<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 6, 1997
REGISTRATION NO. 333-34633
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
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 6, 1997
5,000,000 SHARES
[LOGO]
FRIENDLY ICE CREAM CORPORATION
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
AND THE SENIOR NOTE OFFERING 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 REQUEST OF THE COMPANY, UP TO 250,000 SHARES OF THE 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 $ .
(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 MONTGOMERY SECURITIES ON OR ABOUT , 1997.
---------------------
<PAGE>
NATIONSBANC MONTGOMERY SECURITIES, INC.
, 1997
<PAGE>
[Inside Front Cover: the Company's "Friendly" logo, the words "Leave room for
the ice cream" and color pictures of three of the Company's products (a large
hamburger, a banana split and a Frozen dessert drink.)]
[Gatefold: the Company's "Friendly" logo and the words "Expanded Building,"
"Hand-Dipped Frozen Dessert Station," Revitalized Interior Decor," "Retail
Dessert Center," "Hearty Breakfasts," "Delicious Lunches," "Entree Salads,"
"Home Style Dinners," "Premium Half Gallons, "Great Temptations-TM- Low Fat Half
Gallons" and "Candy Shoppe Sundae Cup." Color picture of a Friendly's
restaurant, an ice cream dipping station, the interior of a revitalized
Friendly's restaurant, a grocery store ice cream freezer decorated with the
Company's logo, a truck with the Friendly's logo on its side, various frozen
dessert products (three half gallon packages, a sundae cup and two types of
sundaes), a "Kids meal" (including a sundae, drink, hamburger and fries) and
various other food presentations (chili, omelette, eggs, sandwich wraps, salad,
steak, shrimp and vegetables.)]
CERTAIN PERSONS PARTICIPATING IN 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) ALL RESTAURANT NUMBERS STATED HEREIN ARE AS OF
JUNE 29, 1997, AFTER GIVING EFFECT TO THE DAVCO AGREEMENT (AS DEFINED HEREIN),
(III) AS USED HEREIN, "NORTHEAST" REFERS TO THE COMPANY'S CORE MARKETS WHICH
INCLUDE CONNECTICUT, MAINE, MASSACHUSETTS, NEW HAMPSHIRE, NEW JERSEY, NEW YORK,
PENNSYLVANIA, RHODE ISLAND AND VERMONT, (IV) THIS PROSPECTUS ASSUMES NO EXERCISE
OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION IN THE COMMON STOCK OFFERING AND (V)
THIS PROSPECTUS GIVES EFFECT TO THE 924-FOR-1 STOCK SPLIT WHICH WILL OCCUR PRIOR
TO THE COMMON STOCK OFFERING. THE COMPANY'S FISCAL YEARS ENDED DECEMBER 27,
1992, JANUARY 2, 1994, JANUARY 1, 1995, DECEMBER 31, 1995 AND DECEMBER 29, 1996
ARE REFERRED TO HEREIN AS 1992, 1993, 1994, 1995 AND 1996, RESPECTIVELY.
THE COMPANY
Friendly's is the leading full-service restaurant operator and has a leading
position in premium frozen dessert sales in the Northeast. The Company owns and
operates 666 and franchises 34 full-service restaurants and manufactures a
complete line of packaged frozen desserts distributed through more than 5,000
supermarkets and other retail locations in 15 states. Friendly's offers its
customers a unique dining experience by serving a variety of high-quality,
reasonably-priced breakfast, lunch and dinner items, as well as its signature
frozen desserts, in a fun and casual neighborhood setting. For the twelve-month
period ended June 29, 1997, Friendly's generated $664.9 million in total
revenues and $71.0 million in EBITDA (as defined herein) and incurred $44.2
million of interest expense. During the same period, management estimates that
over $225 million of total revenues were from the sale of approximately 20
million gallons of frozen desserts.
Friendly's restaurants target families with children and adults who desire a
reasonably-priced meal in a full-service setting. The Company's menu offers a
broad selection of freshly-prepared foods which appeal to customers throughout
all day-parts. Breakfast items include specialty omelettes and breakfast
combinations featuring eggs, pancakes and bacon or sausage. Lunch and dinner
items include a new line of wrap sandwiches, entree salads, soups, super-melts,
specialty burgers and new stir-fry, chicken, pot pie, tenderloin steak and
seafood entrees. Friendly's is also recognized for its extensive line of ice
cream shoppe treats, including proprietary products such as the
Fribble-Registered Trademark-, Candy Shoppe-Registered Trademark- Sundaes and
the Wattamelon Roll-Registered Trademark-.
