committee, if applicable, at any time.
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SECTION 6
CHANGE IN CONTROL
Except as otherwise provided in the agreement reflecting the applicable Award,
upon the occurence of a Change in Control all outstanding Options and Stock
Appreciation Rights shall become immediately exercisable. For purposes of the
Plan, a "Change in Control" shall be deemed to occur on the earliest of the
existence of one of the following events:
(a) (i) any "person" (as such term is used in Sections 13(d) or 14(d) of
the Exchange Act), other than one or more Permitted Holders (as
defined below), 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 (as
defined below) of the Company and (ii) 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 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;
(b) individuals who, as of the date hereof, constitute the Board (as of
the date hereof the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board, provided that any
individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's shareholders,
was approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office
is in connection with an actual or threatened "election contest"
relating to the election of the directors of the Company (as such term
is used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act); or
(c) approval by the Company's shareholders of a reorganization, merger or
consolidation of the Company, in each case, with respect to which all
or substantially all of the individuals and entities who were the
respective beneficial owners of the common stock and voting securities
of the Company immediately prior to such reorganization, merger or
consolidation
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do not, following such reorganization, merger or consolidation,
beneficially own, directly and indirectly, more than 70% of,
respectively, the then outstanding shares of common stock or
the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such reorganization, merger
or consolidation, or of a complete liquidation or dissolution of the
Company or of the sale or other disposition of all or substantially
all of the assets of the Company.
For purposes of this Section 6, the term "Permitted Holders" means Donald
N. Smith, The Equitable Life Assurance Society of the U.S., the Company's then
existing senior management and their respective affiliates. The term "Voting
Stock" of the Company means all classes of capital stock of the Company then
outstanding and normally entitled to vote in the election of directors.
SECTION 7
AMENDMENT AND TERMINATION
The Board may, at any time, amend or terminate the Plan, provided that,
subject to subsection 4.4 (relating to certain adjustments to shares), no
amendment or termination may materially adversely affect the rights of any
Participant or beneficiary under any Award made under the Plan prior to the date
such amendment is adopted by the Board.
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<PAGE>
EXHIBIT 10.4
Draft 10/9/97
FRIENDLY ICE CREAM CORPORATION
1997 RESTRICTED STOCK PLAN
<PAGE>
TABLE OF CONTENTS
SECTION 1.................................................................... 1
GENERAL.................................................................. 1
1.1. Purpose....................................................... 1
1.2. Participation................................................. 1
SECTION 2.................................................................... 2
RESTRICTED STOCK AWARDS.................................................. 2
2.1. Restricted Stock Awards....................................... 2
2.2. Terms and Conditions of Awards................................ 2
SECTION 3.................................................................... 3
OPERATION OF THE PLAN.................................................... 3
3.1. Effective Date................................................ 3
3.2. Shares Subject to Plan........................................ 3
3.3. Adjustments to Shares......................................... 3
3.4. Limit on Distribution......................................... 4
3.5. Withholding................................................... 4
3.6. Agreement with Company........................................ 4
3.7. Limitation of Implied Rights.................................. 5
3.8. Evidence...................................................... 5
3.9. Action by Company or Related Company.......................... 5
3.10. Gender and Number............................................. 5
SECTION 4.................................................................... 6
ADMINISTRATION........................................................... 6
SECTION 5.................................................................... 7
CHANGE IN CONTROL........................................................ 7
<PAGE>
FRIENDLY ICE CREAM CORPORATION
1997 RESTRICTED STOCK PLAN
SECTION 1
GENERAL
1.1. Purpose. The Friendly Ice Cream Corporation 1997 Restricted Stock
Plan (the "Plan") has been established by Friendly Ice Cream Corporation (the
"Company") to:
(a) attract and retain employees and other persons providing services to
the Company and the Related Companies (as defined below);
(b) motivate Participants, by means of appropriate incentives, to achieve
long-range goals;
(c) provide incentive compensation opportunities that are competitive with
those of other major corporations; and
(d) further identify Participants' interests with those of the Company's
other stockholders through compensation that is based on the Company's
common stock;
and thereby promote the long-term financial interest of the Company and the
Related Companies, including the growth in value of the Company's equity and
enhancement of long-term stockholder return. The term "Related Company" means
any company during any period in which it is a "subsidiary corporation" (as that
term is defined in Code section 424(f)) with respect to the Company.
1.2. Participation. Subject to the terms and conditions of the Plan, the
Board (as described in Section 4) shall determine and designate, from time to
time, from among the Eligible Individuals, those persons who will be granted one
or more Restricted Stock awards under Section 2 of the Plan, and thereby become
"Participants" in the Plan. For purposes of the Plan, the term "Eligible
Individual" shall mean any employee of the Company or a Related Company who is
classified as salary grade 109 or above, and any other person providing material
services to the Company or a Related Company that is designated by the Board as
eligible for participation in the Plan.
1
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SECTION 2
RESTRICTED STOCK AWARDS
2.1. Restricted Stock Awards. Subject to the following provisions of this
Section 2, awards of Restricted Stock under the Plan shall be made to persons
selected by the Board in accordance with subsection 1.2 and shall be subject to
the applicable provisions of subsection 2.2. For purposes of the Plan,
"Restricted Stock" awards under the Plan are grants of Stock to Participants the
vesting of which is subject to such conditions as may be established by the
Board, with some or all of those conditions relating to events (such as
performance, satisfaction of Company performance targets established by lenders
or continued employment) occurring after the date of grant. The period
beginning on the date of a grant of Restricted Stock and ending on the vesting
or forfeiture of such Restricted Stock is referred to as the "Restricted
Period". Subject to the limitations of the Plan and the award of Restricted
Stock, at the end of the Restricted Period, Stock will be delivered to the
Participant (or his or her legal representative, beneficiary or heir).
2.2 Terms and Conditions of Awards. In addition to any other terms and
conditions determined by the Board, all shares of Restricted Stock granted to
Participants under the Plan shall be subject to the following terms and
conditions, to the extent applicable:
(a) Except as otherwise provided, Restricted Stock granted to Participants
under the Plan may not be sold, assigned, transferred, pledged,
hypothecated or otherwise encumbered during the Restricted Period,
except as designated by the Participant by will or by the laws of
descent and distribution or pursuant to a qualified domestic relations
order as defined by the Internal Revenue Code, Title I of the Employee
Retirement Income Security Act or the rules thereunder. During the
Restricted Period, the Participant shall have all the rights of a
stockholder, including but not limited to the right to vote such
shares and, except as otherwise provided by the Board, the right to
receive all dividends paid on such shares.
(b) Except as otherwise determined by the Board, a Participant who ceases
to perform services for the Company and the Related Companies prior to
the end of the Restricted Period for any reason shall forfeit all
shares of Restricted Stock remaining subject to any outstanding
Restricted Stock award.
2
<PAGE>
(c) The Company may require a written statement that the Participant is
acquiring shares of Restricted Stock (or Stock at the end of the
Restricted Period) for investment and not for the purpose or with the
intention of distributing the shares, except for a sale to a purchaser
who makes the same representation in writing, and that the holder of
the shares of Restricted Stock or Stock will not dispose of them in
violation of the registration requirements of the Securities Act of
1933, any other applicable law.
SECTION 3
OPERATION OF PLAN
3.1. Effective Date. The Plan shall be effective as of the date it is
adopted by the Board, subject to the approval of the Company's stockholders.
The Plan shall be unlimited in duration and, in the event of Plan termination,
shall remain in effect as long as any shares of Restricted Stock awarded under
it are outstanding and not fully vested.
3.2. Shares Subject to Plan. The shares of Stock with respect to which
Awards may be made under the Plan shall be shares currently authorized but
unissued or currently held or subsequently acquired by the Company as treasury
shares, including shares purchased in the open market or in private
transactions. Subject to the provisions of subsection 4.4, the number of shares
of Stock which may be issued with respect to Awards under the Plan shall not
exceed 375,000 shares in the aggregate. Except as otherwise provided herein,
any shares subject to an Award which for any reason expires or is terminated
without issuance of shares (whether or not cash or other consideration is paid
to a Participant in respect of such shares) shall again be available under the
Plan. In the event that shares of Stock that are delivered under the Plan are
thereafter reacquired by the Company pursuant to rights reserved upon the award
thereof, such reacquired shares shall again be available for awards under the
Plan.
3.3. Adjustments to Shares In the event of any merger, consolidation,
reorganization, recapitalization, spinoff, stock dividend, stock split, reverse
stock split, exchange or other distribution with respect to shares of Stock or
other change in the corporate structure or capitalization affecting the Stock,
the type and number of shares of stock which are or may be subject to awards
under the Plan and the terms of any outstanding awards shall be equitably
adjusted by the Board, in its sole discretion, to preserve the value of benefits
awarded or to be
3
<PAGE>
awarded to Participants under the Plan; provided, however, in the event of a
merger or a sale of substantially all of the assets of the Company, the
Board, in its sole discretion, may substitute awards of equal value for
outstanding awards under the Plan or cancel outstanding awards, provided that
the Participant receives an amount that the Board believes is reasonable
payment therefor.
3.4. Limit on Distribution. Distribution of shares of Stock or other
amounts under the Plan shall be subject to the following:
(a) Notwithstanding any other provision of the Plan, the Company shall
have no liability to deliver any shares of Stock under the Plan or
make any other distribution of benefits under the Plan unless such
delivery or distribution would comply with all applicable laws and the
applicable requirements of any securities exchange or similar entity.
(b) In the case of a Participant who is subject to Section 16(a) and 16(b)
of the Securities Exchange Act of 1934, the Board may, at any time,
add such conditions and limitations to any Award to such Participant,
or any feature of any such Award, as the Board, in its sole
discretion, deems necessary or desirable to comply with Section 16(a)
or 16(b) and the rules and regulations thereunder or to obtain any
exemption therefrom.
(c) To the extent that the Plan provides for issuance of certificates to
reflect the transfer of shares of Stock, the transfer of such shares
may be effected on a non-certificated basis, to the extent not
prohibited by applicable law or the rules of any stock exchange.
3.5. Withholding. All awards under the Plan are subject to withholding of
all applicable taxes, which withholding obligations may be satisfied, with the
consent of the Board, through the surrender of shares of Stock which the
Participant already owns or to which a Participant is otherwise entitled under
the Plan.
3.6. Agreement With Company. At the time of an award to a Participant
under the Plan, the Board may require a Participant to enter into an agreement
with the Company (the "Agreement") in a form specified by the Board, agreeing to
the terms and conditions of the Plan and to such additional terms and
conditions, not inconsistent with the Plan, as the Board may, in its sole
discretion, prescribe.
4
<PAGE>
3.7. Limitation of Implied Rights.
(a) Neither a Participant nor any other person shall, by reason of the
Plan, acquire any right in or title to any assets, funds or property
of the Company or any Related Company whatsoever, including, without
limitation, any specific funds, assets, or other property which the
Company or any Related Company, in its sole discretion, may set aside
in anticipation of a liability under the Plan. A Participant shall
have only a contractual right to the amounts, if any, payable under
the Plan, unsecured by any assets of the Company and any Related
Company. Nothing contained in the Plan shall constitute a guarantee
by the Company or any Related Company that the assets of such
companies shall be sufficient to pay any benefits to any person.
(b) The Plan does not constitute a contract of employment, and selection
as a Participant will not give any employee the right to be retained
in the employ of the Company or any Related Company, nor any right or
claim to any benefit under the Plan, unless such right or claim has
specifically accrued under the terms of the Plan. Except as otherwise
provided in the Plan, no Award under the Plan shall confer upon the
holder thereof any right as a stockholder of the Company prior to the
date on which he fulfills all service requirements and other
conditions for receipt of such rights and shares of Stock are
registered in his name.
3.8. Evidence. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person acting on
it considers pertinent and reliable, and signed, made or presented by the proper
party or parties.
3.9. Action by Company or Related Company. Any action required or
permitted to be taken by the Company or any Related Company shall be by
resolution of its board of directors, or by action of one or more members of the
board (including a committee of the board) who are duly authorized to act for
the board or (except to the extent prohibited by applicable law or the rules of
any stock exchange) by a duly authorized officer of the company.
3.10. Gender and Number. Where the context admits, words in any gender
shall include any other gender, words in the singular shall include the plural
and the plural shall include the singular.
5
<PAGE>
SECTION 4
Administration
The authority to control and manage the operation and administration of the
Plan shall be vested in the Board of Directors of the Company, subject to the
following:
(a) Subject to the provisions of the Plan, the Board will have the
authority and discretion to select employees to receive awards, to
determine the time or times of receipt, to determine the number of
shares covered by the awards, to establish the terms, conditions,
performance criteria, restrictions, and other provisions of such
awards, and to cancel or suspend awards. In making such award
determinations, the Board may take into account the nature of services
rendered by the respective employee, his present and potential
contribution to the Company's success and such other factors as the
Board deems relevant.
(b) The Board will have the authority and discretion to interpret the
Plan, to establish, amend and rescind any rules and regulations
relating to the Plan, to determine the terms and provisions of any
agreements made pursuant to the Plan and to make all other
determinations that may be necessary or advisable for the
administration of the Plan.
(c) Any interpretation of the Plan by the Board and any decision made by
it under the Plan is final and binding on all persons.
(d) Except as otherwise expressly provided in the Plan, where the Board is
authorized to make a determination with respect to any award, such
determination shall be made at the time the award is made, except that
the Board may reserve the authority to have such determination made by
the Board in the future (but only if such reservation is made at the
time the award is granted and is expressly stated in the Agreement
reflecting the award);
provided, however, the Board, in its sole discretion, may delegate any or all of
its authority under the Plan to a committee of the Board and, to the extent so
delegated, references to the Board hereunder shall be deemed to refer such
committee. Except to the extent prohibited by applicable law or the rules of any
stock exchange, the Board or, if applicable, the committee of the Board, may
allocate all or any portion of its responsibilities and powers to any one or
more of its members and
6
<PAGE>
may delegate all or any part of its responsibilities and powers to any person
or persons selected by it. Any such allocation or delegation may be revoked
by the Board or committee, if applicable, at any time.
SECTION 5
CHANGE IN CONTROL
Except as otherwise provided in the Agreement reflecting the applicable award,
upon the occurrence of a Change in Control all restrictions on outstanding
Restricted Stock awards shall lapse. For purposes of the Plan, a "Change in
Control" shall be deemed to occur on the earliest of the existence of one of the
following events:
(a) (i) any "person" (as such term is used in Sections 13(d) or 14(d) of
the Exchange Act), other than one or more Permitted Holders (as
defined below), 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 (as
defined below) of the Company and (ii) 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 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;
(b) individuals who, as of the date hereof, constitute the Board (as of
the date hereof the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board, provided that any
individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company' shareholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for
this purpose, any such individual whose initial assumption of office
is in connection with an actual or threatened "election contest"
relating to the election of the directors of the Company (as such term
is used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act); or
7
<PAGE>
(c) approval by the Company's shareholders of a reorganization, merger or
consolidation of the Company, in each case, with respect to which all
or substantially all of the individuals and entities who were the
respective beneficial owners of the common stock and voting securities
of the Company immediately prior to such reorganization, merger or
consolidation do not, following such reorganization, merger or
consolidation, beneficially own, directly and indirectly, more than
[70]% of, respectively, the then outstanding shares of common stock or
the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case
may be, of the corporation resulting from such reorganization, merger
or consolidation, or of a complete liquidation or dissolution of the
Company or of the sale or other disposition of all or substantially
all of the assets of the Company.
For purposes of this Section 5, the term "Permitted Holders" means Donald
N. Smith, The Equitable Life Assurance Society of the U.S., the Company's then
existing senior management and their respective affiliates. The term "Voting
Stock" of the Company means all classes of capital stock of the Company then
outstanding and normally entitled to vote in the election of directors.
SECTION 6
AMENDMENT AND TERMINATION
The Board may, at any time, amend or terminate the Plan, provided that,
subject to subsection 3.3 (relating to certain adjustments to shares), no
amendment or termination may materially adversely affect the rights of any
Participant or beneficiary under any award made under the Plan prior to the date
such amendment is adopted by the Board.
8
<PAGE>
Exhibit 10.6
DEVELOPMENT AGREEMENT
BETWEEN
FRIENDLY ICE CREAM CORPORATION
1855 Boston Road
Wilbraham, Massachusetts 01095
AND
FRIENDCO RESTAURANTS, INC.
1657 Crofton Boulevard
Crofton, Maryland 21114
DATED
July , 1997
<PAGE>
TABLE OF CONTENTS
Section Page
1. Schedule and Exclusivity ............ 2
2. Term.................................. 6
3. Fees.................................. 6
4. Application of Development Fee ....... 7
5. Application Procedures ............... 8
6. Restaurant Closing Procedure.......... 9
7. Assignment........................... 11
8. Non-Competition...................... 12
9. Default and Termination ............. 14
10. Agency and Indemnity................. 17
11. Notices.............................. 19
12. Miscellaneous ....................... 20
13. Acknowledgement of Risk.............. 21
EXHIBITS:
Exhibit A: Territory and Time Schedule.. A-1
Exhibit B: Omitted
Exhibit C: Franchise Agreement ......... C-1
Exhibit D: Commitment Agreement......... D-1
<PAGE>
DEVELOPMENT AGREEMENT
THIS AGREEMENT dated --------------, 19------, between FRIENDLY'S
RESTAURANTS FRANCHISE, INC., a Delaware corporation ("Friendly's"), and
FRIENDCO RESTAURANTS, INC., a Maryland corporation ("Developer").
WHEREAS, Friendly's owns, operates and licenses others to operate
distinctive high quality restaurants ("Friendly's Restaurants") serving the
public under the name Friendly's" (the "System"); and
WHEREAS, Friendly's desires to achieve market penetration in various
areas of the United States in order to more effectively expand, advertise
and market the System, and
WHEREAS, Friendly's has concluded that to further its goals, it desires
to grant to experienced and financially qualified persons or organizations
the opportunity for exclusive development of Friendly's Restaurants using
the System within limited territories for specified periods of time; and
WHEREAS, Developer desires to obtain the right to acquire sites within a
specific territory during a specified period of time on which to construct
Friendly's Restaurants using the System, to submit to Friendly's
applications for franchise agreements to operate Friendly's Restaurants on
such sites, and upon the approval of each such application, to
<PAGE>
enter into a franchise agreement with Friendly's to operate a Friendly's
Restaurant using the System upon such sites; and
WHEREAS, Developer represents that it has the organizational, operational
and financial strength, experience and resources necessary to carry out the
multiple development of Friendly's Restaurants within the Territory, as
defined below, in the specified time set forth below.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and pursuant to the terms and conditions of this Agreement, the parties
hereby agree as follows:
1. SCHEDULE AND EXCLUSIVITY.
A. Developer agrees to construct, equip and open seventy-four (74)
Friendly's Restaurants using the System within the time schedule and
territory (the "Territory") set forth on Exhibit A attached hereto and made a
part hereof, and to maintain the operation of an additional thirty-four (34)
Friendly's Restaurants pursuant to a franchise agreement, subject to
Paragraph 1.G., infra.
B. Developer agrees that time is of the essence under this Agreement,
and agrees to comply strictly with each and every element of the time
schedule set forth on Exhibit A. Developer further agrees that Exhibit A
sets forth the minimum number of Friendly's Restaurants to be constructed,
that Developer will be required to have
<PAGE>
the minimum number under contract and to demonstrate the number under
contract in order to qualify for any cure period for any default, and that
it is the mutual goal of Friendly's and Developer that Developer construct,
equip and open a greater number in an extended time period (the "Target
Number") of Friendly's Restaurants as described on Exhibit A, but the
failure to open the Target Number shall not be a default hereunder.
C. For the purposes of this Agreement, a restaurant will be considered
open or under construction in such calendar year as the construction permit
is obtained and the building footings are poured. The Developer will have
six (6) months for the date construction commences to have the restaurant
open for business in order for the restaurant to be included in the minimum
number required to be open or under construction in any given year.
D. During the term of this Agreement, Friendly's shall not operate, or
license or franchise others to operate restaurants using the System within
the Territory except as provided in this Agreement; provided however, that
if the Target Number has not been achieved, Friendly's may operate, or
license others to operate Friendly's Restaurants within the Territory and,
provided further, that during the term of this Agreement only, Friendly's
shall not own, license or franchise any Friendly's Restaurant within the
Trade Area (as defined in Paragraph 8) of any Friendly's Restaurant operated
by Developer.
<PAGE>
E. Developer agrees that this Agreement does not grant it the right to
use the System at any location, nor does it grant Developer any rights with
respect to the System or to use any of the trademarks or trade secrets of
Friendly's, such rights being exclusively governed by a Franchise Agreement
for each Friendly's Restaurant opened hereunder.
F. Each Friendly's Restaurant as and when constructed, equipped and
opened, and the relationship of Developer and Friendly's with respect to
each such restaurant, shall be governed by the terms of an individual
Franchise Agreement on the form of such agreement attached hereto as Exhibit
C which will be granted to Developer by Friendly's in the good faith
exercise of its sole discretion; provided, however, that upon the earlier of
the expiration of this Agreement, the completion the Target number or the
elapse of ten (10) years from December 31, 1997, Developer shall thereafter
use the then current form of Franchise Agreement.
G. Developer agrees that all Friendly's Restaurants set forth on
Exhibit A must be open and operating during established business hours at
all times (excepting casualty or condemnation or act of God) on and after
their scheduled opening date and in the event any such restaurant(s) is not
at all times open and operating during established business hours, it will
constitute a default hereunder, except for such restaurant closings as are
permitted in accordance with Paragraph 6 hereof.
<PAGE>
H. Upon final expiration or termination of this Agreement for any
reason, Developer's territorial rights and rights to construct, equip, open
and operate Friendly's Restaurants shall terminate and expire and Developer's
rights to use the System shall be limited to those Friendly's Restaurants
operating pursuant to effective Franchise Agreements which Friendly's and
Developer may have entered into prior to the final expiration or termination
of this Agreement.
I. Developer shall have a right of first refusal on the operation of
any Friendly's Restaurant located in the Territory in an Institutional Site
(such as a government office, theme park, hospital, airport, university or
college, military base or similar setting serving essentially a captive
audience or customer base). The sole exceptions to the exclusivity of
territory granted hereunder shall be the fourteen (14) managed Restaurants,
the two (2) restaurants operated by F.I.C.C. (which shall be closed and
de-identified no later than four (4) months after the Effective Date and the
Maryland Science Center restaurant. Any Friendly's Restaurant in the
Territory which is not managed or operated by Developer may only be managed
and operated by employees of Friendly Ice Cream Corporation during the term
of this Agreement. Such exclusivity shall not limit the rights reserved by
Friendly's or F.I.C.C. under Paragraph 1.C. of the Franchise Agreement.
<PAGE>
2. TERM.
This Agreement shall commence upon the date first written above and shall
terminate upon the earlier of December 31, 2007, or the date of Developer's
execution of a Termination Agreement following the opening of the
seventy-fourth (74th) Friendly's Restaurant required to be constructed,
equipped, opened and operating pursuant to this Agreement, unless terminated
earlier as provided for herein. The feasibility of further development in
the Territory shall be assessed by Friendly's and Developer after the
completion of the 74th restaurant and again after the completion of the
100th restaurant, and thereafter every five (5) years. An agreement to
continue the development of additional restaurants hereunder shall operate
to extend the Term of this Agreement. In no event shall the completion of
the 74th restaurant cause this Agreement to terminate prior to December 31,
2003.
3. FEES.
In consideration of the rights granted Developer, Developer shall pay to
Friendly's the sum of Nine Hundred Thirty Thousand and 00/100 Dollars
($930,000.00) (the "Development Fee") all of which is non-refundable except
as provided under Paragraph 9G and all or part of which has either heretofore
been paid or is tendered herewith.
<PAGE>
4. APPLICATION OF DEVELOPMENT FEE.
A. Developer agrees that Friendly's is not obligated in any event,
including the termination or expiration of this Agreement, to return to
Developer all or any part of the Development Fee, except as provided in
Paragraph 9G of this Agreement.
B. Developer has no rights in the Development Fee except as are
specifically set out in this Agreement.
C. Friendly's agrees that, at such time as Developer and Friendly's
execute a Commitment Agreement for the issuance of a Franchise Agreement
("Commitment Agreement") for any of the Friendly's Restaurants to be
constructed, equipped and opened hereunder, Friendly's shall apply the
Development Fee in an amount equal to one half ( ) of the initial franchise
fee required to be paid in connection with each such application and
subsequent grant of a Franchise Agreement. The Franchise Fee shall be Thirty
Thousand Dollars ($30,000.00) for the first two (2) restaurants constructed
hereunder and Twenty-Five Thousand Dollars ($25,000.00) for each additional
restaurant set forth in Exhibit A, and thereafter shall be an amount equal to
the then-current initial franchise fee.
D. In the event the Development Fee has been applied such that there
is a balance owed against any initial fee(s) which may become due, Developer
shall pay
<PAGE>
any balance of such initial fee due to Friendly's with Developer's
application for a Franchise Agreement.
5. APPLICATION PROCEDURES.
A. Developer acknowledges and agrees that franchise agreements are
granted by Friendly's only after submission and approval of a formal
application on Friendly's then-current application form supplying all
information requested thereon and paying all required fees. Developer
further understands that a Commitment Agreement is first executed and
delivered following approval of such application and that if the terms and
conditions of the Commitment Agreement are complied with, a Franchise
Agreement granting a franchise to operate a Friendly's Restaurant will be
executed and delivered. Developer acknowledges and agrees that the Commitment
Agreement and the Franchise Agreement will be the forms of such agreements
as are attached hereto as Exhibits C and D for the restaurants developed in
accordance with Exhibit A .
B. Developer shall comply in all respects with Friendly's franchise
application policies and procedures when Developer applies for a Franchise
Agreement in order to fulfill its obligations under this Agreement.
Developer understands that it should obtain a Commitment Agreement before
making any unconditional binding commitments to third parties, and
understands and agrees
<PAGE>
that any activities undertaken in reliance on this Agreement prior to such
time are at Developer's own risk and expense.
C. Developer acknowledges and agrees that Friendly's may choose to
grant or deny applications for franchise agreements; however, Friendly's
will exercise good faith in exercising its discretion.
D. Developer shall be solely responsible for locating appropriate sites
for the construction of Friendly's Restaurants as contemplated hereunder and
taking all other actions necessary to finance, build, and construct such
restaurants. Developer understands and agrees that all proposed sites are
subject to Friendly's prior approval, not to be unreasonably withheld.
6. RESTAURANT CLOSING PROCEDURE.
A. Developer may discontinue operations at any Friendly's Restaurant
opened or maintained pursuant to this Development Agreement (other than
through condemnation or casualty loss) only in accordance with the procedure
set forth in this Section 6. Developer shall notify Friendly's that the
restaurant to be discontinued does not produce a profit at a restaurant
operating level, and shall afford Friendly's not less than thirty (30) days
to audit the operations of such restaurant, should Friendly's choose to do
so. Evidence of a restaurant's failure to produce a profit shall be
established through six (6) quarters of consecutive losses totaling
Seventy-Five
<PAGE>
Thousand Dollars ($75,000.00) or if an aggregate loss of Seventy-Five
Thousand Dollars ($75,000.00) is achieved in such shorter period when
measured on the basis of restaurant operating income. Thereafter, Developer
may proceed to discontinue operations at the restaurant so long as
de-identification of the restaurant occurs within fifteen (15) days of the
cessation of restaurant operations.
B. Developer shall replace any closed restaurant with (and shall
transfer the Franchise Agreement for such closed restaurant) to a newly
constructed or remodeled restaurant within eighteen (18) months of the
cessation of restaurant operations, if the replacement restaurant does not
have a drive-thru window, or within twenty-four (24) months if the
replacement restaurant does have a drive-thru window (collectively, such
period shall be considered the "Replacement Period").
C. Developer shall be entitled to a moratorium on royalties and
marketing fees for the Replacement Period for a total of four (4) closed
restaurants; however, for each additional closed restaurant, Developer shall
continue to pay the average monthly royalty and marketing fee for such
restaurant as was paid during the last twelve (12) months of operation until
each such additional restaurant is replaced pursuant to the terms of this
Paragraph 6, and the Franchise Agreement for such closed restaurant is
transferred to the replacement restaurant.
<PAGE>
D. For each closed
Restaurant to be replaced, Developer shall pay a Site Replacement Fee to
Friendly's to cover Friendly's costs of reviewing and approving the
proposed replacement site, such Fee to be in the amount of the lesser of
Friendly's actual costs or Two Thousand Five Hundred Dollars ($2,500.00).
7. ASSIGNMENT.
A. Friendly's may assign all or any part of its rights or obligations
hereunder to any person or entity, provided, however, that such person or
entity has no right or authority, at the time of such assignment, to license
others to operate Friendly's Restaurants within the Territory, unless and
until this Agreement has expired or terminated.
B. The rights and obligations of Developer hereunder are not assignable
without the prior written consent of Friendly's which may be withheld in
Friendly's sole discretion. For the purposes of this clause, an assignment
includes an assignment, sale, or other transfer, directly or indirectly of
any interest in Developer, but shall not include a transfer by merger with
the corporate parent or other affiliate of Developer, provided that the net
worth of the affiliate successor entity is the same or greater than the net
worth of the Developer and its corporate parent as of the Effective Date.
<PAGE>
C. Developer shall not assign, sell or transfer any interest in
Developer during the term hereof without the prior written consent of
Friendly's, not to be unreasonably withheld.
D. Any purported assignment contrary to the foregoing provisions shall
be void and of no force and effect and shall constitute a default hereunder.
8. NON-COMPETITION.
Developer acknowledges and agrees that Friendly's has invested a
substantial amount of time and money in developing the System and the
confidential information associated therewith (the "Confidential
Information") and that Friendly's would be unable to protect its System, the
Confidential Information and trade secrets against unauthorized use or
disclosure and would be unable to encourage a free exchange of ideas and
information among Friendly's and its licensees if prospective licensees or
licensees were permitted to hold interests in or perform services for any
competing business and that the following restrictions are reasonably
required in order to protect Friendly's information, marketing strategies,
operating policies and other elements of the System from unauthorized
appropriation and to ensure that Developer is using its best efforts in
employing its financial and management resources effectively to meet and
exceed the minimum and target development schedule set forth in this
Agreement. Therefore, Developer agrees that, during the term of this
Agreement, neither Developer nor any of its corporate parent, subsidiaries
or their affiliates will have any direct or indirect legal or beneficial
interest or perform
<PAGE>
services in any business which owns, operates, licenses, franchises or
develops any restaurant concept which both (i) has sit down, table service,
and (ii) is a mid-scale priced, family style restaurant, coffee shop or ice
cream/frozen yogurt shoppe (as defined by CREST operators list as of June 1,
1997) including but not limited to Denny's Shoney's Big Boy, Country
Kitchen, Bob Evans, Cracker Barrel, IHOP, Village Inn, Waffle House, Dairy
Queen, Swensen's, Carvel, Baskin Robbins, TCBY or similar. Notwithstanding
the above, a restaurant concept which is a mid-scale priced family style
restaurant will be deemed competitive if frozen deserts comprise 5% or more
of the sales mix as measured on any six (6) month basis. Developer further
agrees that for a period of two (2) years after the termination or expiration
of this Agreement, Developer and all of such persons will be subject to the
same restriction on competing activities (i) within the Territory and (ii)
within the trade area (as reasonably determined by Friendly's) of any
Friendly's Restaurant currently operated by Friendly's or any licensee, but
in no event within a radius of three (3) miles from any such restaurant.
Developer further acknowledges that this paragraph confers no exclusivity on
Developer with respect to Developer's further operation of any Restaurant
within the Territory after the expiration or termination of this Agreement.
The restrictions of this section shall not be applicable to the
Friendly's Restaurants operated under franchise agreements between Developer
and Friendly's, to the ownership of shares of a class of securities listed on
a stock exchange or traded on the over-the-counter market that represent five
percent (5%) or less of the numbers of shares of that class of
<PAGE>
securities issued and outstanding, or to any restaurants franchised by
Wendy's International and operated by the corporate parent or any affiliate
of Developer.
9. DEFAULT AND TERMINATION.
A. This Agreement shall terminate without further notice at the time
and date set forth in Paragraph 2 hereof, unless extended or earlier
terminated as set forth hereinbelow.
B. This Agreement shall automatically terminate without notice in the
event Developer becomes insolvent or is unable to pay its debts as they may
mature or make an assignment for the benefit of creditors or an admission of
inability to pay obligations as they become due or file a voluntary petition
in bankruptcy or any pleading seeking any reorganization, liquidation,
dissolution or composition or other settlement with creditors under any law,
or admitting or failing to contest the material allegations of any such
pleading filed against Developer, or its adjudicated a bankrupt or insolvent
or a receiver or other custodian is appointed for a substantial part of
Developer's assets or the assets of any Friendly's Restaurant owned by
Developer or a final judgment remains unsatisfied or of record for ninety
(90) days or longer (unless supersedeas bond is filed), or if execution is
levied against any substantial part of Developer's assets is made, or suit to
foreclose any lien or mortgage against Developer or any Friendly's Restaurant
owned by Developer is instituted and is not dismissed within ninety (90)
days, or if a substantial part of Developer's real or
<PAGE>
personal property is sold after levy of judgment thereupon by any sheriff,
marshal or constable, or the claims of Developer's creditors are abated or
subject to a moratorium under any law;
C. In the event Developer materially fails to comply with any of the
terms and conditions of this Agreement (excepting only by reason of force
majeure, such as, but not limited to: civil strife or commotion, labor
strike, lockout or Acts of God) or the terms and conditions of any Commitment
Agreement, Franchise Agreement orother agreement between Friendly's and
Developer, it shall constitute a default of this Agreement, and if Developer
fails to cure such default(s) within one hundred eighty (180) days in the
first year of this Agreement, or sixty (60) days in the next four (4)
subsequent years, of Friendly's giving written notice of said default(s) to
Developer or the cure period provided in such other agreement, Friendly's, in
its sole and absolute discretion, and in addition to any other rights and
remedies it may have at law or in equity, may terminate this Agreement and
any Commitment Agreements in force at the time of the default without further
notice.
D. In the event of termination of this Agreement, Friendly's shall
retain all of the Development Fee, as a liquidated damage except as provided
for in Subparagraph G herein, and any unaccrued portion of the Development
Fee shall be retained by Friendly's without the necessity of notice thereof.
<PAGE>
E. A default under this Agreement shall not constitute a default under
any Franchise Agreement between Friendly's and Developer. However, the
failure of Developer to complete the minimum development required hereunder
shall grant to Friendly's the option to purchase the assets and rights
relating to the original thirty-four (34) restaurants sold to Developer by
Friendly Ice Cream Corporation at the same multiple of cash flow (i.e. 5.3
times EBITDA on a trailing twelve (12) month basis) as in the original
transaction by Friendly Ice Cream Corporation and Developer, pursuant to the
Purchase and Sale Agreement dated July 10, 1997.
Upon the exercise of the repurchase option, the leases and subleases
between Friendly Ice Cream Corporation and Developer, as well as any
guarantee of such leases or subleases by DavCo Restaurants, Inc. will
terminate, excepting only such leases or subleases which Developer shall have
assigned or sublet to a third party (the "Remaining Leases").
The assignment or sublease between Developer and any third party on the
Remaining Leases shall attorn to Friendly Ice Cream Corporation, and any
guarantee of the Remaining Leases by DavCo Restaurants, Inc. shall remain in
full force and effect throughout the remainder of the base term (and renewals
at the sole discretion of such third party) of such assignment or sublease.
<PAGE>
F. Upon final expiration or termination of this Agreement for any
reason, Developer's territorial rights and rights to construct, equip, open
and operate Friendly's Restaurants using the System shall automatically
terminate and expire and Developer's rights to use the System shall be
limited to those Friendly's Restaurants pursuant to effective Franchise
Agreements which Friendly's and Developer may have executed and delivered
prior to such expiration or termination.
G. Friendly's failure to comply with the terms and conditions of this
Agreement shall constitute a default hereunder. If Friendly's fails to cure
such default(s) within thirty (30) days of its receipt of written notice
thereof, this Agreementshall terminate and any portion of the Development
Fee not applied pursuant to Paragraph 4 hereunder shall be refunded to
Developer.
10. AGENCY AND INDEMNITY.
A. Developer and Friendly's agree that this Agreement does not create
any fiduciary relationship between them and nothing in this Agreement is
intended to make either party an agent, legal representative, joint venturer,
partner, employee or servant of the other for any purpose whatsoever. Each
party to this Agreement is an independent contractor and shall hold itself
out to the public as an independent contractor.
<PAGE>
B. Developer shall not make any contract, agreement, warranty or
representation in the name of Friendly's, and Friendly's assumes no
liability for, nor shall it be deemed liable by reason of, any action or
omission of Developer and its conduct of business pursuant to this Agreement
or any claim or action arising therefrom.
C. Developer shall indemnify and hold Friendly's harmless from and
promptly reimburse it for any and all claims, demands, taxes or penalties,
actions and payment of money (including, but not limited to, fines, damages
legal fees and expenses) by reason of any or all claims, demands, taxes, or
penalties arising directly or indirectly from, as a result of, or in
connection with Developer's actions oromissions hereunder or those of its
agents or employees, including those of its contractors and subcontractors.
At the election of Friendly's, Developer will also defend Friendly's against
same at Developer's expense. In any event, and regardless of Developer's
payment of legal fees, Friendly's will have the right, through counsel of its
choice, to control any claim, demand, action or matter to the extent it
could directly or indirectly affect Friendly's financially, and all such
expenses shall be subject to indemnity hereunder. Developer's obligations
under this paragraph shall survive the termination or expiration of this
Agreement.
<PAGE>
D. Except as provided above, Friendly's and Developer shall indemnify,
defend and hold each other harmless from claims, demands and causes of
action asserted against the indemnitee by any person for personal injury or
death or for loss of or damage to property and resulting from the
indemnitor's active or passive negligence or willful misconduct. Where such
injury, death, loss or damage is the result of joint active or passive
negligence or willful misconduct, the duty of indemnification shall be in
proportion to the allocable share of the joint active or passive negligence
or willful misconduct.
11. NOTICES.
All notices required under this Agreement shall be in writing and shall
be personally delivered, sent by facsimile or overnight courier or mailed by
United States Mail, Return Receipt Requested, to the respective parties at
the following addresses unless and until a different address has been
designated by written notice to the other party:
Friendly's: FRIENDLY'S RESTAURANTS FRANCHISE, INC.
1855 Boston Road
Wilbraham, Massachusetts 01095
Attention: General Counsel
Developer: FRIENDCO RESTAURANTS, INC.
1657 Crofton Boulevard
Crofton, Maryland 21114
Attention: President
<PAGE>
Notices sent (i) by personal delivery or facsimile shall be effective
when received; (ii) by mail on the third business day after mailing; and
(iii) by overnight courier on the second business day after delivery to the
courier.
12. MISCELLANEOUS.
A. No failure or delay of Friendly's or Developer to exercise any
rights reserved to it in this Agreement or to insist upon compliance by
either party of any obligation or condition in this Agreement, and no custom
or practice of the parties at variance with the terms hereof, shall
constitute a waiver of either party's right to demand strict compliance with
the terms of this Agreement. Waiver by either party of any particular
default will not affect or impair the rights of Friendly's or Developer with
respect to any subsequent default of the same or a different nature.
B. This Agreement is solely for the benefit of the parties hereto and
their permitted assignees and is not intended to and shall not be construed
to benefit any other person, firm or entity.
C. The title headings of the respective paragraphs of this Agreement
are for reference purposes only and shall not effect the meaning or
interpretation of this Agreement in any way.
<PAGE>
D. This Agreement and any rights or liabilities arising from or in
connection with this Agreement shall be governed by the laws of the State of
Delaware. Any action brought to enforce any provision of this Agreement
shall be brought and maintained only in a state or federal court of competent
jurisdiction in Wilmington, Delaware.
E. This is the entire agreement between the parties concerning the
development of Friendly's Restaurants within the Territory and any
modifications must be in writing and signed by both parties, or said
modifications will be void and of no force and effect.
F. If any term or provision of this Agreement or the application
thereof to any person or circumstances shall, to any extent, be invalid or
unenforceable, the remainder of this Agreement, or the application of such
term or provision to persons whose circumstances other than those as to
which it is held invalid or unenforceable, shall not be affected thereby.
13. ACKNOWLEDGEMENT OF RISK.
A. Developer acknowledges the success of the business ventures
contemplated by this Agreement involves substantial business risks and is
dependent upon the Developer's ability. Friendly's expressly disclaims the
making of, and Developer acknowledges that it has not received and is not
relying upon, any
<PAGE>
warranty or guarantee, express or implied, as to the potential volume,
profits, or success of the business venture contemplated by this Agreement.
B. Developer represents that it has independently investigated the
risks of the business venture contemplated by this Agreement and has read
the disclosure documents prepared by Friendly's in accordance with the state
and federal franchise laws and agrees that Friendly's has made no
representation that is not fully set forth therein or herein.
C. Developer acknowledges that it has not and agrees that it will not
rely upon any representations not contained herein or in the disclosure
documents prepared by Friendly's in accordance with state and federal
franchise laws.
<PAGE>
WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date and year first above written.
ATTEST: FRIENDLY'S RESTAURANTS
FRANCHISE, INC.
_____________________________ By: ____________________________
Print Name:
Its:
Date:
WITNESS: DEVELOPER
____________________________ By: ____________________________
Print Name:
Its:
Date:
<PAGE>
E X H I B I T A
to
DEVELOPMENT AGREEMENT
Dated: ---------------------- , 199
between
FRIENDLY'S RESTAURANTS FRANCHISE, INC.
and
TERRITORY:
States of Delaware, Maryland, the District of Columbia and following Virginia
counties: Alexandria, Arlington, Caroline, Clarke, Culpeper, Essex,
Fairfax, Fauquier, Frederick, King George, Lancaster, Loudoun, North
Umberland, Prince William, Rappahanock, Richmond, Shenandoah, Spotsylvania,
Stafford, Warren and Westmoreland.
The boundaries of the Territory defined above shall, throughout the term of
this Development Agreement, be those boundaries as they exist as of the date
hereof.
TIME SCHEDULE:
<TABLE>
<C> <S> <C>
No later than (Date) Minimum number of new Target number of Friendly's
Friendly's Restaurants to be Restaurants to be opened or
opened or under construction under construction
(permits obtained, footings
poured - six (6) months to to
complete construction)
</TABLE>
December 31, 1998 11
December 31, 1999 26
December 31, 2000 41
December 31, 2001 52
December 31, 2002 63
December 31, 2003 74
<PAGE>
December 31, 2004 81
December 31, 2005 88
December 31, 2006 94
December 31, 2007 100
<PAGE>
Exhibit 10.7
FRANCHISE AGREEMENT
BETWEEN
FRIENDLY'S RESTAURANTS FRANCHISE, INC.
1855 Boston Road
Wilbraham, MA 01095
AND
FRIENDCO RESTAURANTS, INC.
1657 Crofton Boulevard
Crofton, Maryland 21114
DATED
July _____ , 1997
FOR
[RESTAURANT STREET ADDRESS]
[STATE, CITY]
<PAGE>
TABLE OF CONTENTS
Section Page
- ------- ----
1. INTRODUCTION AND GRANT OF FRANCHISE 1
A. Introduction 1
B. Grant of Franchise 2
C. Rights Reserved by Company 4
2. TRAINING 5
3. GUIDANCE 6
A. Guidance and Assistance 6
B. Operations Manual 7
4. MARKS 8
A. Goodwill and Ownership of Marks 8
B. Limitations on Licensee's Use of Marks 9
C. Notification of Infringements and Claims 10
D. Discontinuance of Use of Marks 10
E. Indemnification of Franchisee 11
5. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION 11
A. Independent Contractors 11
B. No Liability for Acts of Other Party 12
C. Taxes 13
D. Indemnification 13
<PAGE>
6. CONFIDENTIAL INFORMATION 14
7. FEES 17
A. Initial Franchise Fee 17
B. Royalty Fee 18
C. Definition of Gross Sales 18
D. Interest on Late Payments 19
E. Application of Payments 19
8. RESTAURANT OPERATING STANDARDS 20
A. Condition, Appearance and Operation of the
Restaurant 20
B. Restaurant Menu 21
C. Approved Products, Distributors and Suppliers 22
D. Specifications, Standards and Procedures 25
E. Compliance with Laws and Good Business Practices 26
F. Management and Personnel of the Restaurant 27
G. Insurance 27
9. MARKETING 29
A. By Company 29
B. By Licensee 32
C. By Cooperative 33
10.REPORTS, FINANCIAL STATEMENTS AND FINANCIAL CONDITION 33
11. INSPECTIONS AND AUDITS 35
A. Company's Right to Inspect the Restaurant 35
B. Company's Right to Audit 36
<PAGE>
12. TRANSFER OF FRANCHISE 37
A. By Company 37
B. Franchisee May Not Transfer Without Approval of
Company 37
C. Right of First Refusal 38
D. Conditions for Approval of Transfer 40
E. Transfer to a Wholly-Owned Entity 41
F. Effect of Consent to Transfer 42
13. CONDEMNATION AND CASUALTY 42
14. TERMINATION OF THE FRANCHISE 43
15. DAMAGES 46
16. COVENANT NOT TO COMPETE; RIGHTS AND OBLIGATIONS OF
COMPANY AND FRANCHISEE UPON
TERMINATION OR EXPIRATION OF
THE FRANCHISE 48
A. Covenant Not to Compete 48
B. Payment of Amounts Owed to Company 50
C. Marks and System 50
D. Confidential Information 51
E. Continuing Obligations 52
17. RENEWAL OF FRANCHISE 52
18. ENFORCEMENT 53
A. Severability and Substitution of Valid PROVISIONS 53
B. Waiver of Obligations 55
<PAGE>
C. Force Majeure 56
D. Injunctive Relief 57
E. Rights of Parties Are Cumulative 57
F. Costs and Attorneys' Fees 57
G. Governing Law 58
H. Waiver of Punitive/Exemplary Damages;
Limitation of Actions 58
I. Venue and Jurisdiction 59
J. Waiver of Jury Trial 59
K. Binding Effect 59
L. Interpretation 60
M. Time 61
19. NOTICES AND PAYMENTS 61
20. ACKNOWLEDGEMENTS 62
EXHIBITS:
Exhibit A: Disclosure Acknowledgment Statement...... A-1
<PAGE>
FRANCHISE AGREEMENT
THIS FRANCHISE (the "Agreement") is made and entered into as of _____,
19___ (the "Agreement Date"), by and between FRIENDLY'S RESTAURANTS,
FRANCHISE, INC., a Delaware corporation, whose principal address is 1855
Boston Road, Wilbraham, MA 01095 and FRIENDCO RESTAURANTS, INC. whose
principal address is 1657 Crofton Boulevard, Crofton, Maryland 21114. For
purposes of simplicity, we will sometimes refer to Friendly's as "us", "we"
or the "Company," and we will sometimes refer to you as "you" or "Franchisee."
1. INTRODUCTION AND GRANT OF FRANCHISE
A. Introduction
Through expenditure of considerable time, skill, effort and money, we
have developed a system for establishing, operating and franchising
distinctive, high quality restaurants ("Friendly's Restaurants") serving the
public under the name "Friendly's." A Friendly's Restaurant consists of all
structures, facilities, appurtenances, grounds, landscaping, signs,
furniture, fixtures, equipment and entry, exit, parking and other areas
commonly associated with such a restaurant. The approved food, beverage and
other products served and sold by Friendly's Restaurants (the "Products") for
consumer consumption and not for resale are prepared in accordance with our
standards, specifications and secret recipes. Friendly's Restaurants are
established pursuant to our plans and specifications for construction,
conversion, remodeling, decorating, equipment and layout, and are operated in
accordance
<PAGE>
with our distinctive business formats, construction plans, inspection and
consultation programs, signs, equipment, layouts, methods, specifications,
standards, recipes (including ice cream and other frozen dessert and related
toppings recipes), confidential information, trade secrets, operating
procedures, training programs and materials, guidance, policy statements and
related materials, designs, advertising, publicity, and marketing programs
and other materials (which we may modify from time to time) (collectively,
the "System"). We own, use, promote and license certain trade names,
trademarks, service marks and other commercial symbols, and applications
related thereto, including but not limited to "Friendly's" and "Friendly's
Restaurants" (collectively, the "Marks"), and the confidential information,
copyrights, and business format and related property rights which comprise
the System. We may change, modify or improve the System from time to time to
enhance the operations of Friendly's Restaurants. All improvements and
additions you, we or anyone else makes to the System, whenever made or used
in connection with the system, will inure to us and become our sole property.
We grant, to qualified persons, franchises to own and operate Friendly's
Restaurants pursuant to the System selling the Products and services we
authorize and approve.
B. Grant of Franchise
(1) Grant. You have applied for a franchise to own and operate a
Friendly's Restaurant (the "Restaurant") at, and only at, the location known
as: (the "Premises") and we have approved your application in reliance upon
all of the
<PAGE>
representations and warranties you have made to us in connection with this
Agreement, including but not limited to the information contained in your
application for a franchise and, if the Restaurant is newly constructed and
equipped, the representations and warranties you made to us in the Commitment
Agreement between you and us dated ____________, 19 __ . Subject to the
provisions of the Agreement, and in reliance on such representations and
warranties, we hereby grant to you, effective upon the execution of this
Agreement, a franchise (the "Franchise") to operate a Friendly's Restaurant
at the Premises, and to use the System and the Marks in operating the
Restaurant, for a term of twenty (20) years, beginning on the date of
completion, expiration or termination of the Development Agreement between
you and us dated July 10, 1997, unless this Agreement is sooner terminated as
provided in Section 14 of this Agreement. Termination or expiration of this
Agreement will constitute a termination or expiration of the Franchise.
Except as otherwise provided in the Development Agreement, you may not
conduct your business pursuant to this Agreement from any location other than
the Premises except upon our approval of your application for change of
location, and the payment of the then current change of location fee.
(2) Best Efforts. You agree that you will at all times faithfully,
honestly and diligently perform your obligations under this Agreement and
that you will continuously exert, during the full term of this Agreement,
your best reasonable efforts
<PAGE>
to promote and enhance the business of the Restaurant and the goodwill of the
Marks and the System.
(3) Operation. You agree that you will continuously, from the date you
open the Restaurant for business to the public, operate, occupy and do
business in the Restaurant, 7 days a week, 365 days a year during the hours
of 6:00 a.m. to 11:00 p.m. weekdays, and to 12:00 midnight on weekends (it
being understood that the Restaurant may be closed for business while any
repairs or refurbishments are being undertaken and that different hours of
operation may be approved by the Vice President of Operations of the Company)
and to operate the Restaurant in a manner reasonably calculated to produce
the maximum volume of gross sales (as defined in Section 7C of this
Agreement) and to help establish and maintain a high reputation for the
Restaurant, unless the Restaurant is in the process of being replaced
pursuant to the provisions of any applicable Development Agreement.
C. Rights Reserved by Company
We retain the right, subject to the exercise of good faith, in our sole
and absolute discretion, to: (1) operate and grant to others the right to
operate, Friendly's Restaurants or other restaurants using the System or the
Marks at such locations which may include locations within the Trade Area (as
defined in Section 16A, unless an exclusive territory has been granted
pursuant to a Development Agreement, in which case the terms of the
<PAGE>
Development Agreement will apply) and on such terms and conditions as we deem
appropriate; (2) operate, and grant to others the right to operate
restaurants under other trade names, trademarks, service marks and commercial
symbols different from the Marks, notwithstanding the fact that such
restaurants may be the same as or similar to a Friendly's Restaurant; and (3)
sell the Products or other products identified by the Marks or by other
trademarks in any channel of distribution.
2. TRAINING
Prior to the execution of this Agreement, we have furnished you and your
Restaurant Managers (each as hereinafter defined) training in the operation
of a Friendly's Restaurant. We will require similar training for all
successors to such persons. No person shall be permitted to supervise the
Restaurant until the training has been completed. The training program will
include classroom instruction and field training and will be furnished at our
training facility and/or at a Friendly's Restaurant, and will last for such
duration as we determine to be necessary.
Your Restaurant Managers must complete the training program to our
reasonable satisfaction. If we, in our sole discretion, determine that any
of such persons are unable to complete the training program satisfactorily,
upon our request you agree to hire, as soon as practicable, a replacement who
must complete our training program to our reasonable satisfaction. We may
also offer such refresher or supplemental training programs to you and such
persons as we, from time to time, deem appropriate at such places as we
designate.
<PAGE>
By giving you prior written notice, we will have the right to require
attendance at any refresher or supplemental training program by you or any of
such persons.
No tuition charge will be made for required initial training programs.
You will be responsible for the travel, local transportation, lodging and
meal expenses, and compensation of yourself and your Restaurant Managers
incurred while attending the training program and any refresher or
supplemental training programs we offer to you or require you or such persons
to attend. Reasonable charges may be made by us for training materials and
we may require you to purchase certain equipment to be used in such training.
3. GUIDANCE
A. Guidance and Assistance
We will furnish guidance to you with respect to:
(1)preparation, packaging, sale and delivery of Products authorized for
sale at Friendly's Restaurants;
(2)development, preparation and packaging of new Products we develop for
sale at Friendly's Restaurants;
(3)specifications, standards and operating procedures utilized by
Friendly's Restaurants, and any modification thereof;
(4)approved equipment, furniture, furnishings, signs, food products,
operating materials and supplies;
(5)development and implementation of local advertising and promotional
programs; and
<PAGE>
(6)general operating and management procedures of Friendly's Restaurants.
In our discretion, we will furnish this guidance and assistance to you in the
form of our confidential operations manual, bulletins, written reports and
recommendations, electronic mail or other written or electronic materials
(all of which are hereinafter referred to as the "Operations Manual"),
inspection reports for the Restaurant, refresher training programs and/or
telephonic consultations at our offices or at the Restaurant. If you
request, we will furnish additional guidance and assistance relative to the
operation of the Restaurant at per diem fees and charges we establish from
time to time. If special training of Restaurant personnel or other
assistance in operating the Restaurant is requested by you, and must take
place at the Restaurant, all our expenses for such training, including a per
diem charge and travel, local transportation, lodging and meal expenses for
our personnel, must be paid by you.