The Company believes that one of its key strengths is the strong consumer
awareness of the Friendly's brand name, particularly as it relates to the
Company's signature frozen desserts. This strength and the Company's
vertically-integrated operations provide several competitive advantages,
including the ability to (i) utilize its broad, high-quality menu to attract
customer traffic across multiple day-parts, particularly the afternoon and
evening snack periods, (ii) generate incremental revenues through strong
restaurant and retail market penetration, (iii) promote menu enhancements and
extensions in combination with its unique frozen desserts and (iv) control
quality and maintain operational flexibility through all stages of the
production process.
Friendly's, founded in 1935, was publicly held from 1968 until January 1979,
at which time it was acquired by Hershey Foods Corporation ("Hershey"). While
owned by Hershey, the Company increased the total number of restaurants from 601
to 849 yet devoted insufficient resources to product development and capital
improvements. In 1988, The Restaurant Company ("TRC"), an investor group led by
Donald Smith, the Company's current Chairman, Chief Executive Officer and
President, acquired Friendly's from Hershey (the "TRC Acquisition") and
implemented a number of initiatives to restore and improve operational and
financial efficiencies. From the date of the TRC Acquisition through 1994, the
Company (i) implemented a major revitalization of its restaurants, (ii)
repositioned the Friendly's concept from a
3
<PAGE>
sandwich and ice cream shoppe to a full-service, family-oriented restaurant with
broader menu and day-part appeal, (iii) elevated customer service levels by
recruiting more qualified managers and expanding the Company's training program,
(iv) disposed of 123 under-performing restaurants and (v) capitalized upon the
Company's strong brand name recognition by initiating the sale of Friendly's
unique line of packaged frozen desserts through retail locations.
Beginning in 1994, the Company began implementing several growth initiatives
including (i) testing and implementing a program to expand the Company's
domestic distribution network by selling frozen desserts and other menu items
through non-traditional locations, (ii) distributing frozen desserts
internationally by introducing dipping stores in the United Kingdom and South
Korea and (iii) implementing a franchising strategy to extend profitably the
Friendly's brand without the substantial capital required to build new
restaurants. As part of this strategy, on July 14, 1997 the Company entered into
the DavCo Agreement. See "--Recent Developments."
Implementation of these initiatives since the TRC Acquisition has resulted
in substantial improvements in revenues and EBITDA. Despite the closing of 148
restaurants (net of restaurants opened) since the beginning of 1989 and periods
of economic softness in the Northeast, the Company's restaurant revenues have
increased 9.0% from $557.3 million in 1989 to $607.2 million in the
twelve-months ended June 29, 1997, while average revenue per restaurant has
increased 28.6% from $665,000 to $855,000 during the same period. Retail,
institutional and other revenues have also increased from $1.4 million in 1989
to $57.7 million in the twelve months ended June 29, 1997. In addition, EBITDA
has increased 49.8% from $47.4 million in 1989 to $71.0 million in the
twelve-month period ended June 29, 1997, while operating income has increased
from $4.1 million to $37.7 million over the same period. However, the high
leverage associated with the TRC Acquisition has severely impacted the liquidity
and profitability of the Company. The Company has reported net losses and had
earnings that were insufficient to cover fixed charges for each fiscal year
since the TRC Acquisition and for the six months ended June 29, 1997. It is
anticipated that upon completion of the Recapitalization and the Related
Transactions (as defined herein), approximately 9.8% of the Company's Common
Stock will be owned by the lenders under the Company's Old Credit Facility (as
defined herein) as a group. See "Risk Factors," "Selected Consolidated Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Ownership of Common Stock."
Friendly's intends to utilize the increased liquidity and operating and
financial flexibility resulting from consummation of the Recapitalization (as
defined herein), 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 will receive (i) a royalty based on franchised restaurant
revenues and (ii) revenues and earnings from the sale to DavCo of Friendly's
frozen desserts and other products. DavCo is required to purchase from
Friendly's all of the frozen desserts to be sold in these restaurants. See
"Business--Restaurant Operations--Franchising Program."
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 June 29, 1997, the Company (i) has applied $8.2 million of cash received
pursuant to the DavCo Agreement toward amounts outstanding under the Old Credit
Facility and recorded $2.0 million of associated net income, (ii) has paid $10.0
million of interest on the Old Credit Facility, (iii) will record $1.7 million
of net income related to deferred interest no longer payable under the Old
Credit Facility, (iv) will record $5.8 million of stock compensation expense,
net of taxes, arising out of the issuance of certain shares to management and
the vesting of certain restricted stock previously issued to management, (v)
will write-off $455,000 of deferred financing and debt restructuring costs, net
of taxes, related to the Old Credit Facility and (vi) will apply $10.0 million
of previously restricted cash to be received from Restaurant Insurance
Corporation, its insurance subsidiary ("RIC"), in exchange for a letter of
credit, toward amounts outstanding under the Old Credit Facility (collectively,
the "Related Transactions").