B. Operations Manual
We will loan to you during the term of the Franchise one (1) copy of the
Operations Manual which may consist of multiple parts and/or volumes. The
Operations Manual will contain mandatory and suggested specifications,
standards and operating procedures that we prescribe from time to time for
Friendly's Restaurants and information relative to your obligations under
this Agreement and in the operation of a Friendly's Restaurant. We may
modify the Operations Manual from time to time to reflect changes in the
specifications, standards and operating procedures of Friendly's Restaurants,
to disclose information
<PAGE>
concerning new Products and services which we may develop for sale at
Friendly's Restaurants, to specify types, brands and models of equipment
which you must utilize to produce and sell such new Products and services,
and to specify changes in the decor, format, image, Products, services and
operation of a Friendly's Restaurant. You must keep your copy of the
Operations Manual current by immediately inserting all modified pages we
furnish to you and destroying the then obsolete pages. In the event of a
dispute relative to the contents of the Operations Manual, the master copies
we maintain at our principal office will be controlling. You may not at any
time copy any part of the Operations Manual, disclose any part of it to
employees or others not having a need to know its contents for purposes of
operating the Restaurant, or permit its removal from the Restaurant without
our prior approval. In the event a new version of the Operations Manual is
provided to you, you must immediately return the then obsolete version to us.
To the extent the Operations Manual contains any specification, standard or
operating procedure concerning the operation of the Restaurant, such
provision shall be deemed to be incorporated into this Agreement, unless such
provision conflicts with applicable laws or ordinances.
4. MARKS
A. Goodwill and Ownership of Marks
You acknowledge that we have the right to license the Marks, that the
Marks are represented to be valid, and that your right to use the Marks is
derived solely from this Agreement (and the Trademark License Agreement if
applicable) and is limited to your operation of the Restaurant pursuant to
and in compliance with this Agreement and all
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applicable standards, specifications and operating procedures we prescribe
from time to time during the term of the Franchise. Any unauthorized use of
the Marks by you will constitute a breach of this Agreement and may
constitute an infringement of our rights in and to the Marks. You
acknowledge and agree that all of your usage of the Marks and any goodwill
established by your use of the Marks will inure to our exclusive benefit, and
that this Agreement does not confer any goodwill or other interests in the
Marks upon you (other than the right to operate a Friendly's Restaurant in
compliance with this Agreement). All provisions of this Agreement applicable
to the Marks will apply to any other trademarks, service marks and commercial
symbols we later develop, authorize and license you to use.
B. Limitations on Franchisee's Use of Marks
You agree to use the Marks as the sole trade identification of the
Restaurant. You must also identify yourself as the independent owner of the
Restaurant in the manner we reasonably prescribe. You must not use any Mark
as part of any corporate or trade name or with any prefix, suffix or other
modifying words, terms, designs or symbols (other than logos and additional
trade and service marks we license to you under this Agreement), or in any
modified form, nor may you use any Mark in connection with the performance or
sale of any unauthorized services or products or in any other manner we have
not expressly authorized in writing. You must prominently display the Marks
in the manner we reasonably prescribe at the Restaurant, on menus and in
connection with advertising and marketing materials. You must not employ any
of the Marks in signing contracts, applications for licenses or permits, or
in any manner that may imply our responsibility for,
<PAGE>
or result in our liability for, any of your indebtedness or obligations, nor
may you use the Marks in any way not authorized herein. You further agree to
give such notices of trade and service mark registrations as we specify, and
you must obtain such fictitious or assumed name registrations as may be
required under applicable law.
C. Notification or Infringements and Claims
You agree to immediately notify us of any apparent infringement of or
challenge to your use of any Mark, or claim by any person of any rights in
any mark. You agree not to communicate with any person other than us, your
counsel and our counsel in connection with any such infringement, challenge
or claim. We will have sole discretion to take such action as we deem
appropriate in connection with any infringement, challenge or claim, and the
right to exclusively control any settlement, litigation or U.S. Patent and
Trademark Office or other proceeding arising out of the alleged infringement,
challenge or claim or otherwise relating to any Mark. You agree to execute
any and all instruments and documents, render such assistance and do such
acts and things as may, in the opinion of our counsel, be necessary or
advisable to protect and maintain our interest in any litigation or other
proceeding or to otherwise protect and maintain our interest in the Marks.
D. Discontinuance of Use of Marks
If it becomes advisable at any time in our reasonable judgment to modify
or discontinue use of any Mark and/or for the Restaurant to use one (1) or
more additional or substitute trade or service marks, you agree, at your
expense, to comply with our directions
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to modify or otherwise discontinue the use of such Mark, and/or use one (1) or
more additional or substitute trade or service marks, within a reasonable time
after we give you notice.
E. Indemnification of Franchisee
We agree to indemnify you against, and to reimburse you for, and to our
option, to defend you against, all damages for which you are held liable in
any proceeding arising out of your use of the marks "Friendly's" and
"Friendly's Restaurant", pursuant to and in compliance with this Agreement,
and for all costs you reasonably incur in the defense of any such claim
brought against you or in any such proceeding in which you are named as a
party, including reasonable attorney's fees, provided that you have timely
notified us of such claim or proceeding and you have otherwise substantially
complied with this Agreement. We have the right to approve any counsel
employed by you in the defense of any such claim, and in the event we elect
to defend any such claim, the fees and expenses of any separate counsel
employed by you shall not be reimbursable.
5. RELATIONSHIP OF PARTIES/INDEMNIFICATION
A. Independent Contractors
It is understood and agreed that this Agreement does not create a
fiduciary relationship between you and us, that we and you are and shall be
independent contractors, and that nothing in this Agreement is intended to
make either you or us a general or special agent, legal representative,
joint venturer, partner or employee of the other for any purpose
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or to grant either you or us the right to direct or supervise the daily
affairs of the other. You agree to identify yourself conspicuously in all
dealings with customers, suppliers, public officials, Restaurant personnel
and others as the owner of the Restaurant under a franchise granted by us.
You also agree to place such other notices of independent ownership on forms,
business cards, stationery, advertising and other materials as we may require
from time to time. You acknowledge that no agreement we make with any third
party is for your benefit. Neither we nor you will interfere with each
other's contractual relations.
B. No Liability for Acts of Other Party
You agree that you will not employ any of the Marks in signing any
contract, check, legal obligation, application for any license or permit, or
in a manner that may imply that we are responsible, or which may result in
liability to us for, any of your indebtedness or obligations. You further
agree not to use the Marks in any way not expressly authorized by this
Agreement. Except as expressly authorized in writing, neither we nor you may
make any express or implied agreements, warranties, guarantees or
representations, or incur any debt in the name of or on behalf of the other,
or represent that our relationship is other than franchisor and franchisee,
and neither we nor you will be obligated by or have any liability under any
agreement or representations made by the other that are not expressly
authorized in writing. We will not be obligated for any damages to any person
or property directly or indirectly arising out of the operation of the
Restaurant or your business.
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C. Taxes
You agree that except for taxes which we are required to collect from you
in connection with items you purchase from us, we will have no liability for
any sales, use, service, occupation, excise, gross receipts, income, property
or other taxes, whether levied upon you, the Restaurant, your property, use
or the royalty fees which you pay to us, in connection with the sales made or
business conducted by you. Payment of all such taxes will be your
responsibility.
D. Indemnification
You agree, during and after the term of the Agreement, to indemnify,
defend and hold us, our affiliated entities, and their and our shareholders,
directors, partners, officers, employees, agents, representatives, successors
and assignees harmless against and reimburse the Indemnities for all claims,
obligations and damages descried in Section 5B, any and all claims arising
out of the use of the Marks in any manner not in accordance with this
Agreement and all losses, liabilities, claims, taxes, demands, damages,
causes of action, governmental inquiries and investigations, costs and
expenses, including reasonable attorneys' and accountants' fees,
consequently, directly and indirectly incurred, arising from, as a result of,
or in connection with the operation of the Restaurant or any of your actions,
errors, omissions, breaches or defaults under this Agreement or any acts or
omissions alleged or proven to be a result of your negligence or willful
misconduct. Except as provided above, Friendly's and you shall indemnify,
defend and hold each other harmless from laims, demands and causes of action
asserted against the indemnitee by any person for personal
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injury or death or for loss of or damage to property and resulting from the
indemnitor's active or passive negligence or willful misconduct. Where such
injury, death, loss or damage is the result of joint active or passive
negligence or willful misconduct, the duty of indemnification shall be in
proportion to the allocable share of the joint active or passive negligence
or willful misconduct. For purposes of this indemnification, "claims" shall
mean and include all obligations, actual and consequential damages, expenses,
losses, costs and other liabilities reasonably incurred in the defense of any
claim against the Indemnities, including without limitation reasonable
accountants', attorneys' and expert witness fees, costs of investigation and
proof of facts, court costs, other litigation expenses and travel, lodging
and meal expenses incurred in litigation or preparation for litigation,
whether or not litigation is filed. If the indemnities reasonably conclude
that their interests are not being adequately represented by your counsel,
the indemnities will have the right to employ their own attorneys to defend
any claim against them in the manner they deem appropriate or desirable in
their sole discretion, and the indemnification hereunder shall apply to and
include the costs incurred in any such defense. The obligation to indemnify
the indemnities will continue in full force and effect subsequent to and
notwithstanding the expiration or termination of this Agreement.
6. CONFIDENTIAL INFORMATION
We possess certain confidential and proprietary information and trade
secrets consisting of, but not limited to, the following categories of
information, methods,
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techniques, procedures and knowledge we have developed (collectively, the
"Confidential Information"):
(1)methods and procedures related to the development and operation of
Friendly's Restaurants, whether contained in the Operations Manual or otherwise;
(2)secret recipes of ice cream and other frozen desserts and related
toppings, menu analysis and methods of preparation of Products and services
offered in Friendly's Restaurants;
(3)methods, procedures and techniques for preparing, packaging, marketing,
selling and delivering Products and services offered in Friendly's Restaurants;
(4)knowledge of test programs, concepts and results relating to the
planning, development and testing of the System and Products and services
offered in Friendly's Restaurants;
(5)sources of purchase of food, beverages and other ingredients used by
Friendly's Restaurants;
(6) marketing programs and image; and
(7)methods, techniques, specifications, procedures, information, systems
and knowledge of and experience in the development, licensing and operation of
Friendly's Restaurants.
We will disclose the Confidential Information to you during training, in
the Operations Manual and training manuals, and in guidance and assistance
furnished to you during the term of this Agreement. You may also learn
additional Confidential Information and trade secrets of ours during the term
of this Agreement. You acknowledge and agree that you will not acquire any
interest in the Confidential Information, other than the right to utilize it
in the operation of the Restaurant, and that the use of the Confidential
Information in any other business, or the disclosure of the Confidential
Information to any
<PAGE>
other person or entity, would constitute an unfair method of competition with
us and other Friendly's Restaurant licensees.
We claim that the Confidential Information, which we have invested a
substantial amount of money and time in developing, is a valuable asset of
ours, includes trade secrets of ours, and will be disclosed to you solely on
the condition that you agree, and you do hereby agree, that you:
(1)will not use the Confidential Information in any other business or
capacity;
(2)will maintain the absolute secrecy and confidentiality of the
Confidential Information during and after the term of this Agreement (except
as authorized by this Agreement);
(3)will not make unauthorized copies of any portion of the Confidential
Information which is in written, audio, video or other reproducible form; and
(4)will adopt and implement all reasonable procedures we prescribe from
time to time to prevent unauthorized use or disclosure of the Confidential
Information, including requiring your Restaurant Manages and other employees
who have access to the Confidential Information to execute confidential
agreements in the form we approve or prescribe prior to or during their
employment. Furthermore, other than for consumption in the Restaurant or
approved carry-out or retail sales programs, you agree not to sell or provide
to any person or entity other than us or our designee, for use, testing or
any other purpose, any mixes or formulations for preparation of Products you
purchase from us or our designees.
Notwithstanding anything to the contrary contained in this Agreement, the
restrictions on your disclosure and use of Confidential Information will not
apply to the following: (i)
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information, processes or techniques which are or become generally known in
the restaurant industry, other than through disclosure (whether deliberate or
inadvertent) by you; and (ii) disclosure of Confidential Information in
judicial or administrative proceedings to the extent that you are legally
compelled to disclose such information, provided that you have used your best
reasonable efforts, and have afforded us the opportunity, to obtain an
appropriate protective order or other assurance satisfactory to us of
confidential treatment of the information required to be so disclosed.
You will fully and promptly disclose to us, all ideas, concepts,
formulas, recipes methods and techniques relating to the development and/or
operation of the Restaurant, conceived or developed by you and/or your
employees during the term of this Agreement. You acknowledge that such
ideas, concepts, formulas, recipes, methods and techniques shall be our sole
property, and you shall not be entitled to any compensation whatsoever for
the same.
7. FEES
A. Initial Franchise Fee
The initial franchise fee for your first franchise and second franchise
is thirty thousand dollars ($30,000.00) each and the franchise fee for any
additional franchises is twenty-five thousand dollars ($25,000.00)
(collectively referred to as the "Fee"). The Fee is paid as follows:
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Five thousand dollars ($5,000.00) upon submissions of an application for a
franchise. If the application is approved, that portion of the Fee becomes
non-refundable. If the application is withdrawn prior to a decision by
Friendly's, or if the application is denied, the Fee (less Friendly's costs
and expenses in processing the application) is refunded without interest.
Twenty-five thousand dollars ($25,000.00) (or twenty thousand dollars
($20,000.00) in the case of the third or additional franchises) upon your
execution of a Commitment Agreement ("Commitment Agreement").
B. Royalty Fee
You agree to pay to us a royalty fee equal to four percent (4%) of the
Gross Sales (as defined in Subsection C of this Section) of the Restaurant.
The royalty fee shall be payable by electronic funds transfer not later than
the 21st day after the end of each calendar month, based on Gross Sales for
the prior month. Upon the installation of an upgraded processing system by
Franchisee, we may require that the royalty fee be payable by electronic
funds transfer not later than the 14th day after the end of each calendar
month. In any event, no default may be declared for late payment of the
royalty or marketing fees unless and until seven (7) days have elapsed from
the date the payment was due.
C. Definition of Gross Sales
As used in this Agreement, the term "Gross Sales" shall mean gross sales
of all food, beverage, other menu items, merchandise, and goods and other
services sold or performed by or for you or the Restaurant, in, upon, or from
the Premises, or through or by means of the business conducted at the
Restaurant or the Premises, whether for cash or credit. Sales and service
taxes collected from customers and paid to the appropriate taxing authority,
all
<PAGE>
management or employee meals, and sale of cigars, cigarettes and newspapers
as well as income from pay telephones shall not be included in Gross Sales.
The discounted portion of menu prices whether by way of coupons, promotions
or otherwise shall not be included in Gross Sales.
D. Interest on Late Payments
All royalty fees, Marketing Fund contributions (as described in Section 9
of this Agreement), amounts due for your purchases from us or our
subsidiaries or affiliates, and other amounts which you owe to us or our
subsidiaries or affiliates will bear interest beginning on the date due at
the highest applicable legal rate for open account business credit, not to
exceed one and one-half percent (1.5%) per month. This Section 7D does not
constitute an agreement on our part to accept payments from you after the
payments are due or our commitment to extend credit to, or otherwise finance
your operation of, the Restaurant. Further, you acknowledge that your
failure to pay all amounts when due may constitute grounds for termination of
this Agreement, as provided in Section 14 of this Agreement, notwithstanding
the provisions of this Section 7D.
E. Application of Payments
Notwithstanding your designation, we will have sole discretion to apply
any of your payments to any of your past due indebtedness for initial or
royalty fees, Marketing Fund contributions, purchases from us or our
subsidiaries or affiliates, interest or any other outstanding indebtedness in
such order and amounts as we may elect. The acceptance of
<PAGE>
a partial or late payment will not constitute a waiver of any of our rights
or remedies contained in this Agreement.
8. RESTAURANT OPERATING STANDARDS
A. Condition, Appearance and Operation
Of the Restaurant
You agree that :
(1)neither the Restaurant nor the Premises will be used for any purpose
other than the operation of a Friendly's Restaurant in compliance with this
Agreement, unless and until restaurant operations are appropriately
discontinued on the site (pursuant to this Agreement or the terms of a
Development Agreement);
(2)you will maintain the condition and appearance of the Restaurant, its
equipment, furniture, furnishings, signs and the Premises in accordance with
our specifications and standards as in effect from time to time and
consistent with the image of a Friendly's Restaurant as an efficiently
operated business offering high quality food service and observing the
highest standards of cleanliness and sanitation; and will, upon our
reasonable request, add or alter such equipment in the Restaurant so as to
efficiently and hygienically prepare and serve any new menu items approved
for sale throughout the Friendly's Restaurant system;
(3)you will perform all periodic maintenance with respect to the decor,
equipment, furniture, furnishings and signs of the Restaurant and thePremises
that is required from time to time to maintain such condition, appearance and
efficient operation, including, without limitation:
(a)thorough cleaning, repainting and redecorating of the interior
and exterior of the Premises at reasonable intervals;
(b) interior and exterior repair of the Premises; and
(c)repair or replacement of damaged, worn out or obsolete equipment,
furniture, furnishings and signs.
<PAGE>
(4)you will not make any material alterations to the Premises, or to the
appearance of the Restaurant as originally developed, except as required by
applicable real estate codes, local authorities or landlords, without our
prior written approval, which approval shall not be unreasonably withheld;
(5)we have the right to require that you remodel, redecorate, re-equip,
modernize and refurnish in a non-structural manner the Premises and the
Restaurant not more than once in any five (5) year period and only after fifty
percent (50%) of the Company-operated restaurants in the Friendly's Restaurant
system have been so remodeled, redecorated, re-equipped or modernized, to
reflect any changes in Friendly's Restaurants that we prescribe as our
then-current standards and specifications. You understand that such remodeling,
redecorating, re-equipping, modernization or refurnishing may require a
substantial investment on your part and that we cannot make any guarantee of any
particular return on that investment. We have the right to approve the layouts,
designs, and new equipment, furniture and furnishings you use in any remodeling,
redecorating and re-equipping, such approval not to be unreasonably withheld;
and
(6)you will place or display at the Premises (interior and exterior) only
such signs, emblems, lettering, logos and display and advertising materials that
we from time to time approve, such approval not to be unreasonably withheld.
B. Restaurant Menu
You agree that the Restaurant will offer for sale all food and beverage
products and services that we from time to time require. You agree that the
Restaurant will sell only products that we have approved. You agree that the
Restaurant will not sell any Products to any person for resale to any third
person. The Restaurant must not offer for sale or sell at the Premises or any
other location any unapproved products, or use the Premises for any purpose
other than the operation of the Restaurant.
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We have the right to approve the Restaurant's offering of Products or
services on a test basis, which approval we may condition in any reasonable
manner. We will have the right to stop the test at any time after its
commencement, upon reasonable notice.
C. Approved Products, Distributors and Suppliers
The reputation and goodwill of Friendly's Restaurants is based upon, and
can be maintained only by, the sale of distinctive, high quality food products
and beverages and the presentation, packaging, service and delivery of such
products in an efficient and appealing manner. We have developed various
proprietary products which are prepared by or for us according to our
proprietary and secret recipes and formulas. We have developed standards and
specifications for food products, ingredients, seasonings, mixes, beverages,
materials and supplies incorporated in or used in the preparation, cooking,
serving, packaging and delivery of prepared food products authorized for sale at
Friendly's Restaurants. We have and will periodically approve suppliers and
distributors of the foregoing products that meet our standards and requirements,
including, without limitation, standards and requirements relating to product
quality, prices, consistency, reliability, financial capability, labor relations
and customer relations. You agree that for use in the Restaurant you will:
(1)purchase our proprietary ice cream, frozen yogurt and other frozen
desserts and related toppings, muffin and other mixes and batters, and other
products developed by us from time to time pursuant to secret recipes or
formulas, only from us or a third party licensed by us to prepare and sell such
products; and
<PAGE>
(2)purchase all other food products, ingredients, seasonings, mixes,
beverages, materials and supplies used in the preparation of Products; menus,
paper, glassware, china and plastic products; packaging or other materials,
utensils and uniforms that meet our standards and specifications from suppliers
we have approved.
You must at all times maintain an inventory of approved food products,
beverages, ingredients and other products sufficient in quantity and variety to
realize the full potential of the Restaurant.
We may approve a single distributor or other supplier for any Product and
may approve a distributor or other supplier only as to certain of the Products.
We may concentrate purchases with one (1) or more distributors or suppliers to
obtain lower prices and/or the best advertising support and/or services for any
group of Friendly's Restaurants we license and/or operate. Approval of a
distributor or other supplier may be conditioned on requirements relating to the
frequency and delivery, standards of service, including prompt attention to
complaints or other criteria, and concentration of purchases, as set forth
above, and may be temporary, pending our further evaluation of such distributor
or other supplier.
Notwithstanding the above, you have the right to request our approval of
alternative suppliers or distributors and we will consider alternative suppliers
and distributors. Our evaluation of prospective suppliers and/or distributors
will be conditioned upon payment of our reasonable evaluation costs of their
products and/or services. You agree to notify us and submit to us all
information, specifications and samples that we request if you propose
<PAGE>
to purchase any food products, mixes, seasonings, beverages, menus, paper,
glassware, china or plastic products, packaging, uniforms or other materials or
utensils from a distributor or other supplier who has not been previously
approved by us. We will notify you within a reasonable time whether you are
authorized to purchase such products from such distributor or other supplier.
We may, from time to time, conduct market research and testing to determine
consumer trends and the marketability of new food products and services. You
agree to cooperate and assist us by participating in our consumer surveys and
market research programs, test marketing new food products and services in the
Restaurant and providing us with timely reports and other relevant information
regarding such customer surveys and market research.
You may from time to time conduct your own market research and testing to
determine consumer trends and the marketability in your Trade Area of new food
products or services. Prior to undertaking such market research or testing, you
agree to provide us with written notice no less than thirty (30) days prior to
the commencement of such research or testing for our approval of such research
or testing, which approval shall not be unreasonably withheld.
<PAGE>
D. Specifications, Standards and Procedures
You acknowledge that the operation of the Restaurant in compliance with our
high standards is important to us and all other Friendly's Restaurant licensees.
You agree to cooperate with us by maintaining our high standards in the
operation of the Restaurant. You further agree to comply with all mandatory
specifications, standards and operating procedures relating to appearance,
function, cleanliness, sanitation, safety, business hours, delivery services,
new Products, purchasing or leasing new or different equipment for preparation
and sale of new Products, compliance with the decor, format and image, including
equipment, furniture, fixtures and signage, of a Friendly's Restaurant.
Mandatory specifications, standards and operating procedures we prescribe
from time to time in the Operations Manual, or otherwise communicate to you in
writing, will constitute provisions of this Agreement as if fully set forth in
this Agreement unless such provisions conflict with applicable laws or local
ordinances. All references to this Agreement include all such mandatory
specifications, standards and operating procedures. You agree that the
Restaurant will conduct business in the ordinary course seven days a week
(excluding holidays we specify if any) and 17 hours a day, except as we may
otherwise authorize in writing. You acknowledge that approved restaurant hours
may vary from one location to another depending on conditions in the market
where the restaurant is located.
<PAGE>
E. Compliance with Laws and Good Business Practices
You agree to secure and maintain in force in your name all required
licenses, permits and certificates relating to the operation of the Restaurant.
You further agree to operate the Restaurant in full compliance with all
applicable laws, ordinances and regulations, including, without limitation, all
government regulations relating to health and sanitation, workers' compensation
insurance, unemployment insurance and withholding and payment of federal, state
and local income taxes, social security taxes and sales taxes. All of your
advertising must conform to applicable legal standards, be in good taste in our
reasonable judgment and conform to the highest standards of ethical advertising.
You agree that in all dealings with us, your customers, suppliers and public
officials, you will adhere to the highest standards of honesty, integrity, fair
dealing and ethical conduct. You agree to refrain from any business or
advertising practice which may be injurious to our business or to the goodwill
associated with the Marks and other Friendly's Restaurants.
You agree to notify us, by telephone within seventy-two (72) hours followed
within five (5) days by written notification, including copies of any pleadings
or process received of: (i) the commencement of any action, suit or proceeding
relative to the Restaurant; (ii) the issuance of any order, writ, injunction,
award or decree of any court, agency or other governmental instrumentality which
may adversely affect the operation or financial condition of the Restaurant; and
(iii) any notice of violation of any law, ordinance or regulation relating to
health or safety. You agree that you will not accept service of process for us
and on our behalf.
<PAGE>
F. Management and Personnel of the Restaurant
You agree that at all times you will (i) employ on terms reasonably
satisfactory to us a General Manager who shall have principal operational
responsibility for the Restaurant and who shall have such qualifications
and experience as we shall reasonably require and who shall have completed our
training program and (ii) employ on a full-time basis a Manager and an Assistant
Manager, each of whom has completed our training program (collectively, the
General Manager and Manager and Assistant Manager are referred to as "Restaurant
Managers"). The Restaurant shall during all business hours be under the direct
on-premises supervision of a Restaurant Manager. You agree to hire all
employees to maintain a neat and clean appearance and to conform to the
standards of dress and/or uniforms that we specify from time to time for
Friendly's Restaurants. You shall not recruit or hire any of our employees or
any employees of any Friendly's Restaurant operated by us or by a Friendly
Restaurant licensee without obtaining our prior written permission or the prior
written permission of the other licensee unless six months have expired since
such employee's termination of employment with us or the licensee.
G. Insurance
During the term of the Franchise, you agree to comply with all insurance
requirements related to the Restaurant's lease or mortgage and to maintain in
force at all times, under policies of insurance issued by carriers we have
approved:
(1)employer's liability and workers' compensation insurance as prescribed
by applicable law;
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(2)comprehensive general liability insurance (with products, completed
operations and contractual liability and independent contractors and escalators
coverage) and comprehensive motor vehicle liability insurance (for owned and
non-owned vehicles) against claims for bodily and personal injury, death and
property damage caused by or occurring in conjunction with the operation of the
Restaurant (or otherwise in conjunction with your conduct of business pursuant
to this Franchise) under one (1) or more policies of insurance, each on an
occurrence basis, with single-limit coverage for personal and bodily injury,
death and property damage of at least one million dollars ($1,000,000.00) (or
such other amount as we may reasonably require), with no less than a five
million dollar ($5,000,000.00) umbrella liability policy in force;
(3)All-risk building and contents insurance including flood and earthquake,
vandalism and theft insurance for the replacement value of the Restaurant and
its contents;
(4)business interruption insurance for a period adequate to reestablish
normal business operations; and
(5)builders' risk insurance on a completed value non-reporting basis during
the period of any remodeling of the Restaurant.
We may periodically increase the amounts of insurance you will be required
to maintain, and we may require different or additional kinds of insurance at
any time, including excess liability insurance, to reflect inflation,
identification of new risks, changes in law or standards of liability, higher
damage awards, or other relevant changes in circumstances. Each insurance
policy must name us as an additional insured and must provide for thirty (30)
days' prior written notice to us of any material modification, cancellation,
termination or expiration of such policy.
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Prior to the expiration of the term of each insurance policy, you agree to
furnish us with a certificate of insurance or with a certified copy of each
renewal or replacement insurance policy you will maintain for the immediately
following term and evidence of the payment of the premium for the insurance
policy. If you fail or refuse to maintain required insurance coverage, or to
furnish satisfactory evidence of required insurance coverage and payment of the
premiums we, at our option and in addition to our other rights and remedies
under this Agreement, may obtain the required insurance coverage on your behalf.
You must cooperate fully with us in our effort to obtain such insurance
policies, promptly execute all forms or instruments required to obtain or
maintain such insurance and pay to us, on demand any costs and premiums we
incur.
Your obligations to maintain insurance coverage as described above will not
be affected in any manner by reason of any separate insurance we maintain, nor
will the maintenance of insurance relieve you of any obligation under Section 5
of this Agreement.
9. MARKETING
A. By Company
You agree that because of the value of advertising to the goodwill and
public image of Friendly's Restaurants, we may maintain and administer a
marketing fund (the "Marketing Fund") for the marketing program that we
deem necessary or appropriate, in our sole discretion. You agree to contribute
to the Marketing Fund three percent (3%) of Gross Sales
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of the Restaurant calculated in the same manner as, and payable monthly together
with, the royalty fees due under this Agreement.
You agree that we will direct all marketing programs financed by the
Marketing Fund, and we will have sole discretion over the creative concepts,
materials and endorsements used in the programs, and the geographic, market and
media placement and allocation of the programs. You agree that the Marketing
Fund may be used to pay the costs of preparing and producing video, audio and
written advertising materials; administering multi-regional advertising
programs, including, without limitation, purchasing direct mail and other media
advertising, and employing advertising agencies to assist therewith; supporting
public relations, market research, and menu development; and other advertising
and marketing activities that we, in our sole discretion, deem appropriate.
The Marketing Fund will be accounted for separately from our other funds
and will not be used to defray any of our general operating expenses, except for
such reasonable salaries, administrative costs and overhead as we may incur in
activities reasonably related to the administration of the Marketing Fund and
its marketing programs including, without limitations, conducting market
research and menu development, preparing advertising and marketing materials,
and collecting and accounting for contributions to the Marketing Fund
(including, but not limited to, attorneys' and accountants' fees and other
expenses of litigation). You agree that we may spend in any fiscal year an
amount greater or less than the aggregate contribution of all Friendly's
Restaurants to the Marketing Fund in that year
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and the Marketing Fund may borrow from us or from other lenders to cover
deficits of the Marketing Fund or cause the Marketing Fund to invest any surplus
for future use by the Marketing Fund. You authorize us to collect for the
Marketing Fund any advertising or promotional monies or credits offered by any
supplier based upon your purchases. All interest earned on monies contributed
to the Marketing Fund will be used to pay the expenses of the Marketing Fund
incurred in advertising and promotion, including the reasonable administrative
expenses related thereto before other assets of the Marketing Fund are expended.
We will prepare an annual statement of monies collected and costs incurred by
the Marketing Fund within one hundred twenty (120) days after the end of our
fiscal year and will furnish this statement to you upon your written request.
We have the right to cause the Marketing Fund to be incorporated or operated
through a separate entity at such time as we deem appropriate, and if we do so,
that entity will have all of our rights and duties pursuant to this Section 9A.
You understand and acknowledge that the Marketing Fund is intended to
enhance recognition of the Marks and patronage of Friendly's Restaurants and
Friendly's proprietary branded products. Although we will endeavor to utilize
the Marketing Fund to develop advertising and marketing materials and programs,
and to place advertising that will benefit all Friendly's Restaurants, we
undertake no obligation to ensure that expenditures by the Marketing Fund in or
affecting any geographic area are proportionate or equivalent to the
contributions to the Marketing Fund by Friendly's Restaurants operating in that
geographic area or that any Friendly's Restaurant will benefit directly or in
proportion to the
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contributions to the Marketing Fund from the development of advertising and
marketing materials or the placement of advertising. Except as expressly
provided in this Section 9A, we assume no direct or indirect liability or
obligation to you with respect to our maintenance, direction or administration
of the Marketing Fund. You acknowledge that we have the right, and you hereby
authorize us, to settle or otherwise compromise all disputes with regard to the
Marketing Fund.
B. By Franchisee
Until such time as a Cooperative Marketing Fund is established and funded,
you agree we may expend the marketing contribution less administrative expenses
not to exceed one-half percent (1/2%) required in Section 9A in your DMA in
accordance with marketing plans reviewed and approved by Friendly's. Samples of
any advertising and promotional material we have not prepared or previously
approved must be submitted to us for approval prior to your use. You may not
use any advertising or promotional materials that we have not approved or which
we have disapproved. You agree to cooperate in the development of a Cooperative
Marketing Fund and to coordinate any local or DMA advertising with Friendly's.
Local advertising programs approved by Friendly's will be paid for or credited
against the three percent (3%) marketing expenditure required hereunder at the
option of Friendly's.
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C. By Cooperative
Unless your franchise is granted pursuant to a Development Agreement for an
exclusive territory covering an entire DMA, Friendly's reserves the right to
form and you agree to join a cooperative marketing fund organized on a regional
basis. Each franchisee within the affected region may contribute up to two
percent (2%) of its Gross Sales to the cooperative marketing fund in addition to
the marketing and advertising expense obligations under Section 9A and 9B of
this Agreement. Each company operated restaurant within the region of the
cooperative marketing fund shall likewise be required to contribute to the
cooperative fund on a per restaurant basis equal to the franchisee's percentage
of the Gross Sales contribution. Each franchised and company operated
restaurant contributing to the cooperative shall have one (1) vote per
restaurant in determining how the cooperative will apply the funds of such
cooperative.
10. REPORTS, FINANCIAL STATEMENTS AND FINANCIAL CONDITION
Unless otherwise agreed to by us in writing, you agree to adopt the
Company's financial and operational reporting chart of accounts format, as set
forth in the Operations Manual or otherwise furnished to you, which may be
amended from time to time. You also agree to maintain accurate books of
account, governmental reports, register tapes, guest checks, daily reports and
complete copies of all federal and state income tax returns, property and sales
and use tax returns. Such records, reports and returns must be preserved
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for such periods of time as are reasonably specified by us from time to time in
the Operations Manual or otherwise but not less than the minimum time prescribed
by applicable law.
With respect to the operation and financial condition of the Restaurant,
you agree to furnish us, in the form we from time to time prescribe:
(1)by the tenth (10th) day of each month for the preceding calendar month,
a report of the Gross Sales of the Restaurant, other revenues generated at the
Restaurant and other information which we may reasonably request that may be
useful in connection with our marketing and other legitimate functions. This
report must also include a statement computing amounts then due for royalty fees
and Marketing Fund contributions and be certified by you or by your chief
executive or financial officer;
(2)by the twentieth (20th) day of each month for the preceding calendar
month, a profit and loss statement for the Restaurant and be certified by you or
by your chief executive or financial officer;
(3)upon our request, such other data, information and supporting records
for such periods as we from time to time reasonably require; and
(4)within one hundred twenty (120) days after the end of your fiscal year,
a fiscal year-end balance sheet, income statement and statement of changes in
financial position (cash flow) of the Restaurant for such fiscal year,
reflecting all year-end adjustments (audited if available) and a statement of
annual Gross Sales certifying that your Gross Sales for the immediately
preceding fiscal year have been calculated and reported in compliance with the
terms of this Agreement, each of which shall be certified by you or by your
chief executive or financial officer.
If at any time you are delinquent in the payment of any amount owed to us
or our affiliates, you agree: (1) upon our request, to furnish us income
statements and balance sheets for such periods and as of such dates and all in
such detail as we may request, for
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you and each entity affiliated with you, whether or not such entity conducts any
business with the Restaurant, (2) that we may directly contact any lender,
lessor, supplier or vendor for the purpose of obtaining information relating to
the Restaurant and any lease or financial arrangements and you hereby authorize
such persons to disclose all such information to us and, if you are an entity,
you agree that we may contact any of your officers, directors, shareholders or
partners for any purpose reasonably related to your undertakings contained in
this Agreement and (3) to furnish, at our request, books of account,
governmental reports, register tapes, guest checks, daily reports and complete
copies of federal and state income tax returns, property and sales and use tax
returns.
11. INSPECTIONS AND AUDITS
A. Company's Rights to Inspect the Restaurant
To determine whether you and the Restaurant are complying with this
Agreement, and with specifications, standards and operating procedures we
prescribe for the operation of Friendly's Restaurants, we or our agents will
have the right, at any reasonable time, to:
(1)inspect the Restaurant and the Premises;
(2)observe and video tape the operations of the Restaurant for such
consecutive or intermittent periods as we deem necessary;
(3)remove, in reasonable quantities, samples of any food and beverage
product, material or other products for testing and analysis;
(4)interview personnel of the Restaurant;
(5) interview customers of the Restaurant; and
(6)inspect and copy any books, records and documents relating to the
operation of the Restaurant.
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You agree to fully cooperate with us in connection with any such
inspections, observations, video taping, product removal and interviews. You
agree to present to your customers any evaluation forms we periodically
prescribe and to participate and/or request your customers to participate in any
surveys performed by us or on our behalf.
B. Company's Right to Audit
We have the right at any time during the business hours, and without prior
notice to you, to inspect and audit, or cause to be inspected and audited, the
business records of the Restaurant and the books and records and tax returns of
any entity which holds the Franchise granted under this Agreement. You must
fully cooperate with our representatives and any independent accountants that we
hire to conduct any such inspection or audit. If any such inspection or audit
discloses an understatement of the Gross Sales of the Restaurant, you agree to
pay to us, within fifteen (15) days after receipt of the inspection or audit
report, the royalty fees and Marketing Fund contributions due on the amount of
such understatement, plus interest (at the rate and on the terms provided in
Section 7D of this Agreement) from the date originally due until the date of
payment. Further, in the event such inspection or audit is made necessary
due to your failure to furnish us with reports, supporting records, other
information or financial statements, as required by this Agreement, or to
furnish such reports, records, information or financial statements on a timely
basis, or if an understatement of Gross Sales for the period of any audit is
determined by any such audit or inspection to be greater that two percent
(2%), you agree to reimburse us promptly upon notice for the cost of the
inspection or audit, including, without limitation, the charges
<PAGE>
of attorneys and independent accountants, and the reasonable travel, lodging and
meal expenses and applicable per diem charges for our employees. The forgoing
rights will be in addition to all other remedies and rights that we may have
under this Agreement or under applicable law.
12. TRANSFER OF FRANCHISE
A. By Company
This Agreement is fully transferable by us and will inure to the benefit of
any transferee or other legal successor to our interests in this Agreement.
B. Franchisee May Not Transfer Without Approval of Company
The rights and duties created by this Agreement are personal to you. We
have granted the Franchise to you in reliance upon the individual and collective
character, skill, aptitude, attitude, and business ability of the persons who
will be engaged in the ownership and management of the Restaurant, your
financial capacity and the representations and warranties made to us in the
application and the Commitment Agreement, if applicable, and the
representations, warranties and covenants contained in this Agreement.
Accordingly, neither this Agreement nor the Franchise (or any interest therein),
nor any part or all of the ownership of Franchisee (if an entity) or the
Restaurant (or any interest therein), may be transferred, directly or
indirectly, except by operation of legal merger with your corporate parent or
other affiliate (subject to the successor merged entity having a net worth equal
to the net worth of the Franchisee and corporate parent on the effective date
hereof) without
<PAGE>
our prior written approval, and any attempted transfer without our prior written
approval will constitute a breach of this Agreement and convey no rights to or
interests in this Agreement or the Franchise. As used in this Agreement the
term "transfer" means and includes the voluntary, involuntary, direct or
indirect assignment, sale, gift, pledge, grant of security interest or other
transfer by you of any interest in: (i) this Agreement or any related agreement
between you and us; (ii) the Franchise; (iii) the Franchisee; (iv) the
Restaurant or (v) the Premises. This Section 12B shall not apply to any
interest in the Restaurant or the Premises conditionally transferred to any bona
fide lender as collateral security for any loans to you or to any financing or
refinancing structured as a sale-leaseback, provided that upon the sale of the
Restaurant, it is simultaneously leased back pursuant to a Lease Agreement which
is subject to our rights under this Agreement.
C. Right of First Refusal
If at any time during the term of this Agreement and for a period of one
(1) year thereafter, any interest in this Agreement or the Franchise is proposed
to be sold, the seller shall obtain a bona fide, executed, written offer from a
responsible and fully disclosed purchaser and shall submit an exact copy of such
offer to us along with any other information that we may reasonably request to
evaluate the offer and the identity of the proposed purchaser shall be disclosed
to us. We shall have the right, exercisable by written notice delivered to you
within thirty (30) days after the date of delivery of an exact copy of such
offer and all requested information to us, to purchase such interest for the
price and on the terms and conditions contained in such offer. Regardless of
the terms of the offer,
<PAGE>
we may, in our discretion, structure the transaction as an asset purchase,
rather than a stock purchase and to substitute cash for securities or other
property as consideration. If less than the entire interest in this Agreement
or the Franchise is proposed to be sold, we shall have the right to purchase the
entire interest for a price equal to the proposed price plus a pro-rata
increase based on the value of the interest to be purchased. Our credit shall
be deemed equal to the credit of any proposed purchaser and we shall have not
less than ninety (90) days to prepare for closing. We shall be entitled to all
representations and warranties given by the seller to the proposed buyer. We
shall not be obligated to pay any finder's or broker's fee or commission.
If we do not exercise our right of first refusal, the sale or other
transfer may be completed pursuant to and on the terms of such offer, subject to
our approval of the transfer as otherwise provided in this Agreement; provided,
however, that if the proposed sale or other transfer is not completed within one
hundred eighty (180) days after delivery of such offer to us, or if there is
any change in the terms of the proposed transaction, we shall have an additional
right of first refusal for an additional thirty (30) days.
Our right of first refusal shall not apply to the sale or transfer of an
interest in this Agreement or the Franchise, to a member of Franchisee's
immediate family or, if Franchisee is an entity, between or among the owners of
Franchisee or their affiliates provided that such transfer is otherwise
permissible under this Agreement.
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D. Conditions for Approval of Transfer
The proposed transferee and its owners (if the proposed transferee is an
entity) must meet our then applicable standards for Friendly's Restaurant
licensees. In addition, if the transfer is one of a series of transfers which
in the aggregate constitute the transfer of the Franchise, all of the following
conditions must also be met prior to, or concurrently with, the effective date
of the transfer:
(1)the transferee must have sufficient business experience, aptitude and
financial resources to operate the Restaurant;
(2)prior to the effective date of the transfer, you or the transferee must
pay all royalty fees, Marketing Fund contributions and all other amounts owed to
us or our subsidiaries and affiliates, which are then due and unpaid, and cure
all defaults under this Agreement or any other agreement between you and us to
our satisfaction (or make provision for their cure satisfactory to us);
(3)the transferee and its management personnel must have completed our
training program to our satisfaction;
(4)the transferee must apply for a new license agreement in accordance with
our then current standards for a term equal to the remaining term of this
Agreement or for a full term. If the application is approved, we and the
transferee will enter into a commitment agreement to govern the operation of the
Restaurant until commencement of the new license agreement, provided that the
transferee upgrades and modernizes the Restaurant to our then-current standards
and meets the other requirements of the commitment agreement;
(5)you or the transferee must pay us the then current transfer fee to
defray expenses incurred by us in connection with the transfer;
(6)you, and if you are an entity (and have signed the Entity Addendum (the
"Entity Addendum")), your owners, officers and directors must execute a general
release, in a form satisfactory to us, of any and all existing claims against
us, our subsidiaries and affiliates, and our and their officers, directors,
partners, employees and agents;
<PAGE>
(7)we must approve the material terms and conditions of such transfer,
including, without limitation, our determination that the price and terms of
payment are not so burdensome as to adversely affect the subsequent operation or
financial results of the Restaurant;
(8)you and any guarantors must execute a non-competition covenant in favor
of us and the transferee, containing the terms contained in Section 16A;
(9)the lessor and lender, if any, of the Premises must give you its or
their advance written consent to the transfer of the Premises, if required, and
you must provide us with a copy of such consent; and
(10)you and any guarantors must guarantee the transferee's financial
obligations to us in its commitment agreement and license agreement for two
years from the date of transfer.
If the proposed transfer is to or among owners of you, subsection (5) of
the above requirements shall not apply.
E. Transfer to a Wholly-owned Entity
If you are in full compliance with this Agreement, we will not unreasonably
withhold our approval of a transfer to an entity which conducts no business
other than the Restaurant (or other Friendly's Restaurants), which is actually
managed by you and in which you maintain management control and own and control
one hundred percent (100%) of the equity and voting power of all issued and
outstanding securities, provided that you (i) guarantee, in accordance with our
then current form, the performance of such transferee's obligations under this
Agreement, and (ii) execute our current form of Entity Addendum. Transfers of
interests in such entity will be subject to the other provisions of this Section
12.
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F. Effect of Consent to Transfer
Our consent to a transfer of this Agreement, the Franchise, the Restaurant
or an interest in you will not constitute a waiver of any claims we may have
against you (or your owners if you are an entity), nor shall it be deemed a
waiver of our right to demand exact compliance with any of the terms or
conditions of this Agreement by the transferee.
13. CONDEMNATION AND CASUALTY
You must give us immediate notice in writing of any proposed taking of the
Restaurant or the Premises by eminent domain. If we agree that the Restaurant
or the Premises (or substantial parts thereof) will be taken, we will give due
and prompt consideration to transferring the License to a nearby location which
you select within two (2) months of the taking. If we approve the location and
authorize the transfer, and if you open a new restaurant at such location in
accordance with our specifications within eighteen (18) months if the new
restaurant does not have a drive-thru, or if the new restaurant does have a
drive-thru, within two (2) years of the closing of the Restaurant, the new
restaurant will henceforth be deemed to be the Restaurant under this Agreement.
If a condemnation takes place and the new restaurant does not, for whatever
reason, become the Restaurant under this Agreement in strict accordance with
this Section 13 (or if it is reasonably evident that such will be the case), the
Franchise and this Agreement will terminate as provided for in Section 14.
<PAGE>
If the Restaurant is damaged by fire or other casualty, you will
expeditiously repair the damage. If the damage or repair requires closing the
Restaurant, you will immediately notify us, will repair or rebuild the
Restaurant in accordance with our standards, will commence reconstruction within
four (4) months after closing, and will reopen the Restaurant for continuous
business operations as soon as practicable but in no event later than twelve
(12) months after closing of the Restaurant, giving us ample advance written
notice of the date of reopening. If the Restaurant is not reopened in
accordance with this Section 13, the Franchise and this Agreement will terminate
as prescribed in Section 14.
Nothing in this Section 13 will extend the term of this Agreement but you
will not be required to pay us any royalty fee or Marketing Fund contribution
payments for periods during which the Restaurant is closed by reason of
condemnation or casualty.
14. TERMINATION OF THE FRANCHISE
A. Unless cured to our satisfaction, this Agreement shall terminate 30
days from the date notice is given to you in accordance with Section 19, if you
or any guarantor:
(1)fail to report accurately the Gross Sales of the Restaurant or fail to
make payments of any amounts due to us for royalty fees, Marketing Fund
contributions, or any other amounts due to us, our affiliates or our
subsidiaries;
(2)fail to comply with any other provision of this Agreement or any
mandatory specification, standard or operating procedure we prescribe, unless
such failure cannot reasonably be corrected within such thirty (30) day period
and you undertake within ten (10) days after such written notice is delivered to
you, and continue, efforts to bring the
<PAGE>
Restaurant and the Premises into full compliance, and furnish proof acceptable
to us of such efforts and the date by which full compliance will be achieved;
(3)you or any person controlling you, controlled by you, or under common
control with you is in default of any other agreement with us (for purposes of
this clause control means the ownership by a person or entity, directly or
indirectly, of ten percent (10%) or more of another person or entity or the
power to affect the policies of another person or entity);
(4)in our good faith reasonable judgment, fail to use your reasonable
efforts employ on a full time basis qualified Restaurant Managers with
qualifications and experience acceptable to us.
(5)if you violate the Continuous Operation covenant set forth in Section
1B(3) of this Agreement, or there are three (3) or more breaches of any duration
during any twelve-month period.
B. Unless we have notified you in writing to the contrary after
discovering the relevant facts, this Agreement will terminate automatically and
immediately without further action by us or notice to you, if you:
(1)become insolvent or are unable to pay your or their debts as they mature
or make an assignment for the benefit of creditors or an admission of inability
to pay obligations as they become due or file a voluntary petition in bankruptcy
or any pleading seeking any reorganization, liquidation, dissolution or
composition or other settlement with creditors under any law, or admit or fail
to contest the material allegations of any such pleading filed against you, or
are adjudicated a bankrupt or insolvent or a receiver or other custodian is
appointed for a substantial part of your assets or the Restaurant or a final
judgment remains unsatisfied or of record for ninety (90) days or longer (unless
a supersedeas bond is filed), or if execution is levied against any substantial
part of your assets or a tax levy is made, or suit to foreclose any lien or
mortgage against you or the Restaurant is instituted and is not dismissed within
ninety (90) days, or if a substantial part of your real or personal property is
sold after levy of judgment thereupon by any sheriff, marshal or constable, or
the claims of your creditors are abated or subject to a moratorium under any
law;
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(2)except as provided in Section 13, discontinue operating the Restaurant
as a Friendly's Restaurant, or abandon, surrender or transfer control of the
Restaurant without our prior approval;
(3)have made any material misrepresentation or omission in the application
for the Franchise or in the Commitment Agreement or in this Agreement or in any
other material submitted to us on which we have relied in determining whether to
grant you the Franchise.
(4)are, or are discovered to have been, convicted of or plead no contest to
a felony, or other crime or offense that is likely to have a material adverse
effect on your reputation or the reputation of the Company, the System, or the
Restaurant;
(5)make or attempt to make an unauthorized transfer in violation of Section
12;
(6)make any unauthorized use or disclosure of any Confidential Information
or any portion of the Operations Manual;
(7)lose the right to possession of the Premises or a substantial part
thereof, whether or not due to your fault, except as otherwise provided in
Section 13 of this Agreement regarding condemnation and casualty;
(8)take action toward dissolving or liquidating the entity owning the
Franchise, or any such action is taken against you, without providing us advance
written notice or complying with Section 12 of this Agreement;
(9)deny our representatives the right to enter and inspect the Restaurant
or to examine or audit its books and records pursuant to Section 11B of this
Agreement;
(10)make any unauthorized use of the Marks or contest in any court or
proceeding our ownership of the Marks or the System or any part thereof;
(11)fail on three (3) or more separate occasions, for which notices of
default were given, within any period of twelve (12) consecutive months to
comply with this Agreement whether or not such failures to comply are corrected
after notice of default is given, or fail on two (2) or more separate occasions,
for which notices of default were given,
<PAGE>
within any period of twelve (12) consecutive months to comply with the same
obligation under this Agreement whether or not such failures to comply are
corrected after notice of default is given;
(12)you breach a material obligation, representation or warranty contained
in this Agreement and such breach by its nature cannot be cured; or
(13)have made any material misrepresentation to us regarding your
organizational or financial structure of financial condition.
In any judicial proceeding in which the validity of termination is at
issue, we will not be limited to relying on the reasons for termination which
are set forth in any notice sent to you in accordance with this Section 14.
C. You may terminate this Agreement at any time by giving us at least
twelve (12) but not more than fifteen (15) months written notice.
D. Our rights to terminate this Agreement are in addition to all rights
or remedies available at law or in equity in case of any breach, failure or
default, or threatened breach, failure or default, all of which rights and
remedies shall be cumulative and not alternative.
15. DAMAGES
Except as otherwise provided in this Agreement, if this Agreement and the
Franchise granted hereby terminate under any of the provisions of Section 14 of
this Agreement, you agree to promptly pay us (as liquidated damages for the loss
of the benefit bargained for in this Agreement due to premature termination
only, and not as a penalty or as damages for breaching this Agreement or in lieu
of any other payment) a lump sum equal to the royalty
<PAGE>
fees and Marketing Fund contributions payable to us during the thirty-six (36)
calendar months immediately preceding the termination. In the event the
Restaurant shall not have been open for thirty-six (36) months prior to
termination, the monthly average of such payments during such shorter period
shall be multiplied by thirty-six (36) for purposes of this section.
In the event there are fewer than thirty-six (36) months remaining in the term
hereof, the amount that you agree to pay shall be equal to the number of months
remaining in the term of this Agreement multiplied by the average monthly
royalty fees and Marketing Fund contributions payable to us during the
thirty-six (36) months immediately preceding termination. In no event shall the
damages for the termination of this Agreement, if any, exceed the greater of the
liquidated damages set forth above or the actual damages proven by Friendly's.
If we are unable to determine the amount payable to us by you by reason of
your failure to submit some or all of your Gross Sales reports as required
pursuant to Section 10 of this Agreement, you agree that we may estimate the
Gross Sales of your Restaurant for the applicable periods described above for
the purpose of computing the amount payable to us by you under this Section 15.
<PAGE>
16.COVENANT NOT TO COMPETE; RIGHTS AND OBLIGATIONS OF COMPANY AND LICENSE UPON
TERMINATION OR EXPIRATION OF THE LICENSE
A. Covenant Not to Compete
You acknowledge and agree that we have invested a substantial amount of
time and money in developing the System, the Marks, and the Confidential
Information and that we would be unable to protect our System, the Marks,
Confidential Information and trade secrets against unauthorized use or
disclosure and would be unable to encourage a free exchange of ideas and
information among us or our licensees if prospective licensees or licensees were
permitted to hold interests in or perform services for any competing business
and that the following restrictions are reasonably required in order to protect
our information, marketing strategies, operating policies and other elements of
the System from unauthorized appropriation. Therefore, you agree that during
the term of this Agreement, you will not have any direct or indirect or
beneficial interest or perform services as an officer, director, manager,
employee or consultant or otherwise for or in any business which owns, operates,
licenses, franchises or develops any restaurant concept which both (i) has sit
down, table service, and (ii) is a mid-scale priced, family style restaurant,
coffee shop or ice cream/frozen yogurt shoppe (as defined by CREST operators
list as of June 1, 1997) including but not limited to Denny's Shoney's Big Boy,
Country Kitchen, Bob Evans, Cracker Barrel, IHOP, Village Inn, Waffle House,
Dairy Queen, Swensen's, Carvel, Baskin Robbins, TCBY or similar.
Notwithstanding the above, a restaurant concept which is a mid-scale priced
family style restaurant will be deemed competitive if frozen deserts comprise
five percent (5%) or more of the sales mix as measured on any six (6) month
basis. You further
<PAGE>
agree that for a period of two (2) years after the termination or expiration of
this Agreement, you and all of such persons will be subject to the same
restriction on competing activities within the trade area (the "Trade Area") of
the Restaurant or within the trade area (as reasonably determined by us) of any
Friendly's Restaurant operated currently by us or any other licensee of ours,
but in no event within a radius of three (3) miles from any such restaurant.
You and all of such persons also agree during such periods of time not to offer
to employ or employ any person who is then employed by us, our affiliates or any
other licensee. You acknowledge and agree that the Trade Area is an area equal
to a three (3) mile radius with its epicenter at the Restaurant.
You acknowledge that the determination of the Trade Area is based on many
factors, some of which are subjective, and that the Trade Area as described in
this Agreement is reasonable under the circumstances. The restrictions of this
Section shall not be applicable to the ownership of a Friendly's Restaurant
operated pursuant to a License Agreement with us, to the ownership of shares of
a class of securities listed on a stock exchange or traded on the
over-the-counter market that represent five percent (5%) or less of the number
of shares of that class of securities issued and outstanding, or to the
ownership or operation of any restaurant franchised by Wendy's International to
your corporate parent or affiliate.