Upon completion of the Recapitalization, Friendly's total available
borrowings under the New Credit Facility are expected to be $55.0 million,
excluding $3.1 million of letter of credit availability (compared to $13.7
million as of June 29, 1997 under the Old Credit Facility, excluding $2.4
million of letter of credit availability), which borrowings may be used, with
certain limitations, for capital spending and general corporate purposes. After
giving effect to the Recapitalization and the Related Transactions, the
aggregate pro forma net decrease in interest expense would have been $16.0
million for 1996 and $8.1 million for the six-month period ended June 29, 1997.
See "Selected Consolidated Financial Information," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Description of New Credit Facility."
The following table sets forth the estimated sources and uses of funds in
connection with the Recapitalization after giving effect to the Related
Transactions:
<TABLE>
<CAPTION>
AT CLOSING
---------------------
<S> <C>
(DOLLARS IN
THOUSANDS)
SOURCES OF FUNDS:
Available cash........................................................ $ 1,339
Term Loan Facility (a)................................................ 105,000
Senior Note Offering (b).............................................. 175,000
Common Stock Offering (c)............................................. 100,000
--------
Total Sources..................................................... $ 381,339
--------
--------
USES OF FUNDS:
Retirement of Old Credit Facility (d)................................. $ 353,089
Retirement of capital leases.......................................... 9,000
Estimated fees and expenses (e)....................................... 19,250
--------
Total Uses........................................................ $ 381,339
--------
--------
</TABLE>
- ----------------------------------
(a) Represents borrowing in full under the Term Loan Facility. As part of the
Recapitalization, the Company will have a $55,000 Revolving Credit Facility
which is expected to be undrawn at closing and $3,111 available under the
Letter of Credit Facility. These facilities are expected to be drawn in
part, from time to time, to finance the Company's working capital and other
general corporate requirements.
(b) Represents gross proceeds from the Senior Note Offering.
(c) Represents gross proceeds from the sale of 5,000,000 shares of Common Stock
at an assumed initial public offering price of $20.00 per share.
(d) Represents the balance of all amounts expected to be outstanding under the
Old Credit Facility ($371,327 as of June 29, 1997) after giving effect to
the application of (i) $8,238 received on July 15, 1997 pursuant to the
DavCo Agreement and (ii) $10,000 of previously restricted cash and
investments of RIC which is expected to be released to the Company in
exchange for a $11,889 letter of credit, with the $1,889 of additional
released cash and investments increasing the Company's cash balance.
(e) Includes estimated underwriting discounts and commissions and other fees and
expenses relating to the Offerings and the New Credit Facility of which
$8,427 relates to the Common Stock Offering and $10,823 relates to the
Senior Note Offering and the New Credit Facility. See "Underwriting."
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
$362 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 stockholder's 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 121,528 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>
TWELVE
MONTHS
SIX MONTHS ENDED ENDED
FISCAL YEAR (A) ------------------ --------
------------------------------------------------ JUNE 30, JUNE 29, JUNE 29,
1992 1993 1994 1995 1996 1996 1997 1997
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF RESTAURANTS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant................................. $542,859 $580,161 $589,383 $593,570 $596,675 $284,025 $294,518 $607,168
Retail, institutional and other............ 20,346 30,472 41,631 55,579 54,132 24,759 28,310 57,683
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues............................... 563,205 610,633 631,014 649,149 650,807 308,784 322,828 664,851
-------- -------- -------- -------- -------- -------- -------- --------
Non-cash write-downs (b)..................... -- 25,552 -- 7,352 227 -- 347 574
Depreciation and amortization................ 35,734 35,535 32,069 33,343 32,979 16,606 16,401 32,774
Operating income............................. 25,509 8,116 36,870 16,670 30,501 7,958 15,117 37,660
Interest expense, net (c).................... 37,630 38,786 45,467 41,904 44,141 22,138 22,238 44,241
Cumulative effect of changes in accounting
principles, net of income taxes (d)........ -- (42,248) -- -- -- -- 2,236 2,236
Net income (loss)............................ $(13,321) $(61,448) $ (3,936) $(58,653) $ (7,772) $ (8,026) $ (2,404) $ (2,150)
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
OTHER DATA:
EBITDA (e)................................... $ 61,243 $ 69,203 $ 68,939 $ 57,365 $ 63,707 $ 24,564 $ 31,865 $ 71,008
Net cash provided by operating activities.... 34,047 42,877 38,381 27,790 26,163 14,896 9,625 20,892
Capital expenditures:
Cash....................................... 33,577 37,361 29,507 19,092 24,217 10,912 8,810 22,115