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You further acknowledge that this Agreement does not confer any rights of
exclusivity on you with respect to your operation of a Friendly's Restaurant
within the Trade Area and will not prevent us from placing another Friendly's
Restaurant or other food service establishment within the Trade Area.
B. Payment of Amounts Owed to Company
You must pay to us within fifteen (15) days after the effective date of
termination or expiration of this Agreement, or such later date that the amounts
due to us are determined, all royalty fees, Marketing Fund contributions,
amounts owed for your purchases from us or our subsidiaries and affiliates,
predecessors, successors and assigns, interest due on any of the foregoing,
and all other amounts owed to us or our subsidiaries and affiliates under this
Agreement or otherwise.
C. Marks and System
You agree that immediately after the termination or expiration of this
Agreement, you will:
(1)not directly or indirectly at any time or in any manner identify
yourself or any business as a current or former Friendly's Restaurant, or as a
franchisee or licensee of, or as otherwise associated with us, or use any Mark
or any colorable imitation thereof in any manner or for any purpose, or utilize
for any purpose any trade name, trade or service mark or other commercial symbol
that suggests or indicates a connection or association with us;
(2)remove from the Premises, discontinue using for any purpose and return
to us (or with our consent, destroy) any and all signs, menus, fixtures,
furniture, furnishings, equipment, advertising, materials,
<PAGE>
stationary supplies, forms or other articles that display or contain any Mark or
that otherwise identify or relate to a Friendly's Restaurant;
(3)remove all Marks that are affixed to uniforms and/or, at our direction,
cease to use all uniforms that have been used in the Restaurant;
(4)take such action as may be required to cancel all fictitious or assumed
name or equivalent registrations relating to your use of any Mark;
(5)change the telephone number of the Restaurant and instruct all telephone
directory publishers to modify all telephone directory listings of the
Restaurant associated with any Marks when the directories are next published;
(6)take such action to alter the physical interior and exterior decor of
the Restaurant as will effectively de-identify and distinguish the Premises from
the System; and
(7)furnish to us, within thirty (30) days after the effective date of
termination or expiration, evidence satisfactory to us of your compliance with
the foregoing obligations.
In the event that you fail to take such actions as required above to our
satisfaction within the thirty (30) days to termination or expiration of this
Agreement, you grant us the right to enter the Premises to remove all items
bearing the Marks and take such actions as we deem necessary to de-identify the
Restaurant from the System without committing any trespass or incurring any
liability for such actions. You acknowledge and agree that you will be
responsible for all costs and expenses that we incur in taking such actions.
D. Confidential Information
You agree that upon termination or expiration of this Agreement, you will
immediately cease to use in any business or otherwise any of our Confidential
Information disclosed to, or otherwise learned or acquired by you, and that you
will return to us all
<PAGE>
copies of the Operations Manual and all other Confidential Information which we
have loaned or made available to you or which is otherwise in your possession.
You must also provide us with any and all supplies of our proprietary frozen
desserts and toppings for which you will be compensated at the lower of their
costs or market value.
E. Continuing Obligations
All obligations of the Company and Licensee which expressly or by their
nature survive the expiration or termination of this Agreement shall continue in
full force and effect subsequent to and notwithstanding its expiration or
termination and until they are satisfied in full or by their nature expire.
17. RENEWAL OF FRANCHISE
You understand that you have the conditional right to renew this Agreement
one time to operate the Restaurant in the System for twenty (20) years beyond
the expiration date provided for in this Agreement. However, if you desire to
obtain a new license upon the expiration of this Agreement, you must apply to us
for a new license agreement at least ninety (90) days, but not more than twelve
(12) months, before expiration of the term of this Agreement. Upon payment of a
renewal fee, which will not exceed our then standard initial license fee, we
will process your application in good faith and in accordance with our
procedures, criteria and requirements regarding upgrading of facilities, credit,
market feasibility and related criteria then being applied by us in issuing new
licenses to use the System. If you fulfill our upgrading and other
then-current requirements, we will grant you
<PAGE>
a new license in the form of agreement then in use by us. If you are granted a
new license, you (and if you are an entity, your owners) will be required to
execute a general release, in a form satisfactory to us, of any and all claims
against us and our subsidiaries, affiliates, partners, agents, employees,
representatives and servants, including claims arising under this Agreement and
federal, state and local laws, rules and regulations. If you are not granted a
new license, we will return the renewal fee less expenses incurred in processing
your application.
During the pendency of your application for the issuance of a new license,
royalty fees and Marketing Fund contributions will be paid at the rate specified
in this Agreement. Upon issuance of the new license agreement, fees must be
paid at the rates specified in the new license agreement, which may be greater
than the rates specified in this Agreement.
18. ENFORCEMENT
A. Severability and Substitution of Valid Provisions
Except as expressly provided to the contrary, each section, paragraph, term
and provision of this Agreement, and any portion thereof, shall be considered
severable and if, for any reason, any such provision of this Agreement is held
to be invalid, contrary to, or in conflict with any applicable present or future
law or regulation in a final, unappealable ruling issued by any court, agency or
tribunal with competent jurisdiction in a proceeding to which we are a party,
that ruling shall not impair the operation of, or have any other effect upon,
such other portions of this Agreement as may remain otherwise enforceable, all
<PAGE>
of which shall continue to be given full force and effect and bind the parties
to this Agreement, although any portion held to be invalid shall be deemed not
to be a part of this Agreement from the date the time for appeal expires, if you
are a party thereto, or otherwise upon your receipt of a notice of
non-enforcement thereof from us. To the extent that any provision of Section
12D(8) or Section 16A is deemed unenforceable by virtue of its scope in terms of
area, business activity prohibited and/or length of time, but could be made
enforceable by reducing any or all thereof, you and we agree that such
provisions shall be enforced to the fullest extent permissible under the laws
and public policies applied in the jurisdiction in which enforcement is sought.
If any applicable and binding law or rule of any jurisdiction requires a greater
prior notice of the termination of or refusal to renew this Agreement, than is
required in this Agreement, or if under any applicable and binding law or rule
of any jurisdiction, any provision of this Agreement or any specification,
standard or operating procedure we prescribe is invalid or unenforceable, the
prior notice and/or other action required by such law or rule shall be
substituted for the comparable provisions of this Agreement, and we will have
the right, in our sole discretion, to modify such invalid or unenforceable
provision, specification, standard or operating procedure to the extent required
to be valid and enforceable. You agree to be bound by any promise or covenant
imposing the maximum duty permitted by law which is contained within the terms
of any provision of this Agreement, as though it were separately articulated in
and made a part of this Agreement, that may result from striking from any of the
provisions of this Agreement, or any specification, standard or operating
procedure that we prescribe, any portion or portions which a court may hold to
be unenforceable in a final decision to which we are
<PAGE>
a party, or from reducing the scope of any promise or covenant to the extent
required to comply with such a court order. Such modifications to this
Agreement shall be effective only in such jurisdiction, unless we elect to give
them greater applicability, and shall be enforced as originally made and entered
into in all other jurisdictions.
B. Waiver of Obligations
You and we may by written instrument unilaterally waive or reduce any
obligation of or restriction upon the other under this Agreement, effective upon
delivery of written notice thereof to the other or such other effective date
stated in the notice of waiver. Any waiver granted by us shall be without
prejudice to any other rights we may have, will be subject to continuing review
by us, and may be revoked, in the good faith exercise of our sole discretion, at
any time and for any reason, effective upon delivery to you of ten (10) days'
prior written notice. You and we shall not be deemed to have waived or impaired
any right, power or option reserved by this Agreement (including, without
limitation, the right to demand strict compliance with every term, condition,
and covenant herein, or to declare any breach thereof to be default and to
terminate the License prior to the expiration of its term), by virtue of any
custom or practice of the parties at variance with the terms hereof; any
failure, refusal, or neglect by you or us to exercise any right under this
Agreement or to insist upon exact compliance by the other with its obligations
hereunder, including, without limitation, any mandatory specification, standard,
or operating procedure; any waiver, forbearance, delay, failure, or omission by
us to exercise any right, power, or
<PAGE>
option, whether of the same, similar or different nature, with respect to any
other Friendly's Restaurant; or the acceptance by us of any payments from you
after any breach by you of this Agreement.
C. Force Majeure
Neither you nor we shall be liable for loss or damage or deemed to be in
breach of this Agreement if a failure to perform particular obligations results
from: (i) transportation shortages, inadequate supply or unavailability from
the manufacturers or suppliers of equipment, merchandise, supplies, labor,
material, or energy, or the voluntary surrender of the right to acquire or
use any of the foregoing in order to accommodate or comply with the orders,
requests, regulations, recommendations, or instructions or any federal, state or
municipal government or any department or agency thereof; (ii) compliance with
any law, ruling, order, regulation, requirement or instruction of any federal,
state or municipal government or any department or agency thereof; (iii) acts
of God; (iv) fire, strikes, embargos, war or riot; or (v) any other similar
event or cause.
Any delay resulting from any of such causes shall extend the time for
performance or excuse performance, in whole or in party, as may be reasonable,
except that such causes shall not excuse payments of amounts owed at the time of
such occurrence or payment of any amounts due thereafter.
<PAGE>
D. Injunctive Relief
You agree that we will have the right to preliminary injunctive relief
to restrain any conduct by you in the development or operation of the Restaurant
that could materially damage the goodwill associated with the System, the Marks
and Friendly's Restaurants. You further agree that we will not be required to
post a bond to obtain injunctive relief.
E. Rights of Parties Are Cumulative
Your and our rights under this Agreement are cumulative and no exercise or
enforcement by you or us of any right or remedy hereunder shall preclude the
exercise or enforcement by you or either of us of any right or remedy hereunder
or which you or we are entitled by law to enforce.
F. Costs and Attorneys' Fees
In any proceeding by either party to enforce or interpret any provision of
this Agreement, or appeal thereof, the party prevailing in such proceeding shall
be entitled to reimbursement of its costs and expenses, including but not
limited to, reasonable accounting and attorneys' fees. Attorneys' fees shall
include, without limitation, reasonable legal and expert witness fees, cost of
investigation and proof of facts, court costs, other litigation expenses and
travel and living expenses, whether incurred prior to or in preparation for or
in contemplation of the filing of any written demand or claim, action, hearing
or proceeding. In any such proceeding involving more than one (1) allegation,
issue or provision of this
<PAGE>
Agreement under circumstances where neither party prevails on all allegations
or issues, the presiding court or other body may apportion costs and expenses
between the parties.
G. Governing Law
EXCEPT TO THE EXTENT GOVERNED BY THE UNITED STATES TRADEMARK ACT OF 1946 OR
OTHER FEDERAL LAW, THIS AGREEMENT AND THE LICENSE SHALL BE GOVERNED BY THE LAWS
OF THE STATE OF DELAWARE WITHOUT REGARD TO CONFLICT OF LAWS RULES.
H. Waiver of Punitive/Exemplary Damages:
Limitations of Actions
THE PARTIES HEREBY WAIVE TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT
OR CLAIM TO ANY PUNITIVE OR EXEMPLARY DAMAGES AGAINST THE OTHER AND AGREE THAT
IN THE EVENT OF A DISPUTE BETWEEN THEM EACH SHALL BE LIMITED TO THE RECOVERY OF
ANY ACTUAL DAMAGES SUSTAINED. ANY AND ALL CLAIMS, EXCEPT CLAIMS FOR MONIES DUE
US OR OUR AFFILIATES, ARISING FROM OR RELATING TO THIS AGREEMENT OR THE
RELATIONSHIP AMONG THE PARTIES SHALL BE BARRED UNLESS AN ACTION OR LEGAL
PROCEEDING IS COMMENCED WITHIN ONE (1) YEAR FROM THE DATE THE CLAIMANT KNEW OR
SHOULD HAVE KNOWN OF THE FACTS GIVING RISE TO SUCH CLAIMS.
<PAGE>
I. Venue and Jurisdiction
YOU AGREE THAT WE MAY INSTITUTE ANY ACTION AGAINST YOU TO ENFORCE THE
PROVISIONS OF THIS AGREEMENT IN ANY STATE OR FEDERAL COURT OF COMPETENT
JURISDICTION IN THE STATE OF DELAWARE AND YOU IRREVOCABLY SUBMIT TO THE
JURISDICTION AND VENUE OF SUCH COURTS AND WAIVE ANY OBJECTION YOU MAY HAVE TO
EITHER THE JURISDICTION OR VENUE OF SUCH COURTS. YOU AGREE THAT ANY ACTION
BROUGHT BY YOU TO ENFORCE ANY PROVISION OF THIS AGREEMENT WILL BE BROUGHT AND
MAINTAINED ONLY IN A STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE
STATE OF DELAWARE.
J. Waiver of Jury Trial
THE PARTIES HEREBY IRREVOCABLY WAIVE TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM, WHETHER AT LAW OR IN EQUITY, BROUGHT BY EITHER OF
THEM.
K. Binding Effect
This Agreement is binding upon the parties hereto and their respective
executors, administrators, heirs, assigns and successors in interest, and shall
not be modified except by written agreement signed by both you and us.
<PAGE>
L. Interpretation
The preambles and exhibits are a part of this Agreement, which together
with the Commitment Agreement and the Development Agreement, if any, constitutes
the entire agreement of the parties, and there are no other oral or written
understandings or agreements between the Company and the Franchisee relating to
the subject matter of this Agreement except for the Commitment Agreement,
certain portions of which survive the execution and delivery of this Agreement.
In the event of a conflict between this Agreement and the Commitment Agreement
(if applicable), the provisions of this Agreement shall control. In the event
of a conflict between this Agreement and the Purchase and Sale Agreement or the
Development Agreement, the provisions of the Purchase and Sale Agreement shall
first control the interpretation, with the Development Agreement also
superseding this Agreement. This Agreement may be modified only by a writing
signed by both you and us. Nothing in this Agreement is intended, nor shall be
deemed, to confer any rights or remedies upon any person or legal entity not a
party hereto. Except where this Agreement expressly obligates the Company to
reasonably approve or not unreasonably withhold its approval of any action or
request of the Franchisee, the Company has the absolute right to refuse any
request by the Franchisee or to withhold its approval of any action or omission
by the Franchisee. The headings of the several sections and paragraphs hereof
are for convenience only and do not define, limit or construe the contents of
such sections or paragraphs. The term "attorneys' fees" shall include, without
limitation, reasonable legal fees, whether incurred prior to, in preparation
for or in contemplation of the filing of any written demand or claim, action,
hearing or proceeding, including appellate
<PAGE>
proceedings, to enforce the obligations of this Agreement. The term "family
member" as used herein refers to parents, spouses, offspring and siblings, and
the spouses of parents and siblings. The term "affiliate" as used herein means
any person or entity that directly or indirectly owns or controls, or is owned
or controlled by, or is under common ownership or control with, another person
or entity. References to a "controlling interest" in the Franchisee means
fifty-one (51%) or such lesser percentage that may have the power to control the
management and affairs of the Restaurant or the Licensee. The term "Franchisee"
as used herein is applicable to one (1) or more persons, a corporation or a
partnership or other entity, as the case may be, and the singular usage includes
the plural and the masculine and neuter usages include the other and the
feminine. If two or more persons are at any time the Franchisee hereunder,
whether or not as partners or joint venturers, their obligations and liabilities
to the Company shall be joint and several. This Agreement may be executed in
counterparts, each of which shall be deemed an original.
M. Time
Time is of the essence of this Agreement
19. NOTICES AND PAYMENTS
All written notices and reports permitted or required to be delivered
hereunder shall be deemed so delivered at the time delivered by hand, the day of
transmission by facsimile or other electronic system, one (1) business day after
being placed in the hands of a commercial courier service for overnight
delivery, or three (3) business days after placement
<PAGE>
in the United States Mail by Registered or Certified Mail, Return Receipt
Requested, postage prepaid and addressed to the party to be notified at its most
current principal business address of which the notifying party has been
notified. All payments and reports required by this Agreement shall be directed
to the Company at the address notified to the Franchisee from time to time, or
to such other persons and places as the Company may direct from time to time.
Any required payment or report not actually received by the Company during
regular business hours on the date due (or postmarked by postal authorities at
least two (2) days prior thereto) shall be deemed delinquent.
20. ACKNOWLEDGEMENTS
Contemporaneously with the execution of this Agreement, you have carefully
reviewed and executed the Disclosure Acknowledgement Statement attached and
incorporated into this Agreement as Exhibit A.
You acknowledge that, due to the length of time we have been granting
licenses to operate Friendly's Restaurants or other food service concepts using
the Marks, there is more than one form of license agreement in effect between us
and our various licensees and that such agreements contain provisions that may
be materially different from the provisions contained in this Agreement and that
you are not entitled to rely on any provision of any other such agreement,
whether to establish course of dealing, waiver, estoppel or for any other
purpose.
<PAGE>
IN WITNESS WHEREOF the parties hereto have executed and delivered this
Agreement as of the Agreement Date.
FRIENDLY'S RESTAURANTS FRANCHISEE:
FRANCHISE, INC.
By:____________________ By:
Its:____________________ Its:
<PAGE>
Exhibit 10.8
MANAGEMENT AGREEMENT
BETWEEN
FRIENDLY ICE CREAM CORPORATION
1855 Boston Road
Wilbraham, Massachusetts 01095
AND
FRIENDCO RESTAURANTS, INC.
1657 Crofton Boulevard
Crofton, Maryland 21114
DATED
July_____, 1997
<PAGE>
TABLE OF CONTENTS
Section Page
------- -----
1. Defined Terms 1
2. Scope 4
3. Term 4
4. Authority to Act 5
5. Compensation 5
6. Restaurant Capital Requirements 6
7. Non-Solicitation 6
8. Termination 7
9. Indemnification 8
10. Breach; Notice and Right to Cure 9
11. Reporting of Sales 9
12. Assignment 9
13. Conflict of Interest 10
14. Choice of Law; Arbitration of Disputes 10
15. Insurance 10
16. Notices 11
17. General Provisions 12
EXHIBITS:
Exhibit A: List of Managed Restaurants
Exhibit B: Arbitration Program
<PAGE>
MANAGEMENT AGREEMENT
This Management Agreement is made and dated this _____day of_____,
1997, by and between Friendly Ice Cream Corporation, a Massachusetts
Corporation with its principal location at 1855 Boston Road, Wilbraham,
Massachusetts, 01095 (hereinafter "FICC"), and FriendCo Restaurants, Inc., a
Maryland Corporation with its principal location at 1657 Crofton Boulevard,
Crofton, Maryland, 21114 (hereinafter "FriendCo").
1. DEFINED TERMS
a. "Definitive Agreement" shall mean all documents executed
between FriendCo, FICC and Friendly's Restaurants, Franchise, Inc. relating
to the acquisition by FriendCo of the right to lease and operate thirty-four
(34) Friendly's Restaurants and to construct an additional seventy-four (74)
Friendly's Restaurants.
b. "Dispute" shall mean any claim of breach, action to enforce,
material disagreement in interpretation, or legal proceeding involving or
arising out of this Agreement.
c. "Exclusive Territory" shall mean the territory in the States of
Delaware and Maryland, the District of Columbia, and such portion of Northern
<PAGE>
Virginia as is assigned to FriendCo in the Definitive Agreement wherein
FriendCo has the exclusive right to construct and to operate Friendly's
Restaurants.
d. "Net Sales" shall mean all sales of all food, beverage, other
menu items, merchandise, and goods and other services sold or performed by or
for you or the Restaurant, in, upon, or from the Premises, or through or by
means of the business conducted at the Restaurant or the Premises, whether
for cash or credit. Sales and service taxes collected from customers and
paid to the appropriate taxing authority, all management or employee meals,
and sale of cigars, cigarettes and newspapers as well as income from pay
telephones shall not be included in Net Sales. The discounted portion of on
menu prices whether by way of coupons, promotions or otherwise shall not be
included in Net Sales.
e. "Restaurant Capital Requirements" shall mean any replacement,
improvement or addition of equipment, fixtures or improvements which, in
accordance with generally accepted accounting principles would be treated as
a capitalized cost rather than an expense.
f. "Restaurant Cash Flow" shall mean Net Sales less (i) restaurant
cost of food and merchandise, (ii) restaurant labor including all restaurant
employee wages, sick, holiday and vacation pay and in-restaurant cleaning
services, (iii) restaurant fringes including payroll taxes, group and
workers' compensation insurance
<PAGE>
and pension, (iv) restaurant supplies including china, glassware, utensils,
cleaning supplies, uniforms, and paper & plastic supplies, (v) restaurant
utilities including electricity, allocated Friendly Ice Cream energy
management fees, natural gas, telephone and water and sewer, (vi) restaurant
maintenance costs including landscaping, snow removal, maintenance service
contracts and repairs to property and equipment that would not be considered
a Restaurant Capital Requirement, (vii) restaurant administrative costs
including office expense, trash, other services (rug cleaning services,
music, etc.) allocated property and general liability insurance, employee
relocation expense, travel costs, credit card expenses, bank service charges,
commission income, safety program costs, police and security costs, use taxes
and other miscellaneous restaurant expenses, (viii) restaurant advertising
and promotional costs including allocated advertising costs, local restaurant
promotions (team sponsorships, etc.), required lease advertising, specific
billboard costs and mall displays and (ix) restaurant occupancy costs
including rent, common area maintenance, real estate and personal taxes and
decorating expenses.
Restaurant Cash Flow specifically excludes (i) restaurant depreciation,
amortization, interest or taxes, (ii) any allocation of costs except for
insurance, pension, energy management, maintenance contracts and advertising
and (iii) costs relating to the supervision of the restaurants by district,
division, area and corporate personnel.
<PAGE>
2. SCOPE
Upon execution of this Agreement, FICC grants to FriendCo the
exclusive right to manage the Friendly's Restaurants identified on Exhibit A,
attached hereto, for the duration of the Term, unless this Agreement is
terminated by either party as of some earlier date.
3. TERM
This Agreement shall be in effect for one (1) year from the date
first written above, unless terminated by either party in accordance with
Paragraph 8, infra. At the option of FICC, this Agreement may be extended
for two (2) successive six (6) month periods, as long as all payments due
hereunder are current and timely made. Thereafter, the parties agree to
negotiate in good faith concerning any further extensions hereof.
4. AUTHORITY TO ACT
For each managed restaurant, FriendCo and its management employees shall
have the authority to approve hiring, discipline, and termination of all crew
(i.e. waiter/waitress, host/hostess, Guest Service Supervisor, grill worker,
fountain worker, and dish washers) providing all FICC policies and procedures
are followed. Failure by FriendCo to adhere to FICC's policies and
procedures in performing the foregoing functions shall obligate FriendCo to
indemnify FICC (pursuant to Section 9 of this Agreement) from any liabilities
caused therefrom. FriendCo shall have the right to
<PAGE>
seek guidance from FICC on a case-by-case basis to interpret FICC's policies
and procedures as applied to case specific situations. FriendCo will have
authority to schedule and assign employee jobs as well as schedule deliveries
of milk, bread and produce. FriendCo will also have authority to perform
routine restaurant maintenance and such other incidences of routine
restaurant operations. FriendCo and its management employees will not have
authority to alter any other secondary restaurant management position (i.e.
general managers or assistant managers) without FICC approval as well as
contract for or approve any extraordinary expenses, hire consultants or
arrange for or approve capital expenditures without the prior express written
consent of FICC.
5. COMPENSATION
For each fiscal month or partial fiscal month during the Term for
which this Agreement is in effect, FICC shall pay to FriendCo a management
fee equal to four percent (4%) of the Net Sales for each managed restaurant
prorated for such days the restaurant was open. This management fee shall be
paid on or before the 20th day following the end of such month or partial
month.
In addition to the management fee, FICC shall pay FriendCo an operations
improvement fee in an amount equal to fifteen percent (15%) of the
improvement in Restaurant Cash Flow ("RCF") which will be calculated based
upon one of two ways:
<PAGE>
(1)FriendCo manages for a full year -- to the anniversary date of this
agreement; operations improvement is calculated based on aggregate RCF for
the twelve (12) month period of FriendCo's oversight less aggregate RCF for
prior twelve (12) month corresponding period;
(2)FriendCo manages less than a full year (i.e., to a termination date
for the Agreement); operations improvement is calculated based on aggregate
RCF corresponding partial period of the prior year (in whole months).
This operations improvement fee will be paid on or before the 45th day
following the end of the measurement period.
6. RESTAURANT CAPITAL REQUIREMENTS
Any Restaurant Capital Requirements shall be determined on a monthly
basis by mutual agreement between FICC and FriendCo. All agreed upon
Restaurant Capital Requirements shall be the sole responsibility of FICC, and
FICC agrees to reimburse FriendCo for any expenditures made by FriendCo for
any approved Restaurant Capital Requirements.
7. NON-SOLICITATION
During the Term of this Agreement, and for a period of six (6)
months following the termination of this Agreement, FriendCo and its
affiliates agree that they shall not solicit for employment, offer to employ
or employ any employees of FICC employed at any managed restaurant without
the express written consent of FICC. FriendCo agrees that, in addition to
other remedies, FICC may seek an injunction in a court of competent
jurisdiction to enforce this provision.
<PAGE>
During the term of this Agreement and for a period of six (6) months
following the termination of this Agreement, FICC agrees that it shall not
solicit for employment, offer to employ or employ any employees of FriendCo
or its affiliates without the express written consent of FriendCo. FICA
agrees that, in addition to other remedies, FriendCo may seek an injunction
to a court of competent jurisdiction to enforce this provision.
8. TERMINATION
a. This Agreement may be terminated by FICC without cause, with
such termination effective upon the ninetieth (90th) day following the
receipt of a written notice of termination.
b. Termination for failure of payment or abandonment of any
restaurant shall be effective upon the tenth (10th) day following the receipt
of a written notice of Termination for Cause issued by either party.
c. The termination of this Agreement pursuant to Subparagraph a.,
supra, shall operate to release both parties from any claims for lost
business opportunities, lost future economic benefit, interference with
existing or future contractual relations or trade disparagement, as well as
from any claims for consequential damages arising from such termination.
<PAGE>
d. The termination of this Agreement pursuant to either
Subparagraph a. or Subparagraph b. shall not operate to release either party
from any obligation arising under this Agreement.
9. INDEMNIFICATION
FICC and FriendCo shall indemnify, defend and hold each other
harmless from claims, demands and causes of action asserted against the
indemnitee by any person (including, without limitation, FICC's and
FriendCo's employees) for personal injury, death, or loss of or damage to
property resulting from the indemnitor's active or passive negligence or
willful misconduct. Where such personal injury, death, or loss of or damage
to property is the result of joint active or passive negligence or willful
misconduct of FICC and FriendCo, the indemnitor's duty of indemnification
shall be in proportion to its allocable share of joint active or passive
negligence or willful misconduct. If FICC is strictly liable under law,
FriendCo's duty of indemnification shall be in the same proportion that the
negligent acts or omissions or willful acts of FriendCo contributed to the
personal injury, death, or loss of or damage to property for which FICC is
strictly liable. If FriendCo is strictly liable under law, FICC's duty of
indemnification shall be in the same proportion that the negligent acts or
omissions or willful acts of FICC contributed to the personal injury, death,
or loss of or damage to property for which FriendCo is strictly liable.
<PAGE>
10. BREACH; NOTICE AND RIGHT TO CURE
For any claim of breach of this Agreement to be effective, the
breaching party must be sent written notice detailing the particulars of the
breach and provided not less than ten (10) days in which to cure the claim of
breach or to dispute such claim. For any claim of breach which does not
create grounds for a Termination for Cause, the breaching party may cure the
breach within such ten (10) day period, or, if such breach is not capable of
being cured within such ten (10) day period, the breaching party must
commence its efforts to cure the breach within such ten (10) day period and
thereafter must diligently pursue such cure.
11. REPORTING OF SALES
FICC shall provide FriendCo with a complete report of monthly sales
and a unit level profit and loss statement within ten (10) days of the close
of each financial reporting period.
12. ASSIGNMENT
Neither party to this Agreement can assign its interest herein
(other than to an affiliate or subsidiary) without the prior written consent
of the other party, and the granting of such consent is at the sole
discretion of the granting party.
<PAGE>
13. CONFLICT OF INTEREST
FICC and FriendCo will exercise utmost care and diligence in the
application of reasonable business practices, to prevent any actions or
conditions which could result in a conflict with the other's best interest.
14. CHOICE OF LAW; ARBITRATION OF DISPUTES
This Agreement shall be governed and interpreted in accordance with
the substantive laws (but not the choice of law provisions) of the State of
Delaware. No party to this Agreement may bring or maintain an action
against, or which includes, another party to this Agreement except in the
federal or state courts located in the State of Delaware. All parties to
this Agreement expressly waive any defense of lack of jurisdiction or
improper venue to any action brought in the State of Delaware.
For any action or Dispute arising under this Agreement, the parties
expressly agree that the sole forum shall be in arbitration before the
American Arbitration Association pursuant to the terms of the Arbitration
Program attached hereto as Exhibit B. Add attorneys fees/cost to prevailing
party.
15. INSURANCE
During the term of this Agreement, and for a period of one (1) year
following the termination of this Agreement, FICC agrees to maintain in
effect such policies of commercial general liability, workers compensation,
unemployment,
<PAGE>
property and hazard insurance as are commercially reasonable and necessary to
fulfill each of its obligations under Paragraph 11, supra; and to provide
FriendCo with certificates of insurance naming FriendCo as an additional
insured on such policies.
16. NOTICES
To F.I.C.C.:
Friendly Ice Cream Corporation
1855 Boston Road
Wilbraham, Massachusetts 01095
Attention: Donald N. Smith
Chairman and President
Facsimile No.: (413)543-3282
with a copy to:
Aaron B. Parker
Associate General Counsel
Friendly Ice Cream Corporation
1855 Boston Road
Wilbraham, Massachusetts 01095
Facsimile No.: (413)543-3282
To FriendCo:
FriendCo Restaurants, Inc.
1657 Crofton Boulevard
Crofton, Maryland 21114
Attention: Ronald D. Kirstien
Chairman, President and CEO
Facsimile No.: (410)793-0754
<PAGE>
with a copy to:
David J. Norman
Mason, Ketterman & Morgan, P.A.
1657 Crofton Boulevard
Suite 100
Crofton, Maryland 21114
Facsimile No.: (410)793-0522
17. GENERAL PROVISIONS
a. Modifications. No change or modification of this Agreement
shall be valid or binding upon the parties hereto, nor shall any waiver of
any term or condition in the future unless such change, modification or
waiver shall be in writing and signed by all of the parties hereto.
b. Binding Effect. This Agreement shall inure to the benefit of
and shall be binding upon the parties, their transferees, successors and
assigns.
c. Entire Agreement. This Agreement represents the entire and
integrated agreement of the parties with respect to the subject matter
hereof, and supersedes all prior agreements, oral and written, relating to
the subject matter hereof.
d. Exhibits. All exhibits which are referenced herein and
attached hereto are incorporated herein by reference.
<PAGE>
e. Severability. In the event any provision of this Agreement is
held to be unenforceable or invalid, such finding of unenforceability or
invalidity shall not affect the enforceability or validity of the remaining
provisions of this Agreement.
f. Continuing Obligations. Each indemnity provided for herein
shall survive the termination of this Agreement for any reason whatsoever and
each covenant which provides for or permits performance hereunder after
termination or by its nature requires performance after termination shall
survive the termination of this Agreement.
g. Audit. Either party, at its expense, shall have the right to audit
the other's books and records relating to any managed restaurant from
time-to-time, limited, however, to two (2) times during the Term of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and date first written above.
ATTEST: FRIENDLY ICE CREAM CORPORATION
By:___________________________ By:
Name:_________________________ Name:
Title:________________________ Title:
<PAGE>
ATTEST: FRIENDCO RESTAURANTS, INC.
By:___________________________ By:
Name:_________________________ Name:
Title:________________________ Title:
<PAGE>
E X H I B I T A
Management Agreement Properties (14 Total)
No. Rest. No. City Address State
1 0384 Baltimore 6901 Security Boulevard MD
2 0780 Cockeysville 240 Hunt Valley MD
3 0880 Randallstown 9428 - 30 Liberty Road MD
4 0905 Laurel 14750 Baltimore Washington Blvd. MD
5 0919 Gaithersburg 701 Russell Avenue MD
6 0929 Fredericksburg 280 Spotsylvania Mall VA
7 0939 Waldorf 2850 Crain Highway MD
8 0956 Manassas 8891 Centerville Road VA
9 0972 Alexandria 6550-A Little River Turnpike VA
10 1013 Columbia 8660 Guilford Road MD
11 1028 Glen Burnie 7900 Ritchie Highway MD
12 0393 Wilmington Concord Mall DE
13 0452 Towson 825 Dulaney Valley Road MD
14 0835 Woodbridge 14510 Jefferson Davis Highway VA
<PAGE>
Exhibit 10.9
PURCHASE AND SALE AGREEMENT
BETWEEN
FRIENDLY ICE CREAM CORPORATION
1855 Boston Road
Wilbraham, Massachusetts 01095
AND
FRIENDCO RESTAURANTS, INC.
1657 Crofton Boulevard
Crofton, Maryland 21114
DATED
July , 1997
<PAGE>
TABLE OF CONTENTS
Section Page
1. Assets Purchased........................................1
A. Franchise Rights...................................2
B. Management Rights 2
C. Development Rights 2
D. Equipment and Tenant Improvements 3
E. Software Rights 3
F. Trademark and Service Mark Rights 3
G. Inventory and Restaurant Cash 3
2. Purchase Price and Allocation 4
3. Purchase Price Refunded on Loss of
Franchised Restaurant 5
4. Holdback of Portion of Purchase Price 6
A. Creation of Escrow Account 6
B. Application of Escrow 7
C. Notice of Claims 8
D. Disbursement by Escrow Agent 9
5. Closing 9
A. Time and Place 9
B. Documents Executed at Closing 10
C. Documents Delivered at Closing 10
D. Real Estate Closing 11
<PAGE>
E. Documents Executed at Real Estate Closing 11
F. Documents Delivered at Post-Real Estate Closing 11
6. Conditions of F.I.C.C.'s Obligation to Close 12
A. Board of Director Approval 12
B. Approval of Non-Disturbance Agreement
By Voting Majority of Lending
Group 12
C. Representations and Warranties 13
D. Opinion of FriendCo's Counsel 13
E. Evidence of Payment 13
7. Conditions of FriendCo's Obligation to Close 13
A. Board of Director Approval of FriendCo
and DavCo Restaurants, Inc. 14
B. Receipt of Executed Non-Disturbance Agreement 14
C. Representations and Warranties 14
8. Representations and Warranties of F.I.C.C. 14
A. Organization 14
B. Authorization 15
C. No Violations 15
D. Title to Assets 16
E. Joint Inspection 16
F No Brokers 16
G. Post Closing 17
<PAGE>
9. Representations and Warranties of FriendCo 17
A. Organization 17
B. Authorization 17
C. No Violations 18
D. No Conflict with Wendy's International 18
E. No Brokers 19
F. Offer of Employment 19
10. Indemnification 19
A. Pre-Effective Date 19
B. Post-Effective Date Expenses 20
C. General Indemnification 20
D. Environmental Indemnification 20
11. Definitions 21
12. Choice of Law and Jurisdiction 23
A. Governing Law and Forum 23
B. Arbitration of Minor Disputes 23
C. Award of Costs and Attorney's Fees 23
13. Survival of Terms, Representations and Warranties 24
14. Severability 24
<PAGE>
15. Notices 25
EXHIBITS: SCHEDULES:
Exhibit A: Franchise Agreement Schedule A: List of Franchised Restaurants
Exhibit B: Management Agreement Schedule B: List of Managed Restaurants
Exhibit C: Development Agreement Schedule C: List of Exempted Equipment
Exhibit D: Software License Agreement
Exhibit E: Trademark License Agreement
Exhibit F: Escrow Agreement
Exhibit G: Non-Disturbance Agreement
Exhibit H: Guaranty
<PAGE>
PURCHASE AND SALE AGREEMENT
THIS AGREEMENT is dated , 1997, by and
between Friendly Ice Cream Corporation, a Massachusetts corporation ("F.I.C.C.")
and FriendCo Restaurants, Inc., a Maryland corporation ("FriendCo").
WHEREAS, F.I.C.C. owns and operates 51 Friendly's Restaurants in Delaware,
Maryland and certain counties of Northern Virginia; and
WHEREAS, F.I.C.C. desires to achieve additional market penetration in the
above-mentioned territory, and FriendCo desires to operate Friendly's
Restaurants and to construct new Friendly's Restaurants;
NOW, THEREFORE, in consideration of the exchange of mutual covenants and
the consideration contained herein, F.I.C.C. hereby agrees to sell, and
FriendCo hereby agrees to buy, the following rights and assets pursuant to the
terms and conditions of this Agreement.
1. ASSETS PURCHASED
Upon the Effective Date of this Agreement, FriendCo will acquire from
F.I.C.C. and its relevant subsidiaries all right, title and interest in the
following assets:
<PAGE>
A. Franchise Rights. FriendCo will receive the right to operate the
thirty-four (34) Friendly's Restaurants identified in Schedule A pursuant to
the terms of a Franchise Agreement with Friendly's Restaurants Franchise, Inc.
("F.R.F.I.") in the form attached hereto as Exhibit A.
B. Management Rights. FriendCo will receive the right to manage
fourteen (14) Friendly's Restaurants identified in Schedule B pursuant to the
terms of a Management Agreement with F.I.C.C. in the form attached hereto as
Exhibit B. FriendCo will also receive the right to convert any managed
restaurant to a franchised restaurant during the term of the Management
Agreement at FriendCo's sole option (subject only to landlord consent to lease
assignment or subletting, if necessary) upon notice to F.I.C.C., payment of an
initial franchise fee, execution of a Franchise Agreement, execution of a
sublease in substantially the form of the subleases employed the parties
pursuant to this transaction and payment to F.I.C.C. of an amount equal to a 5.3
multiple of the restaurant earnings before interest, taxes, depreciation and
amortization (hereinafter "Restaurant EBITDA") as measured on a trailing twelve
(12) month basis from the last day of the last full month preceding the notice
to F.I.C.C. (but in no event shall the payment be less than the amount of the
depreciated book value of the restaurant equipment, cash and inventory).
C. Development Rights. FriendCo will receive the right to construct
and operate up to one hundred (100) additional Friendly's Restaurants in an
exclusive territory consisting of the States of Delaware and Maryland, the
District of Columbia, and certain
<PAGE>
counties of Northern Virginia, all as is more specifically set forth in the
Development Agreement between F.R.F.I. and FriendCo, in the form attached
hereto as Exhibit C.
D. Equipment and Tenant Improvements. FriendCo will receive all of
F.I.C.C.'s rights, title and interest to the equipment and tenant improvements
(but not fixtures) in each of the thirty-four (34) Friendly's Restaurants
identified in Schedule A, with the sole exception of such equipment identified
in Schedule C, attached hereto.
E. Software Rights. FriendCo will receive the rights to use all
current F.I.C.C. operating software in all franchised restaurants, and will be
entitled to receive all improvements and upgrades to such software, pursuant to
the terms of a Software License Agreement with F.I.C.C. in the form attached
hereto as Exhibit D.
F. Trademark and Service Mark Rights. FriendCo will receive the
non-exclusive rights to utilize for the benefit of each franchised or managed
restaurant all valid Trademarks and Service Marks owned or licensed by F.I.C.C.
pursuant to the terms of the Franchise Agreements with F.R.F.I. and a Trademark
License Agreement with F.I.C.C. in the form attached hereto as Exhibit E.
G. Inventory and Restaurant Cash. FriendCo will receive on the
Effective Date the rights to all inventory and restaurant cash for each of the
thirty-four (34) franchised restaurants identified in Schedule A.
<PAGE>
2. PURCHASE PRICE AND ALLOCATION
A. With respect to the assets listed in subparagraphs 1.A., 1.B.,
1.C., 1.D., 1.E. and 1.F., the purchase price shall be Seven Million Five
Hundred Fifty-Six Thousand Dollars ($7,556,000.00), representing approximately
a 5.3 times multiple of the represented Restaurant EBITDA of the thirty-four
(34) restaurants identified in Schedule A.
B. With respect to the assets listed in category 1.G., the purchase
price shall be an amount agreed upon by F.I.C.C. and FriendCo following the
conclusion of an Inventory and Restaurant Cash audit performed jointly by
F.I.C.C. and FriendCo on the Effective Date.
C. The purchase price set forth in subparagraph 2.A. shall be
allocated as follows: first, in the amount of Eight Hundred Sixty Thousand
Dollars ($860,000.00) to initial franchise fees for the thirty-four (34)
franchised restaurants; second, in the amount of Two Million Seven Hundred
Thousand Dollars ($2,700,000.00) to equipment and tenant improvements in the
thirty-four (34) franchised restaurants; third, in the amount of Three Million
Four Hundred Ninety-Six Thousand Dollars ($3,496,000.00) to goodwill; and
fourth in the amount of Five Hundred Thousand Dollars ($500,000.00) to
franchise development rights for the States of Delaware and Maryland, the
District of Columbia and Northern Virginia.
<PAGE>
3. PURCHASE PRICE REFUNDED ON LOSS OF FRANCHISED RESTAURANT
A. For any of the thirty-four (34) franchised restaurants being
acquired by FriendCo from F.I.C.C., if the right to occupy and operate such
restaurant is terminated by a landlord, lender or governmental agency or if
primary access to such restaurant is lost due to a defect in title existing as
of the Effective Date, within ten (10) years of the Effective Date hereof, and
such termination was neither caused nor contributed to by FriendCo but results
from the loss or denial of a Certificate of Occupancy, or the loss of the right
to occupy or access the property other than through an eminent domain
proceeding which provides FriendCo with compensation for its loss of business
at such location, then for each such terminated restaurant, an allocable
portion of the purchase price will be refunded to FriendCo by F.I.C.C. in
accordance with the following formula:
1) For each full year less than ten (10) years of occupancy lost
through such termination, F.I.C.C. shall refund 10% of the allocable portion of
the restaurant purchase price (i.e. 5.3 times the restaurant's 1996
E.B.I.T.D.A.) to FriendCo.
2) For any partial year of occupancy lost through such termination,
F.I.C.C. shall refund an amount equal to .00274 times the number of days lost
in such partial year times the allocable portion of the restaurant purchase
price (i.e. 5.3 times the restaurant's 1996 E.B.I.T.D.A.) to FriendCo.
<PAGE>
3) In addition, FriendCo shall be entitled to recover from F.I.C.C.
FriendCo's reasonable expenses incurred in attempting to prevent the
termination of its right to occupy and operate such restaurant only, if
F.I.C.C. does not elect to attempt to prevent the termination of such rights
itself.
B. No refund shall be due to FriendCo for any of the thirty-four
(34) franchised restaurants lost or terminated after ten (10) years of
occupancy by FriendCo, for any franchised restaurant lost or terminated due to
any action or inaction specifically attributable to FriendCo, or for any newly
constructed restaurant beyond the original thirty-four (34) franchised
restaurants.
C. The sole exceptions to the ten (10) year period of occupancy and
operation required under this Paragraph shall be for the expiration of the
lease for restaurant numbered 751 and 461, which the parties hereby acknowledge
expire on January 31, 2006 and February 28, 2007.
4. HOLDBACK OF PORTION OF PURCHASE PRICE
A. Creation of Escrow Account. F.I.C.C. and FriendCo agree to the
creation of an Escrow Account at First National Bank of Maryland pursuant to
the terms of an Escrow Agreement, in the form attached hereto as Exhibit F, to
be funded by the
<PAGE>
holdback of Two Hundred Fifty Thousand Dollars ($250,000.00),
which amount shall be deposited into the Escrow Account.
B. Application of Escrow.
1) Subject to subparagraph 4.B.2), below, the parties hereto agree
that the amounts in the Escrow Account shall be used to indemnify and hold
harmless FriendCo from and against losses relating to cash, inventory and
restaurant conditions existing as of the Effective Date in the manner set forth
in Paragraph 4 of this Agreement and in the Escrow Agreement. All such amounts
shall be disbursed out of the Escrow Account in accordance with the terms of the
Escrow Agreement, and any such amounts distributed to FriendCo shall be deemed
to reduce the goodwill portion of the Purchase Price as set forth in Paragraph
2 of this Agreement.
2) FriendCo may not make any claim for losses (other than for
Restaurant Cash Losses or Inventory Losses) pursuant to this Paragraph 4 unless
the claim relates to a condition which existed as of the Effective Date and
such claim amounts to Ten Thousand Dollars ($10,000.00) for a loss relating to
an individual item, occurrence or event or Twenty Thousand Dollars ($20,000.00)
for a claim arising out of or relating to a series of items, occurrences or
events or related items occurrences or events (collectively, the "Threshold
Amount"). A claim for each of Restaurant Cash Losses or Inventory Losses may
not be made unless such claim exceeds One Hundred Dollars ($100.00) on an
individual restaurant basis.
<PAGE>
C. Notice of Claims.
1) For any claims relating to Restaurant Cash Losses or Inventory
Losses, FriendCo shall have thirty (30) days from the Effective Date hereof to
send written notice of the claim(s) simultaneously to the Escrow Agent and to
F.I.C.C. Such written notice shall identify the franchised restaurant(s) to
which the claim applies and shall state the factual basis for the claim and
well as the exact amount of the claim.
2) For any other claims for losses which exceed the Threshold
Amount, FriendCo shall have ninety (90) days from the Effective Date to send
written notice of such claims(s) simultaneously to the Escrow Agent and to
F.I.C.C. Such written notice shall identify the franchised restaurant(s) to
which the claim applies and shall state the factual basis for the claim as well
as the exact amount of the claim or an estimate of the amount of the claim if
the exact amount is not determinable at the time written notice is given.
3) If F.I.C.C. shall object to either the claim or the amount
claimed in the written notice, F.I.C.C. shall send written notice of its
objection simultaneously to the Escrow Agent and FriendCo within thirty (30)
days of its receipt of the written notice of the claim. If no objection is
provided within such thirty (30) day period, F.I.C.C. shall be deemed to have
acknowledged the validity of the amount claimed, and the Escrow Agent shall
thereafter transfer to FriendCo in immediately available funds an amount equal
to the claim, pursuant to the terms of the Escrow Agreement.
<PAGE>
4) If F.I.C.C. shall have sent a written objection to FriendCo and
the Escrow Agent within the thirty (30) day period for objection, F.I.C.C. and
FriendCo shall have a period of thirty (30) days thereafter to resolve or
compromise the claim. If a resolution or compromise is reached, the parties
shall jointly send to the Escrow Agent a notice of resolution, and the Escrow
Agent shall make such distribution(s) as are specified in the notice of
resolution. If F.I.C.C. and FriendCo are unable to resolve or compromise the
claim within the thirty (30) day period, then the Escrow Agent shall retain an
amount equal to the amount in dispute between the parties, and either F.I.C.C.
or FriendCo shall have the right to refer the disputed claim(s) to arbitration
pursuant to Paragraph 12.B, infra.
D. Disbursement by Escrow Agent. If the Escrow Agent shall not have
received any written notice of claim(s) by the ninety-third (93rd) day
following the Effective Date of this Agreement, or if the total amount of all
claims received does not equal or exceed the amount of the Escrow Account, the
Escrow Agent shall thereafter proceed to disburse to F.I.C.C. the amount by
which the Escrow Account exceeds the amount of any claims in immediately
available funds, pursuant to the terms of the Escrow Agreement.
5. CLOSING
A. Time and Place. The Closing on this Purchase and Sale Agreement
will take place at the offices of DavCo Restaurants, Inc., 1657 Crofton
Boulevard, Crofton, Maryland, 21114 on Thursday, July 10, 1997, or at such time
and place as the parties hereto may agree. Any documents necessary to
effectuate the Closing on this Purchase and Sale
<PAGE>
Agreement may be executed in two (2) or more original counterparts, any one
of which need not contain the signatures of more than one (1) party, but all
such counterparts taken together will constitute one and the same agreed
document.
B. Documents Executed at Closing. The following documents shall be
executed by all such necessary parties at the Closing:
1) Purchase and Sale Agreement between F.I.C.C. and FriendCo
2) Development Agreement between F.R.F.I. and FriendCo
3) 34 Individual Restaurant Franchise Agreements between F.R.F.I.
and FriendCo
4) Trademark License Agreement between F.I.C.C. and FriendCo
5) Software License Agreement between F.I.C.C. and FriendCo
6) Escrow Agreement between F.I.C.C., FriendCo and First National
Bank of Maryland
7) Letter Agreement regarding Maryland Science Center restaurant
between F.I.C.C. and FriendCo
C. Documents Delivered at Closing. The following documents shall be
delivered by the designated party at Closing:
1) Non-Disturbance Agreement between Lender's of F.I.C.C., FriendCo
and DavCo Restaurants (F.I.C.C.)
<PAGE>
2) Opinion of Counsel of FriendCo
<PAGE>
D. Real Estate Closing. The Closing on all necessary Real Estate
Documents will take place at the offices of DavCo Restaurants, Inc., 1657
Crofton Boulevard, Crofton, Maryland, 21114, at 11:00 a.m. on the Effective
Date, or at such time and place as the parties hereto may agree. Any documents
necessary to effectuate the Real Estate Closing may be executed in two (2) or
more original counterparts, any one of which need not contain the signatures of
more than one (1) party, but all such counterparts taken together will
constitute one and the same agreed document.
E. Documents Executed at Real Estate Closing. The following
documents shall be executed by all necessary parties at the Real Estate
Closing:
1) 13 Prime Leases between F.I.C.C. and FriendCo
2) 21 Subleases between F.I.C.C. and FriendCo
F. Documents Delivered Post-Real Estate Closing. The following
documents shall be delivered by F.I.C.C. to FriendCo within six (6) months of
the Effective Date, pursuant to paragraph 8.G.:
1) 11 Landlord Consents to Sublease (F.I.C.C.)
2) Lease Extensions on Restaurants
Nos. 404, 411, 751 and 813
3) Evidence of Financing
<PAGE>
4) 34 Memoranda of Lease or Sublease between F.I.C.C. and FriendCo
5) 21 Estoppel Certificates on Subleases
6) 21 Non-Disturbance Agreements from Lenders of Subleased Properties
6. CONDITIONS OF F.I.C.C.'S OBLIGATION TO CLOSE
The obligations of F.I.C.C. to close on this Purchase and Sale Agreement
shall be subject to the fulfillment at or prior to the Closing of each of the
following conditions:
A. Board of Director Approval. The Board of Directors of F.I.C.C.
shall have approved the transactions contemplated under this Purchase and Sale
Agreement and shall have authorized its execution by F.I.C.C.
B. Approval of Non-Disturbance Agreement By Voting Majority of
Lending Group. F.I.C.C. shall have received the approval of a majority of the
votes of the Lending Group for the Non-Disturbance Agreement between the
Lenders, FriendCo and DavCo Restaurants, as evidenced by the signature of the
Collateral Agent on the Non-Disturbance Agreement.
<PAGE>
C. Representations and Warranties. The representations and
warranties of FriendCo set forth in Paragraph 9 shall be true and correct in
all material respects as of the date of this Agreement and as of the Effective
Date.
D. Opinion of FriendCo's Counsel. F.I.C.C. shall have received an
opinion of FriendCo's counsel, Mason, Ketterman & Morgan, dated as of the
Closing Date, as to FriendCo's authority to execute the Purchase and Sale
Agreement, DavCo Restaurants, Inc.'s authority to execute any guarantee, and the
lack of any conflict between this transaction and any contracts with Wendy's
International, Inc., whether executed by FriendCo, its corporate parent, or any
affiliate.
E. Evidence of Payment. F.I.C.C. shall have received by the Real
Estate Closing Date evidence of FriendCo's ability to transfer sufficient funds
to F.I.C.C. to satisfy the purchase price set forth in Paragraph 2, supra.
7. CONDITIONS OF FRIENDCO'S OBLIGATION TO CLOSE
The obligations of FriendCo to close on the Purchase and Sale Agreement
shall be subject to the fulfillment at or prior to the Closing of each of the
following conditions:
<PAGE>
A. Board of Director Approval of FriendCo and DavCo Restaurants,
Inc. The Boards of Directors of FriendCo and its corporate parent, DavCo
Restaurants, Inc., shall both have approved of this Purchase and DavCo's
guarantee and shall both have authorized execution.
B. Receipt of Executed Non-Disturbance Agreement. FriendCo shall
have received an original Non-Disturbance Agreement between F.I.C.C.'s
Lenders, FriendCo and DavCo Restaurants, Inc., in the form attached hereto
as Exhibit G, executed by the Collateral Agent for F.I.C.C.'s Lenders.
C. Representations and Warranties. The representations and
warranties of F.I.C.C. set forth in Paragraph 8 shall be true and correct in
all material respects as of the date of this Agreement and the Effective
Date.
8. REPRESENTATION AND WARRANTIES OF F.I.C.C.
F.I.C.C. hereby represents and warrants to FriendCo as follows:
A. Organization. F.I.C.C. is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation and has all requisite corporate power and authority to
execute all documents contemplated in this transaction.
<PAGE>
B. Authorization. F.I.C.C. has full corporate power and
authority to perform its obligations under this Agreement and the documents
to be signed at Closing and all other transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the other
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action by F.I.C.C. The Board of Directors of F.I.C.C.
has approved the execution, delivery and performance of this Agreement and
the consummation of all other transactions contemplated hereby. This
Agreement has been duly executed and delivered by F.I.C.C. and constitutes
the valid and binding agreement of F.I.C.C., enforceable against F.I.C.C. in
accordance with its terms, subject to applicable bankruptcy, insolvency and
other similar laws affecting the enforceability of creditors' rights
generally, general equitable principles and the discretion of courts in
granting equitable remedies.
C. No Violations. The execution, delivery and performance of this
Agreement, the consummation of the other transactions contemplated hereby
and the fulfillment of a compliance with the terms and conditions of this
Agreement do not and will not violate or conflict with (i) any terms or
provisions of the Articles of Incorporation or By-laws of F.I.C.C. or (ii)
any judgment, decree, order, statute, rule or regulation applicable to
F.I.C.C. or any of its assets listed in Paragraph 1, supra, except for such
violations which could not reasonably be expected to materially impair or
delay the ability of F.I.C.C. to consummate the transactions contemplated
hereby.
<PAGE>
D. Title to Assets. Title to all assets identified in Paragraph
1, supra, which F.I.C.C. will transfer, lease or license to FriendCo is
valid and transferable by F.I.C.C., except as specifically excluded. The
trademarks and service marks to be licensed to FriendCo are validly held by
F.I.C.C. or licensed to F.I.C.C. for use without dispute or challenge.
F.I.C.C. maintains current and valid Certificates of Occupancy for each of
the thirty-four (34) franchised restaurants and fourteen (14) managed
restaurants, the cash flow represented to FriendCo as the 1996 E.B.I.T.D.A.
for the thirty-four (34) franchised restaurants is correct and accurate to
the best of F.I.C.C.'s knowledge and understanding, and each of the
thirty-four (34) franchised restaurants have valid and existing primary
access as of the Effective Date, provided, however, any breach of this
warranty of access shall have as its sole remedy the rights provided under
Paragraph 3, supra.
E. Joint Inspection. Repairs reasonably determined to be
necessary to the Restaurant and Premises to bring them into standard
operating condition through a Joint Inspection will be made by F.I.C.C. at
its sole cost and expense, in a good and workmanlike manner at a time
mutually convenient to F.I.C.C. and FriendCo.
F. No Brokers. None of F.I.C.C., F.R.F.I., or any of their
respective executive officers or directors has employed any broker, finder
or investment banker or incurred any liability for commissions or finders
fees in connection with the transactions contemplated hereby.
<PAGE>
G. Post Closing. F.I.C.C. shall employ reasonable and good faith
efforts to expeditiously obtain and deliver to FriendCo all third party
landlord consents to sublet, lease extensions, estoppel certificates and
non-disturbance certificates for the twenty-one (21) subleased franchised
restaurants. A breach of this warranty shall be deemed to have occurred
upon any third party landlord (or its successor-in-interest) terminating or
attempting to terminate its lease with F.I.C.C.; however, FriendCo's sole
remedy for a breach of this warranty shall be pursuant to Paragraph 3, supra.
9. REPRESENTATIONS AND WARRANTIES OF FRIENDCO
FriendCo hereby represents and warrants to F.I.C.C. as follows:
A. Organization. FriendCo is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation and has all requisite corporate power and authority to
execute all documents contemplated in this transaction.
B. Authorization. FriendCo has full corporate power and authority
to perform its obligations under this Agreement and the documents to be
signed at Closing and all other transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the other
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action by FriendCo. The Board of Directors of FriendCo
has approved the execution, delivery and performance of this Agreement and
<PAGE>
the consummation of all other transactions contemplated hereby. This
Agreement has been duly executed and delivered by FriendCo and constitutes
the valid and binding agreement of FriendCo, enforceable against FriendCo in
accordance with its terms, subject to applicable bankruptcy, insolvency and
other similar laws affecting the enforceability of creditors' rights
generally, general equitable principles and the discretion of courts in
granting equitable remedies.
C. No Violations. The execution, delivery and performance of this
Agreement, the consummation of the other transactions contemplated hereby
and the fulfillment of a compliance with the terms and conditions of this
Agreement do not and will not violate or conflict with (i) any terms or
provisions of the Articles of Incorporation or By-laws of FriendCo or (ii)
any judgment, decree, order, statute, rule or regulation applicable to
FriendCo or any of its assets listed in Paragraph 1, supra, except for such
violations which could not reasonably be expected to materially impair or
delay the ability of FriendCo to consummate the transactions contemplated
hereby.
D. No Conflict with Wendy's International. The execution,
delivery and performance of this Agreement and the consummation of the other
transactions contemplated hereby will not violate or conflict with any
agreements, contracts or obligations between FriendCo or its corporate
parent, DavCo Restaurants, Inc. and Wendy's International, Inc.
<PAGE>
E. No Brokers. Neither FriendCo nor its respective executive
officers or directors has employed any broker, finder or investment banker
or incurred any liability for commissions or finders fees in connection with
the transactions contemplated hereby.
F. Offer of Employment. FriendCo agrees to make an offer of
employment to the restaurant level employees at the thirty-four (34)
Friendly's Restaurants identified in Schedule A upon substantially the same
terms as each employee is presently employed. For purposes of this Paragraph
9F only, restaurant level employees shall include waiter/waitress,
host/hostess, guest services, supervisor, grill workers, fountain worker,
dish washer, district manager, general manager and assistant manager.
10. INDEMNIFICATION
A. Pre-Effective Date Expenses. Except as provided in
subparagraph 10.D. infra, F.I.C.C. will indemnify and hold FriendCo harmless
for any and all expenses of restaurant occupation or operation which arise
or are fully due prior to the Effective Date hereof. Further, F.I.C.C. will
indemnify and hold FriendCo harmless for F.I.C.C.'s pro rata portion of any
expenses of restaurant occupation or operation which do not become due until
after the Effective Date hereof.
<PAGE>
B. Post-Effective Date Expenses. Except as provided in
subparagraph 10.D., infra, FriendCo will indemnify and hold F.I.C.C.
harmless for any and all expenses of restaurant occupation or operation which
arise or are fully due after the Effective Date hereof. Further, FriendCo
will indemnify and hold F.I.C.C. harmless for FriendCo's pro rata portion of
any expenses of restaurant occupation or operation which become due prior to
the Effective Date hereof.
C. General Indemnification. Except as otherwise provided in this
Paragraph 10, F.I.C.C. and FriendCo will indemnify, defend, and hold each
other harmless from claims, demands and causes of action asserted against
the indemnitee by any person (including, without limitation, F.I.C.C.'s and
FriendCo's employees, agents, contractors or any third party) for personal
injury or death or for loss of or damage to property and resulting from the
indemnitor's active or passive negligence or willful misconduct. Where
personal injury, death, or loss of or damage to property is a result of the
joint active or passive negligence or willful misconduct of F.I.C.C. and
FriendCo, the indemnitor's duty of indemnification shall be in proportion to
its allocable share of joint active or passive negligence or willful
misconduct.
D. Environmental Indemnification. In the event of any leak,
spill, discharge, seepage or other contamination which occurred or was first
present in any of the thirty-four (34) franchised restaurants or the
surrounding leased or subleased premises prior to the Effective Date, or
which occurred or was present in any of the fourteen (14) managed
<PAGE>
restaurants at any time prior to their conversion to the status of a
franchised restaurant, F.I.C.C. shall indemnify and hold FriendCo harmless
from any and all claims, losses, demands, remediation, testing or clean-up
arising from such leak, spill, discharge, seepage or other contamination. In
the event of any leak, spill, discharge, seepage or other contamination
which occurred or was first present in any of the thirty-four (34)
franchised restaurants after the Effective Date, FriendCo shall indemnify and
hold F.I.C.C. harmless from any and all claims, losses, demands,
remediation, testing or clean-up, unless such leak, spill, discharge,
seepage or other contamination first occurs or is first present after the
reversion of control over such property to F.I.C.C.
11. DEFINITIONS
A. As used in this Agreement, the following terms shall have the
following meanings:
1) "Certificate of Occupancy"
shall mean all documentation issued from the appropriate state or county
authorities which permit the occupation and use of the restaurant as a
retail food service establishment.
2)"Closing"
shall mean the execution of all documents set forth in Paragraph 5B of this
Agreement
3)"Closing Date"
shall mean the date of execution of all documents set forth in Paragraph 5B
of this Agreement.
<PAGE>
4)"Effective Date"
shall mean the date of transfer of operational control, title to all assets
and right to receive all income of the thirty-four (34) franchised Friendly's
Restaurants purchased by FriendCo from F.I.C.C. and the receipt of the
purchase price by F.I.C.C.
5)"Escrow Agent"
shall mean First National Bank of Maryland or such affiliated banking entity
as may be designed by First National Bank of Maryland.
6) "Inventory"
shall mean all saleable food products, merchandise, supplies, flatware,
dishes or other items maintained as restaurant inventory by F.I.C.C.
7) "Inventory Losses"
shall mean any damaged, missing or unsaleable food products, merchandise,
unusable, missing or unservicable supplies.
8) "Joint Inspection"
shall mean F.I.C.C. and FriendCo shall jointly inspect each Restaurant and
Premises to determine what if any repairs are necessary to the Building, the
Outside Areas, the Systems, the Trade Fixtures or the Equipment to bring the
foregoing into standard operable condition.
9) "Lending Group" or "Lenders"
shall mean those financial institutions identified in the Second Amended and
Restated Revolving Credit.
10) "Restaurant Cash"
shall mean all cash maintained at any individual restaurant.
<PAGE>
11) "Restaurant Cash Losses"
shall mean any shortfall or negative discrepancy between the amount of
Restaurant Cash determined to be present upon the Joint Inspection and paid
for by FriendCo, and the amount of Restaurant Cash determined to be present
upon the opening of the restaurant for business by FriendCo's employees.
<PAGE>
12. CHOICE OF LAW AND JURISDICTION
A. Governing Law and Forum. This Agreement shall be governed and
interpreted in accordance with the substantive laws (but not the choice of
law provisions) of the State of Delaware. No party to this Agreement may
bring or maintain an action against, or which includes, another party to
this Agreement except in the federal or state courts located in the State of
Delaware unless the sole and exclusive forum for such claim lies in another
jurisdiction. All parties to this Agreement expressly waive any defense of
lack of jurisdiction or improper venue to any action brought in the State
of Delaware.
B. Arbitration of Minor Disputes. For any action or dispute in
which the damages claimed, less costs and attorneys fees, do not exceed Two
Hundred Fifty Thousand Dollars ($250,000.00), the parties expressly agree
that the sole and exclusive forum shall be in arbitration before the
American Arbitration Association, pursuant to its rules in effect at the time
the action or dispute is brought, with the situs of the arbitration in
Wilmington, Delaware.
C. Award of Costs and Attorney's Fees. For any action or dispute
between the parties, the forum court or arbitration panel shall have the
power to award costs and attorneys fees incurred along with a judgment in
favor of the prevailing party.
<PAGE>
13. SURVIVAL OF TERMS, REPRESENTATIONS AND WARRANTIES
None of the terms, obligations, representations or warranties contained
in this Agreement shall be deemed merged with the Closing of this Agreement
or the execution of any documents contemplated hereunder but rather shall
survive the Closing until the expiration or termination of such terms,
obligations, representations and warranties by the written action of all
parties hereto.
14. SEVERABILITY
Any provision hereof which is prohibited or unenforceable in any
jurisdiction will, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction will not invalidate or render unenforceable such provision in
any other jurisdiction. To the extent permitted by law, the parties hereto
waive any provision of law which renders any such provision prohibited or
unenforceable in any respect.
<PAGE>
15. NOTICES
All notices, communications and deliveries hereunder shall be made in
writing signed by the party making the same, shall specify the Paragraph of
this Agreement pursuant to which it is being made or given, and shall be
deemed given or made on (a) the date delivered if delivered in person or
sent by telecopier, (b) the first business day after the date it is sent by a
nationally recognized courier, or (c) the third business day after the date
it is mailed if mailed by registered or certified mail, return receipt
requested, with all postage and other fees prepaid, as follows:
To F.I.C.C.:
Friendly Ice Cream Corporation
1855 Boston Road
Wilbraham, Massachusetts 01095
Attention: Donald N. Smith
Chairman and President
Telecopier: (413)543-3186
with a copy to:
Aaron B. Parker, Esquire
Associate General Counsel
Friendly Ice Cream Corporation
1855 Boston Road
Wilbraham, Massachusetts 01095
Telecopier: (410)543-3282
<PAGE>
To FriendCo:
FriendCo Restaurants, Inc.
1657 Crofton Boulevard
Crofton, Maryland 21114
Attention: Ronald D. Kirstien
Chairman and President
Telecopier: (410)793-0754
with a copy to:
David J. Norman, Esquire
Mason, Ketterman and Morgan
1657 Crofton Boulevard
Suite 100
Crofton, Maryland 21114
Telecopier: (410)7930522
IN WITNESS WHEREOF, the parties hereto have caused their hands and seals
to be subscribed on the day and date first set forth above.
ATTEST: FRIENDLY ICE CREAM CORPORATION
______________________ By:_______________________ (Seal)
Name: Name:
Title: Title:
<PAGE>
FRIENDCO RESTAURANTS, INC.
______________________ By:_______________________ (Seal)
Name: Name:
Title: Title:
<PAGE>
E X H I B I T H
GUARANTY
As an inducement to FRIENDLY ICE CREAM CORPORATION ("Friendly's") to
execute the Purchase and Sale Agreement and all Exhibits thereto, dated July
10, 1997 between Friendly's and FRIENDCO RESTAURANTS, INC. ("FriendCo") and
all addenda and amendments thereto (collectively the "Agreement"), the
undersigned, jointly and severally, hereby unconditionally warrant to
Friendly's and its successors and assigns that all FriendCo's
representations in the Agreement are true and guarantee that all of
FriendCo's obligations and covenants under the Agreement will be punctually
paid and performed.
Upon notice by Friendly's of a default by FriendCo the undersigned will
within the applicable cure period make each payment and perform each
obligation required of FriendCo under the Agreement. Without affecting the
obligations of the undersigned, Friendly's may extend, modify or release any
indebtedness or obligation of FriendCo or any of the undersigned or settle,
adjust or compromise any claims against FriendCo of any of the undersigned.
The undersigned waive notice of amendment of the Agreement, notice of demand
for payment or performance by FriendCo, and all other notices or demands of
any nature whatsoever.
The undersigned further agrees that this Guaranty shall continue to be
effective or be reinstated as the case may be, if at any time payment of any
of the guaranteed obligations is
<PAGE>
rescinded or must otherwise be restored or returned by Friendly's upon the
insolvency, bankruptcy, or reorganization of FriendCo, all as though such
payment has not been made.
The Guarantor specifically waives any obligation of Friendly's to proceed
against FriendCo on any other money or held by FriendCo or any other person
as collateral security, by way of set-off or otherwise.
IN WITNESS WHEREOF, the undersigned has signed this Guaranty as of the
date of the Agreement.
ATTEST: GUARANTOR:
________________________________________
DavCo Restaurants, Inc.
By:
Name:
Title:
<PAGE>
S C H E D U L E B
Management Agreement Properties (14 Total)
No. Rest. No. City Address State
---- --------- ---- ------- -----
1 0384 Baltimore 6901 Security Boulevard MD
2 0780 Cockeysville 240 Hunt Valley MD
3 0880 Randallstown 9428 - 30 Liberty Road MD
4 0905 Laurel 14750 Baltimore Washington Blvd. MD
5 0919 Gaithersburg 701 Russell Avenue MD
6 0929 Fredericksburg 280 Spotsylvania Mall VA
7 0939 Waldorf 2850 Crain Highway MD
8 0956 Manassas 8891 Centerville Road VA
9 0972 Alexandria 6550-A Little River Turnpike VA
10 1013 Columbia 8660 Guilford Road MD
11 1028 Glen Burnie 7900 Ritchie Highway MD
12 0393 Wilmington Concord Mall DE
13 0452 Towson 825 Dulaney Valley Road MD
14 0835 Woodbridge 14510 Jefferson Davis Highway VA
<PAGE>
SOFTWARE LICENSE AGREEMENT
BETWEEN
FRIENDLY ICE CREAM CORPORATION
1855 Boston Road
Wilbraham, Massachusetts 01095
AND
FRIENDCO RESTAURANTS, INC.
1657 Crofton Boulevard
Crofton, Maryland 21114
DATED
July ____, 1997
<PAGE>
TABLE OF CONTENTS
SectionPage
1. Grant of License 1
2. Support 2
3. Term 3
4. Fee 4
5. Ownership of the Product: Confidentiality 4
6. Warranty; Exclusion of Warranties 5
7. Hold Harmless and Indemnity 7
8. Limitation of Liability 8
9. Documentation 8
10. Notices 9
11. Payment 9
12. Modifications to Product 9
13. Entire Agreement 10
14. Governing Laws 10
15. Invalid Provision 10
EXHIBITS
Exhibit A: Maintenance Agreement
<PAGE>
SOFTWARE LICENSE AGREEMENT
THIS AGREEMENT, entered into as of the _____ day of __________, 199__,
is by and between FRIENDLY'S RESTAURANTS FRANCHISE, INC. (hereinafter
("Friendly's") and FRIENDCO RESTAURANTS, INC. hereinafter ("Franchisee").
This Agreement states the terms, covenants and the conditions under which
Friendly's will make available to the Franchisee a proprietary computer
program or programs (hereinafter individually and collectively, depending on
context, referred to as "Product").
1. Grant of License. Friendly's has developed, or obtained the rights
to use and license Franchisee to use, the Product. Friendly's hereby grants
to the Franchisee the non-exclusive, nonassignable, limited right to use the
Product on the computer system located at the Franchisee's Restaurant
("Restaurant") located at
______________________________________. The right granted to the Franchisee
hereunder is personal in nature and, further, may not be used at a location
other than the location stated herein unless and until the Franchise is
transferred to a replacement restaurant pursuant to the terms of the
Development Agreement or the Franchise Agreement. The Product may not be
used for any purpose other than processing the Restaurant's data. The
Product shall include both the Fischer Processing System and the Automated
<PAGE>
Labor Scheduling System, when available.
<PAGE>
2. Support. Friendly's will provide personnel to assist Franchisee
with the installation of the Product on Franchisee's computer system at the
Restaurant under one of two options to be selected by the franchisee
a) Friendly's personnel will spend up to five days training the
Franchisee's designated training team (not to exceed 4 people) on location
at no charge; additional days needed beyond the five days will be billed at
reasonable costs and expenses.
b) Friendly's personnel will develop and execute a comprehensive
training plan for the restaurant staff (not to exceed 60 people); this
customized and more extensive approach will be billed at an amount mutually
agreed to by Friendly's and Franchisee.
Friendly's will make available to Franchisee certain support services.
During the first year of the term of this Agreement, Franchisee agrees to
enter into and maintain a software maintenance agreement (attached as Exhibit
A) with Friendly's covering maintenance, upgrades and enhancements to the
Product. Provided that Franchisee has a software maintenance agreement in
effect with Friendly's, Friendly's will provide to Franchisee later versions
of or enhancements to the Product, and Franchisee agrees to install and use
such later versions or enhancements, subject to the terms of this Agreement.
The software maintenance agreement currently provides for a Six Hundred
Dollar ($600.00) annual fee per restaurant and is cancelable on two (2)
month's notice to Friendly's and renewal shall
<PAGE>
be at the discretion of Franchisee and Friendly's. Provided that Franchisee
elects to enter into and maintain a software maintenance agreement, the
Franchisee may opt to obtain "Help Desk" service for each restaurant
franchised by Friendly's to Franchisee at a cost to Franchisee of One Hundred
Dollars ($100.00) per month per franchised restaurant.
3. Term. This Agreement is effective as of the date hereof and shall
terminate on the earlier of:
a) the termination or expiration of the franchise or license agreement
for the Restaurant between Friendly's and Franchisee;
b) the Franchisee's failure to cure any default under this Agreement
within thirty (30) days after Franchisee's receipt of written notice of such
default; or if such default is not curable within thirty (30) days;
Franchisee's failure to commence and diligently pursue such cure within
thirty (30) days after written notice; or
c) Friendly's delivery of notice to Franchisee that further use of the
Product is not legally authorized due to the decision of a court of law,
government authority or other legal enforcement body.
Upon termination of this Agreement, Franchisee shall: (i) cease using
the Product, (ii) cause the Product to be completely erased from its
computer system, including any backup copies, (iii) promptly return each and
every Product, including all documentation
<PAGE>
and copies thereof, and (iv) certify within fifteen (15) business days of the
termination that the obligations of this Section 3 have been complied with.
Franchisee may terminate this Agreement and the license granted hereunder
at any time by ceasing to use the Product and otherwise complying with the
preceding paragraph.
4. Fee. The one time license fee for the use of the Product is One
Thousand Five Hundred Dollars ($1,500.00), plus a Five Hundred Dollar
($500.00) X Cellnet License fee, per restaurant, which shall be waived for
the thirty-four (34) original Franchised Restaurants. The annual software
maintenance fee is Six Hundred Dollars ($600.00) per restaurant per year and
may be adjusted from time to time. The software maintenance fee shall be
waived for the first year for the thirty-four (34) original Franchised
Restaurants and any managed restaurants which are converted to Franchised
Restaurants pursuant to subparagraph 1B of the Purchase and Sale Agreement
dated July 10, 1997. Franchisee is responsible for the acquisition of the
required hardware, as outlined in the UFOC, in order to insure that the
Product runs properly, and for obtaining an approved hardware maintenance
contract in order for Friendly's to perform its obligations pursuant to the
software maintenance agreement.
5. Ownership of the Product: Confidentiality. Friendly's is the owner
of the Product, or is otherwise authorized to make available to Franchisee
the Product, and warrants that it has full and complete authority to enter
into this Agreement with Franchisee.
<PAGE>
Franchisee acknowledges that the Product is a valuable trade secret of
Friendly's, the author or the owner of the Product. Friendly's, the author
or the owner of the Product developed the Product through the expenditure of
substantial time, effort and money. Friendly's, the author and the owner of
the Product wish to, and Franchisee agrees to, maintain in strict confidence
and withhold from disclosure to unauthorized persons any data or information
concerning the Product. Franchisee hereby agrees that the Product and any
information, knowledge and factual data related to the Product which may be
imparted to the Franchisee by Friendly's, the author or the owner of the
Product at any time, or from time to time, will not be copied (except one
back-up copy of the Product is permitted) or communicated to any third
party, except for information required by employees of the Franchisee for
use only in performing their duties on behalf of Franchisee and which is to
be retained in confidence by such employees. This Agreement creates in the
Franchisee a license to obtain and utilize the Product for the limited
purposes provided herein, but confers no right, title or interest in or to
the Product, which title shall continue to vest solely in Friendly's, the
author or owner of the Product.
6. Warranty; Exclusion of Warranties. Friendly's warrants that the
Product will function in accordance with the specifications contained in the
Friendly's authored documentation delivered by Friendly's, so long as
Franchsee uses a Friendly's-supported version of the Product. THIS WARRANTY
IS IN LIEU OF ALL OTHER WARRANTIES EXPRESSED OR IMPLIED, INCLUDING BUT NOT
LIMITED TO A WARRANTY BY FRIENDLY'S OF MERCHANTABILITY OF THE PRODUCT OR A
WARRANTY OF FITNESS
<PAGE>
FOR A PARTICULAR PURPOSE OF THE PRODUCT. NEITHER FRIENDLY'S, THE AUTHOR NOR
THE OWNER OF THE PRODUCT WARRANTS THE PERFORMANCE OR RESULTS FRANCHISEE MAY
OBTAIN BY USING THE PRODUCT.
Franchisee hereby acknowledges that Friendly's has made no
representations or warranties to Franchisee with respect to the Product
inconsistent with those described in materials previously provided to
Franchisee. All warranties and guarantees, if any, that affect Franchisee's
use of the Product are expressly contained herein.
In the event of significant malfunction of the Product, provided that
Franchisee promptly notifies Friendly's thereof, Friendly's will use all
commercially reasonable efforts to correct any fault occurring in the Product
or replace the Product with a comparable substitute, other than faults caused
by the intentional or negligent acts of the Franchisee or Franchisee's
employees or independent contractors, or by the malfunction of Franchisee
computer system.
Provided that Franchisee is not in default of this Agreement during the
term hereof, Friendly's will defend Franchisee against any claim or suit
brought against Franchisee on the basis of a claim that Franchisee's use of
the Product infringes third party patent, copyright or other proprietary
rights, provided that Friendly's is promptly notified of such claims or
suits and Franchisee has given Friendly's full authority, information and
assistance in the
<PAGE>
defense thereof. Friendly's will not be responsible for fees or costs of
counsel retained by Franchisee, or for any settlement made without
Friendly's written consent.
Provided that Franchisee is not in default of this Agreement, in the
event Friendly's receives notice of Franchisee's alleged infringement of a
third party's rights or if Franchisee's use of the Product is prevented by an
injunction based on alleged infringement of a third party's rights,
Friendly's, may, at its option, (a) obtain the rights to continue using the
Product, (b) substitute other suitable software, or (c) modify or obtain
modifications to the Product so it is no longer infringing. If none of the
above options are reasonably available, in Friendly's discretion, upon
written notice from Friendly's, Franchisee shall stop using the Product and
comply with Section 3 of this Agreement, in which event Friendly's will
refund to Franchisee the license fee paid by Franchisee under this Agreement.
7. Hold Harmless and Indemnity. Franchisee has read the description of
the Product's features and capabilities, and has participated in one or more
demonstrations of the Product's capabilities. Franchisee acknowledges that
it has exercised its independent judgment in making its decision to acquire
the Product and enter this Agreement. Franchisee hereby agrees that it will
not pursue a claim of any sort against Friendly's or its officers,
directors, partners, employees or representatives, or the author or owner of
the Product in the event the Product fails to perform in a manner or produce
the results anticipated by Franchisee. Franchisee agrees to indemnify and
hold harmless Friendly's, the author and the owner of the Product from any
claims, demands, losses and expenses,
<PAGE>
including attorney fees and court costs, including such costs on appeal, from
any third party resulting from the actions of Franchisee, its agents or
employees which cause or contribute to any loss, destruction, unauthorized
access or misappropriation of programs, information or data stored on the
computer on which the Product is installed or to which any such computer may
have access, except to the extent caused or contributed to by Friendly's,
its agents or employees.
8. Limitation of Liability. In no event shall Friendly's, the author
or the owner of the Product be liable, whether based on breach of warranty
or contract, in tort or strict liability or otherwise, for (a) any damages
arising from performance or nonperformance of the Product, (b) any lost
profits, loss of use, or other consequential or incidental damages, even if
Friendly's, the author or the owner of the Products have been advised of the
possibility of such damage, or (c) any claim against Franchisee by any other
party, except as provided for in Section 5 or Section 7 with respect to
infringement of the rights of others. In no event shall Friendly's liability
to Franchisee for any cause related to this Agreement or the Product exceed
the license fee paid by Franchisee to Friendly's pursuant to this Agreement,
except as may be provided above.
9. Documentation. Franchisee will be provided with all necessary
documentation by Friendly's, the author or the owner of the Product, which
documentation will be required to operate the Product effectively.
<PAGE>
All material, both written and otherwise, furnished to Franchisee by
Friendly's, the author or the owner of the Product, shall remain the
property of the provider of such material, and Franchisee shall save and
preserve any such material except those that may be consumed in the normal
course of business operations.
10. Notices. Any notice permitted or required to be given pursuant to
this Agreement shall be sent via certified mail, return receipt requested,
or overnight courier, or telecopy, to the party intended to receive the same
at such address as either party may provide to the other.
11. Payment. any amounts due hereunder, including the help desk fee, on
the same schedule as royalty payments are made pursuant to the Franchise
Agreement. All past due amounts are subject to 1.5% per month late fee.
Payment of support fees where the second training option is elected under
Paragraph 2, are subject to the separate negotiations related to that
support option.
12. Modifications to Product. Franchisee will not modify, amend, add
to, decompile, disassemble, reverse engineer or otherwise alter the Product
or the menu or menus of the Product without the prior written consent of
Friendly's. Franchisee will not alter or remove any copyright notice or other
notice of proprietary interest of Friendly's, the author or the owner of the
Product.
<PAGE>
Franchisee shall not use the Product in connection or combination with
software not provided or approved by Friendly's for the Product.
13. Entire Agreement. This Agreement constitutes the entire
understanding of the relationship between the parties with respect to the
Product. No prior or contemporaneous representation or agreement outside of
this Agreement shall have any effect whatsoever on the terms hereof.
14. Governing Laws. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware.
15. Invalid Provision. If any provision of this Agreement is
determined by a court of competent jurisdiction to be invalid, such
provision shall be stricken and the remaining provisions shall be given full
force and effect.
WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date and year first above written.
FRIENDLY'S RESTAURANTS
FRANCHISE, INC.
By:
Its:
<PAGE>
FRANCHISEE
By:
Its:
<PAGE>
Exhibit 10.13
[LETTERHEAD OF FRIENDLY'S]
Mr. Larry W. Browne
Executive Vice President, Corporate Finance, General Counsel & Secretary
THE RESTAURANT COMPANY
One Pierce Place, Suite 100 East
Itasca, IL 60143
Dear Mr. Browne:
This letter is being written to confirm the maximum annual management fee
payable to The Restaurant Company. This amount will not exceed $800,000 in
1996, $824,000 in 1997 and $848,720 in 1998 unless the increase is approved
by a vote of fifty-one percent (51%) of Friendly's Board of Directors,
including at least one director nominated by the Class B stockholders.
In addition, this management fee can be terminated at any time with written
notice from Friendly and upon the immediate payment of all management fees
due at the time of notice and a lump sum payment of $500,000. This written
notice would also be approved by a vote of fifty-one percent (51%) of
Friendly's Board of Directors, including at least one director nominated by
the Class B stockholders.
Please indicate your agreement and acceptance by signing below. You should
keep one original and return the other to me.
Regards,
/s/ Garrett J. Ulrich
- ------------------------------------
Garrett J. Ulrich
GJU/nf
Agreed To And Accepted:
THE RESTAURANT COMPANY
/s/ Larry W. Browne
- ------------------------------------
Larry W. Browne
Executive Vice President, Corporate Finance, General Counsel & Secretary
cc: Mike Donahue, The Restaurant Company
<PAGE>
Exhibit 10.14
TRADEMARK LICENSE AGREEMENT
This License Agreement, made and entered into effective September 2, 1988,
between and among Hershey Foods Corporation, a Delaware corporation (hereinafter
called "Hershey"), Dogwood Restaurants, Inc., a Delaware Corporation
(hereinafter called "Licensor"), and Dogwood II, Inc., a wholly owned subsidiary
of Tennessee Restaurant Company (hereinafter called "Licensee").
WITNESSETH:
WHEREAS Licensor is the owner of certain trademarks, trade names, service
marks and packaging trade dress used in connection therewith; and
WHEREAS Licensee wishes to obtain a sole and exclusive license of said
trademarks, trade names, service marks and packaging trade dress used in
connection therewith for use in connection with its products and services.
WHEREAS, Licensor and Licensee desire to safeguard, promote and maintain
the good will and excellent reputation for quality now associated with the
services and goods sold under the Trademarks (as hereinafter defined) and desire
to safeguard and maintain the Trademarks.
NOW, THEREFORE, the parties do hereby agree as follows:
1. Definitions.
"Trademarks" shall mean collectively all of the trademarks, tradenames and
service marks listed on Schedule A hereto and any packaging trade dress used in
connection with such trademarks.
<PAGE>
-2-
"Licensee's Products" means any food product, packaging or other product
or service now or hereafter manufactured, distributed, sold or provided by
Licensee or any sub-licensee.
"Licensed Territory" shall be worldwide.
2. Grant.
(a) Licensor hereby grants to Licensee the sole and exclusive license of
the Trademarks upon and in connection with the manufacture, advertising,
distribution and sale of any of Licensee's Products in the Licensed Territory
and to sub-license the Trademarks to others for use in connection with the
Licensee's Products in the Licensed Territory provided the quality control
protections afforded by this Agreement are incorporated in any such sub-license.
(b) All proprietary rights and goodwill in the Trademarks shall inure to
the benefit of Licensor and not Licensee. Licensee shall acquire no property
rights in the Trademarks by reason of its use thereof, and if, by operation of
law, or otherwise, Licensee is deemed to or appears to own any property rights
in any of the Trademarks, Licensee shall, at Licensor's request, execute any and
all documents necessary to confirm or otherwise establish Licensor's rights
therein.
(c) License shall have all the proprietary rights of Licensor to make, or
to have made and to sell Licensee's Products: (1) using the Trademarks, (2)
combining the Trademarks with a trademark, name or logo of Licensee in the
Licensed Territory, any use of both trademarks being subject to the provisions
of Section 3 hereof, and provided such use does not create confusion as to the
source of the goods or services associated therewith, or
<PAGE>
-3-
(3) using any trademark of Licensee's choosing. All rights and title in the
Licensee's use of a trademark other than the Trademarks shall be in Licensee.
(d) Nothing in this Agreement shall be construed to require Licensee to
use the Trademarks on or in connection with any of Licensee's Products.
3. Provisions Relating to the Use of the Trademarks By Licensee.
(a) Licensee (and any sub-licensee) may use the Trademarks on all of
Licensee's Products distributed by Licensee or any sub-licensee and on all
menus, labeling, packaging, advertising and promotional materials used in
connection with Licensee's Products. The Trademarks and any trademark(s) of
Licensee may be used on the same package in a manner not detrimental to
Licensor's ownership of and goodwill in the Trademarks.
(b) Licensee covenants that all of Licensee's products associated with the
Trademarks shall be of a high standard and quality so as to reflect favorably
upon the businesses of both Licensor and Licensee and the goodwill associated
with the Trademarks, and Licensor, to insure conformance herewith, shall have
the right of inspection and the right to receive from Licensee a reasonable
number of samples of products and advertising material, all upon reasonable
notice to Licensee. If it is determined through reasonable inspection that any
of Licensee's Products associated with the trademarks are not of a high standard
and quality, Licensee agrees to cooperate with Licensor in facilitating a return
of such products to a high standard and quality.
<PAGE>
- 4 -
4. Terms of Payment.
Licensee hereby agrees to pay Licensor a fee of $37,500,000, due upon
execution of this Agreement, for the license granted herein. The parties
acknowledge this payment, as well as the mutual promises made herein, as full
and adequate consideration for this Agreement.
5. Registration and Protection of Trademarks.
(a) Licensee has agreed to be bound by the terms and conditions of this
Agreement and recognizes and acknowledges Licensor's exclusive ownership and
title to the Trademarks and the value of the associated goodwill. Licensee
agrees that it will not challenge the title of any rights of Licensor in and to
the Trademarks in the Licensed Territory or make any claim or take any action
adverse to Licensor's rights therein, or challenge the validity of this
Agreement. Licensee further agrees that its every use of the Trademarks in the
Licensed Territory shall inure to the benefit of Licensor.
(b) Licensee agrees to cooperate fully and in good faith with Licensor and
to execute such documents as Licensor reasonably requests for the purpose of
securing and preserving Licensor's rights in and to the Trademarks in the
Licensed Territory. Notwithstanding anything to the contrary contained herein,
Licensor makes no claim and asserts no rights to the Trademarks outside of the
Licensed Territory.
(c) Licensor shall use reasonable efforts to obtain and maintain
registrations for the Trademarks in the Licensed Territory to the extent
available in accordance with the terms and conditions of this Agreement. All
costs of protection and registration of the Trademarks shall be borne by
licensee.
<PAGE>
- 5-
(d) Licensor and Licensee agree, both during and after the term of this
Agreement, to cooperate fully and in good faith with each other and to execute
such documents as either party reasonably requests for the purpose of securing
and preserving Licensor's rights in and to the Trademarks.
(e) Licensor and Licensee shall each promptly notify the other of any
event or action of which it obtains knowledge which might constitute any
infringement, counterfeit or unfair competition with request to the Trademarks.
Licensor may take action, but shall be under no obligation to take any action,
with respect to any such infringement, counterfeit or unfair competition. If
Licensor or Licensee elects to commence any action or proceeding to protect the
Trademarks in the Licensed Territory, each party shall cooperate fully with the
other to whatever extent is necessary to prosecute such action or proceeding,
but in any event all expenses (including attorney's fees) and costs incurred in
any such actions or proceedings whether commenced by Licensee or Licensor shall
be borne by Licensee. Each party shall keep the other advised of the status of
such actions or proceedings. Recoveries in such actions or proceedings shall be
for the account of Licensee to the extent of the expenses which it has borne;
any recovery in excess of such expenses shall be for the account of the damaged
party or parties.
6. Term of License.
This Agreement and the licenses hereby granted shall become effective
immediately upon the execution hereof and, unless extended as hereinafter
provided, shall expire on the anniversary date hereof in 2028. At any time
within 180 days prior to the anniversary date hereof in 2028, Licensee shall
<PAGE>
- 6 -
have the right, upon written notice to Licensor and the payment to Licensor of
$20,000,000 dollars not later than sixty (60) days after the date of notice, to
extend the term of this Agreement and the licenses hereby granted to the
anniversary date hereof in 208. Should Licensee not wish to exercise the
foregoing option, then the payment of $20,000,000 dollars need not be made.
7. Licensor's Representations, Warranties and Covenants.
In further consideration of Licensee's entering into this License
Agreement, Licensor represents and covenants as follows:
(a) The Licensor has the corporate power to execute, deliver and perform
its obligations under this License Agreement, and has taken all corporate action
necessary to permit it to do so.
(b) Licensor shall not make use of the Trademarks on any of its products
or in any other manner without the prior written consent of the Licensee.
(c) Licensor represents that, to the best of its knowledge, the Trademarks
do not, as of the date hereof, infringe any contract, copyright, trademark or
other property right of any third party in the areas and on the products with
respect to which the Trademarks are actually being used by Licensor.
8. Licensee's Representations, Warranties and Indemnity.
Licensee represents and warrants that:
(a) The execution and delivery of this Agreement and the performance by
Licensee of the transactions contemplated hereby have been duly authorized by
all appropriate corporate action.
<PAGE>
-7-
(b) The performance by Licensee of any of the terms and conditions of this
Agreement on its part to be performed will not constitute a breach or violation
of any other agreement or understanding, written or oral, to which it is a
party.
(c) Licensor will not be liable for any third party infringement claims
based upon Licensee's use of the Trademarks on new products or services or in
new areas.
9. Indemnification by Licensor.
Licensor agrees to indemnify and hold harmless Licensee from and against
any and all claims, liabilities, costs, damages and expenses, including
attorney's fees and accrued costs incurred by Licensee in connection with or
arising from (a) any breach by Licensor of any of its covenants contained in
this Agreement, and (b) any breach of any representation or warranty of Licensor
contained in this Agreement.
10. Indemnification by Licensee.
Licensee agrees to indemnify and hold harmless Licensor from and against
any and all claims, liabilities, costs, damages and expenses, including
attorney's fees and court costs, incurred by Licensor in connection with or
arising from (a) any breach by Licensee of any of its covenants contained in
this Agreement, and (b) any breach of any representation or warranty of Licensee
contained in this Agreement.
11. Rights Upon Termination or Expiration.
Upon expiration of this Agreement, Licensee shall have the right to sell
or otherwise dispose of existing products bearing the Trademarks, components and
raw materials related thereto within a reasonable period of time. Except as
required in connection with such sales and dispositions,
<PAGE>
-8-
Licensee will, on expiration of this License Agreement, discontinue and cease to
use the Trademarks and not initiate any promotional activities relating thereto.
12. Benefit and Assignment.
This Agreement is not assignable to any party without the consent of the
remaining parties, provided, however, that (a) such consent will not be
unreasonably withheld nor any compensation nor consideration be expected or
required therefor, (b) Licensee may assign to another party in its own corporate
group or to any of its affiliates, as long as it remains liable for the
obligation hereunder, and (c) Licensor may assign its rights hereunder directly
to Hershey or indirectly through an intermediate assignment to an affiliated
company who shall make a further assignment to Hershey, but thereafter Hershey
may not assign its rights other than under clause (a) above.
13. Applicable Law.
This Agreement shall be governed by and construed in accordance with the
Laws of the State of Delaware without reference to choice of law rules.
14. Waivers.
The failure of either party to insist upon the strict performance of the
terms, conditions and provisions of this Agreement shall not be a waiver of
future compliance or a waiver of any other provisions hereof. No waiver by
either party of any provisions hereof shall be deemed to have been made unless
expressed in writing and signed by a duly authorized officer of such party.
<PAGE>
-9-
15. Notice.
Any notice or communication required or permitted to be sent hereunder
shall be duly made and shall be valid and effective if in writing and sent by
certified or registered mail, postage prepaid, or if delivered:
(a) If to Licensee:
Dogwood II, Inc.
1855 Boston Road
Wilbraham, Massachusetts 01095
Attention: General Counsel
(b) If to Licensor:
Dogwood Restaurants, Inc.
1855 Boston Road
Wilbraham, Massachusetts 01095
Attention: General Counsel
(c) If to Hershey Foods Corporation:
Hershey Foods Corporation
100 Mansion Drive
Hershey, Pennsylvania 17033-0810
Attention: General Counsel
16. Miscellaneous.
(a) No modifications, amendments or supplements to this agreement shall be
effective for any purpose unless duly recorded in writing and signed by
authorized representatives of all parties hereto or their successors or assigns.
(b) If any provision of this Agreement should be invalid or inoperable,
this shall not affect the validity of the remaining provisions of this
Agreement. The parties hereto shall in such event use their best efforts to
substitute for any invalid or inoperable provision a valid or operable
arrangement which achieves results as nearly equivalent as possible to the
invalid or inoperable provision.
<PAGE>
-10-
(c) Nothing contained herein shall be construed to place the parties in
the relationship of agents, partners or joint venturers.
17. Counterparts and Other Agreements.
This Agreement may be executed in one or more counterparts, each of which
shall be considered an original.
18. Hershey Guarantee.
By its execution hereof, Hershey guarantees to Licensee the performance by
Licensor of its obligations under this Agreement.
19. TRC Guarantee
By its execution hereof, TRC guarantees to Licensor, and its assignee, the
performance by Licensee of all of Licensee's duties and obligations under this
Agreement.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
DOGWOOD RESTAURANTS, INC.
/s/ Thomas C. Fitzgerald
-----------------------------------------
By:
HERSHEY FOODS CORPORATION
/s/ [ILLEGIBLE]
-----------------------------------------
By:
TENNESSEE RESTAURANT COMPANY
/s/ [ILLEGIBLE]
-----------------------------------------
By:
<PAGE>
-11-
DOGWOOD II, INC.
/s/ [ILLEGIBLE]
-----------------------------------------
By:
<PAGE>
SCHEDULE A
----------
FEDERAL REGISTRATIONS
---------------------
REGISTRATION NUMBER MARK
- ------------------- ----
845,093 FRIBBLE and Design (TM)
1,010,077 CLAMBOAT (SM)
1,015,495 FISHAMAJIG (SM)
1,072,831 FRIBBLE (TM)
1,093,903 CLAMBOAT (TM)
1,100,306 FISHAMAJIG (TM)
1,245,504 A.M. FRIES (TM) (Section 8 affidavit
not to be filed as of 7/12/89)
1,245,629 A.M. FRIES (SM) (Section 8 affidavit
not to be filed as of 7/12/89)
1,262,053 GREAT AWAKENINGS (SM)
1,282,706 CREAMY COW (TM)
1,286,573 Design of Wizard Character (SM)
1,313,682 WATTAMELON ROLL (TM)
1,346,611 HAPPY ENDING (TM)
1,420,679 DUTCH FUDGE ROLL (TM)
1,459,665 FLAVORLAND (SM)
<PAGE>
STATE REGISTRATIONS
-------------------
State Registration Number Mark
- ----- ------------------- ----
CONNECTICUT 251 BIG BEEF (TM)
- ----------- 3260 CLAMBOAT (TM)
2570 FISHAMAJIG (TM)
4659 FRIBBLE with Design (TM)
DELAWARE TM 158-19 BIG BEEF (TM)
- -------- TM 161-14 CLAMBOAT (TM)
TM 158-21 FISHAMAJIG (TM)
TM 158-20 FRIBBLE (TM)
FLORIDA TO8381 BIG BEEF (TM)
- ------- TO8380 CLAMBOAT (TM)
TO8379 DUTCH FUDGE ROLL (TM)
TO8378 FISHAMAJIG (TM)
TO8373 FRIBBLE (TM)
TO8386 GREAT AWAKENINGS (SM)
TO8374 HAPPY ENDING (TM)
TO8387 WATTAMELON ROLL (TM)
ILLINOIS 45479 CLAMBOAT (SM)
- -------- 45478 FISHAMAJIG (TM)
45473 FRIBBLE with Design (TM)
INDIANA 5009-734 BIG BEEF (TM)
- ------- 5009-733 CLAMBOAT (TM)
5009-735 FISHAMAJIG (TM)
5009-757 FRIBBLE (TM)
MAINE 820011T BIG BEEF (TM)
- ----- 820010T CLAMBOAT (TM)
850144T(R) FISHAMAJIG (TM)
820008T FRIBBLE (TM)
MARYLAND 81-5776 BIG BEEF (TM)
- -------- 84-6256 CLAMBOAT (TM)
81-5774 FISHAMAJIG (TM)
81-5775 FRIBBLE (TM)
MASSACHUSETTS 29083 A.M. FRIES (SM) not to be
- ------------- renewed as of January 8,
1989
29089 A.M. FRIES (TM) not to be
renewed as of January 8,
1989
29085 AT LAST, FAST FOOD AT FAST
FOOD PRICES (SM) not to be
renewed as of January 8,
1989
<PAGE>
29084 BACON-EGGER (SM) not to be
renewed as of January 8,
1989
29090 BACON-EGGER (TM) not to be
renewed as of January 8,
1989
35549 BIG BEEF (TM)
29086 BREAKFAST (SM) not to be
renewed as of January 8,
1989
29082 BREAKFAST (TM) not to be
renewed as of January 8,
1989
29081 BURGERBLAST (SM) not to be
renewed as of January 8,
1989
29088 BURGERBLAST (TM) not to be
renewed as of January 8,
1989
34981 CLAMBOAT (TM)
31451 FISHAMAJIG (TM)
36266 FRIBBLE (TM)
29087A SPECIAL'S (SM) not to be
renewed as of January 8,
1989
29087 SPECIAL'S (TM) not to be
renewed as of January 8,
1989
MICHIGAN M83-002 BIG BEEF (TM)
- -------- M28-006 CLAMBOAT (TM)
M64-011 FISHAMAJIG (TM)
M44-012 FRIBBLE (TM)
NEW HAMPSHIRE BIG BEEF (TM)
- ------------- CLAMBOAT (TM)
FISHAMAJIG (TM)
FRIBBLE (TM)
NEW JERSEY BIG BEEF (TM)
- ---------- CLAMBOAT (TM)
FISHAMAJIG (TM)
FRIBBLE (TM)
NEW YORK R-12853 BIG BEEF (TM)
- -------- R-22216 CLAMBOAT (TM)
R-20261 FISHAMAJIG (TM)
R-11852 FRIBBLE (TM)
OHIO SM 1980 CLAMBOAT (TM)
- ---- TM 7147 FISHAMAJIG (TM)
TM 7149 FRIBBLE (TM)
<PAGE>
PENNSYLVANIA 3-1-75; 11-534 CLAMBOAT (TM)
- ------------ 81-34 1684 FISHAMAJIG (TM)
81-34 1690 FRIBBLE (TM)
RHODE ISLAND 85-3-1 CLAMBOAT (TM)
- ------------ 81-3-20 FISHAMAJIG (TM)
76-6-47 FRIBBLE (TM)
VERMONT 4447 BIG BEEF (TM)
- ------- 4615 CLAMBOAT (TM)
4440 FISHAMAJIG (TM)
4585 FRIBBLE (TM)
VIRGINIA BIG BEEF (TM)
- -------- CLAMBOAT (TM)
FISHAMAJIG (TM)
FRIBBLE (TM)
<PAGE>
UNREGISTERED TRADEMARKS
-----------------------
SCOOPY
RISE 'N SHINE
CLASSIC with Design
EXPRESS LUNCH
MERRY MINT with Design
ORIGINAL with Design
PASTA PLEASERS
SILVER SERVICE
ULTIMATE with Design
<PAGE>
ASSIGNMENT OF MARKS REGISTERED IN THE
UNITED STATES PATENT AND TRADEMARK OFFICE
ASSIGNMENT
WHEREAS, Friendly Ice Cream Corporation, a Massachusetts corporation,
having a principal place of business at 1855 Boston Road, Wilbraham,
Massachusetts 01095, is the owner of the trademarks and service marks set forth
on Schedule A attached hereto which are registered in the United States Patent
and trademark office;
WHEREAS, in order to effectuate a dividend, Friendly Ice Cream Corporation
wishes to assign to Hershey Foods Corporation, a Delaware corporation, having a
principal place of business at 100 Mansion Road East, Hershey, Pennsylvania
17033, all its right, title and interest in and to the marks; and
WHEREAS, Hershey Foods Corporation is desirous of acquiring said marks and
the registrations therefor.
NOW, THEREFORE, for good and valuable consideration, Friendly Ice Cream
Corporation does hereby assign and transfer to Hershey Foods Corporation all
right, title and interest in and to the marks set forth on Schedule A attached
hereto, together with the good will of the business symbolized by the marks and
the identified registrations therefor, together with all rights of action
accrued and to accrue under and by virtue hereof, including the right to sue and
recover for past infringement of said marks.
IN WITNESS WHEREOF, this Assignment has been executed as of the 2nd day of
September, 1988.
Attest: FRIENDLY ICE CREAM CORPORATION
/s/ Daniel J. Killi By: /s/ William Lehr, Jr.
- --------------------------------- ---------------------------------
Daniel J. Killi William Lehr, Jr.
Assistant clerk Clerk
COMMONWEALTH OF PENNSYLVANIA )
: ss.
COUNTY OF DAUPHIN )
On this 2nd day of September , 1988, before me personally appeared William
Lehr, Jr. , to me known, who, being by me duly sworn, did depose and say that he
is Clerk of Friendly Ice Cream Corporation, a corporation of the Commonwealth of
Massachusetts, the corporation described in and on whose behalf he executed the
foregoing instrument, and the he executed said instrument for the purposes
contained therein under authority of the Board of Directors of said corporation.
/s/ [ILLEGIBLE]
---------------------------------
Notary Public
My Commission Expires: 5/29/89
Derry Twp.- Dauphin Co.-PA.
<PAGE>
EXHIBIT 12.1
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
-------------
SEPTEMBER 29,
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Earnings
Income (loss) before (provision for) benefit from
income taxes and cumulative effect of changes in
accounting principles................................ $ (12,121) $ (30,670) $ (8,597) $ (25,234) $ (13,640) $ (10,236)
Interest and amortization of deferred finance costs.... 37,630 38,786 45,467 41,904 44,141 33,084
Implicit rental interest expense....................... 4,986 5,171 5,590 5,729 5,990 4,507
--------- --------- --------- --------- --------- -------------
Total earnings....................................... 30,495 13,287 42,460 22,399 36,491 27,355
--------- --------- --------- --------- --------- -------------
Fixed Charges
Interest and amortization of deferred finance costs.... 37,630 38,786 45,467 41,904 44,141 33,084
Capitalized interest................................... 128 156 176 62 49 44
Implicit rental interest expense....................... 4,986 5,171 5,590 5,729 5,990 4,507
--------- --------- --------- --------- --------- -------------
Total fixed charges.................................. 42,744 44,113 51,233 47,695 50,180 37,635
--------- --------- --------- --------- --------- -------------
Earnings insufficient to cover fixed charges............. $ 12,249 $ 30,826 $ 8,773 $ 25,296 $ 13,689 $ 10,280
--------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- -------------
Ratio of ernings to fixed charges........................ -- -- -- -- -- --
Pro Forma Data (a):
Earnings
Income (loss) before (provision for) benefit from
income taxes and cumulative effect of changes in
accounting principles................................ $ 2,643 $ 1,978
Interest and amortization of deferred finance costs.... 28,804 21,580
Implicit rental interest expense....................... 5,990 4,507
--------- -------------
Total earnings....................................... 37,437 28,065
--------- -------------
Fixed Charges
Interest and amortization of deferred finance costs.... 28,804 21,580
Capitalized interest................................... 49 44
Implicit rental interest expense....................... 5,990 4,507
--------- -------------
Total fixed charges.................................. 34,843 26,131
--------- -------------
Earnings sufficient to cover fixed charges............... $ 2,594 $ 1,934
--------- -------------
--------- -------------
Ratio of earnings to fixed charges....................... 1.1x 1.1x
--------- -------------
--------- -------------
<CAPTION>
SEPTEMBER 28,
1997
-------------
<S> <C>
Earnings
Income (loss) before (provision for) benefit from
income taxes and cumulative effect of changes in
accounting principles................................ $ 215
Interest and amortization of deferred finance costs.... 32,972
Implicit rental interest expense....................... 4,540
-------------
Total earnings....................................... 37,727
-------------
Fixed Charges
Interest and amortization of deferred finance costs.... 32,972
Capitalized interest................................... 27
Implicit rental interest expense....................... 4,540
-------------
Total fixed charges.................................. 37,539
-------------
Earnings insufficient to cover fixed charges............. $ --
-------------
-------------
Ratio of ernings to fixed charges........................ 1.0x
-------------
-------------
Pro Forma Data (a):
Earnings
Income (loss) before (provision for) benefit from
income taxes and cumulative effect of changes in
accounting principles................................ $ 11,570
Interest and amortization of deferred finance costs.... 21,617
Implicit rental interest expense....................... 4,540
-------------
Total earnings....................................... 37,727
-------------
Fixed Charges
Interest and amortization of deferred finance costs.... 21,617
Capitalized interest................................... 27
Implicit rental interest expense....................... 4,540
-------------
Total fixed charges.................................. 26,184
-------------
Earnings sufficient to cover fixed charges............... $ 11,543
-------------
-------------
Ratio of earnings to fixed charges....................... 1.4x
-------------
-------------
</TABLE>
- ------------------------------
(a) As adjusted to give effect to the Recapitalization and the change in
accounting principle for pensions. See Note 10 of Notes to Consolidated
Financial Statements.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all reference to our Firm) included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
October 17, 1997
<PAGE>
EXHIBIT 24.2
LIMITED POWER OF ATTORNEY
The undersigned, a director of Friendly Ice Cream Corporation, a
Massachusetts corporation (the "Company"), 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 the Registration Statements on Form S-1
of the Company (File nos. 333-34633 and 333-34635), each originally filed with
the Securities and Exchange Commission on August 29, 1997, 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.
Dated: October 17, 1997
/S/ Charles A. Ledsinger, Jr.
--------------------------------------
By: Charles A. Ledsinger, Jr.
<PAGE>
EXHIBIT 99.2
CONSENT TO BE NAMED IN THE REGISTRATION STATEMENTS
To: Friendly Ice Cream Corporation
The undersigned hereby consents to be named as a Director in the
Registration Statements on Form S-1 (the "Registration Statements"), as first
filed by Friendly Ice Cream Corporation (the "Company") on August 29, 1997, and
to the statements in such Registration Statements concerning the undersigned's
intended nomination to the Board of Directors of the Company.
<TABLE>
<S> <C> <C>
Dated October 6, 1997
By: /s/ BURTON J. MANNING
-----------------------------------------
Name: Burton J. Manning
</TABLE>