Non-cash (f)............................... 3,121 7,129 7,767 3,305 5,951 2,811 2,057 5,197
-------- -------- -------- -------- -------- -------- -------- --------
Total capital expenditures................. $ 36,698 $ 44,490 $ 37,274 $ 22,397 $ 30,168 $ 13,723 $ 10,867 $ 27,312
Ratio of earnings to fixed charges (g)....... -- -- -- -- -- -- -- --
PRO FORMA DATA:
EBITDA (e)(h)(l)............................. $ 64,653 $ 31,865 $ 71,481
Interest expense, net (c)(i)................. 28,163 14,157 28,226
Net income (j)............................... 2,213 2,364 7,578
Net income per share......................... $ 0.31 $ 0.33 $ 1.06
Weighted average shares outstanding (k)...... 7,125 7,125 7,125
Ratio of EBITDA to interest expense, net
(l)........................................ 2.3x 2.3x 2.5x
Ratio of earnings to fixed charges (g)....... 1.1x 1.0x 1.3x
Ratio of total long-term debt to EBITDA
(l)........................................ 4.0x
RESTAURANT OPERATING DATA:
Number of restaurants (end of period) (m).... 764 757 750 735 707 721 700 700
Average revenue per restaurant (n)........... $ 708 $ 750 $ 783 $ 797 $ 828 -- -- $ 855
Change in comparable restaurant revenues
(o)........................................ 6.0% 5.4% 3.4% 0.9% 1.8% (0.7)% 4.7% 7.7%
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 29, 1997
------------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(P)
-------------- --------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)..................................................................... $ (19,435) $ (19,130)
Total assets.................................................................................. 373,142 358,374
Total long-term debt and capital lease obligations, excluding current maturities.............. 385,622 289,050
Total stockholders' equity (deficit).......................................................... $ (175,534) $ (76,775)
</TABLE>
8
<PAGE>
(a) All fiscal years presented include 52 weeks of operations except 1993 which
includes 53 weeks of operations.
(b) Includes non-cash write-downs of approximately $16,337 in 1993 related to a
trademark license agreement as a result of new product development and the
replacement of certain trademarked menu items and $3,346 in 1995 related to
a postponed debt restructuring. All other non-cash write-downs relate to
property and equipment disposed of in the normal course of the Company's
operations. See Notes 3, 5 and 6 of Notes to Consolidated Financial
Statements.
(c) Interest expense, net is net of capitalized interest of $128, $156, $176,
$62, $49, $35, $17 and $31 and interest income of $222, $240, $187, $390,
$318, $215, $146 and $249 for 1992, 1993, 1994, 1995, 1996, the six months
ended June 30, 1996, the six months ended June 29, 1997 and the twelve
months ended June 29, 1997, respectively.
(d) Includes non-cash items, net of related income taxes, as a result of
adoption of accounting pronouncements related to income taxes of $30,968,
post-retirement benefits other than pensions of $4,140 and post-employment
benefits of $7,140 in 1993 and pensions of $2,236 in 1997.
(e) EBITDA represents consolidated Net income (loss) before (i) (Provision for)
benefit from income taxes, (ii) Interest expense, net, (iii) Depreciation
and amortization, (iv) Cumulative effect of changes in accounting
principles, net of income taxes, (v) Equity in net loss of joint venture and
(vi) Non-cash write-downs and all other non-cash items, plus cash
distributions from unconsolidated subsidiaries, each determined in
accordance with generally accepted accounting principles ("GAAP"). The
Company has included information concerning EBITDA in this Prospectus
because it believes that such information is used by certain investors as
one measure of an issuer's historical ability to service debt. EBITDA should
not be considered as an alternative to, or more meaningful than, earnings
from operations or other traditional indications of an issuer's operating
performance.
(f) Non-cash capital expenditures represent the cost of assets acquired through
the incurrence of capital lease obligations.
(g) The Ratio of earnings to fixed charges is computed by dividing (i) income
before interest, income taxes and other fixed charges by (ii) fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense which represents interest (assumed to be one-third).
For 1992, 1993, 1994, 1995, 1996, the six months ended June 30, 1996, the
six months ended June 29, 1997 and the twelve months ended June 29, 1997,
earnings were insufficient to cover fixed charges by $12,249, $30,826,
$8,773, $25,296, $13,689, $14,215, $7,881 and $7,355, respectively.
(h) Represents historical EBITDA adjusted to give effect to the benefit from the
change in accounting for pensions related to determining the return-on-asset
component of annual pension expense of $946 in 1996 and the incremental
benefit of $473 for the twelve months ended June 29, 1997. See Note 10 of
Notes to Consolidated Financial Statements.
(i) Represents historical interest expense adjusted to give effect to the
Recapitalization. Borrowings under the New Credit Facility will bear
interest at a floating rate equal to LIBOR plus 2.25% or the Alternative
Base Rate (as defined in the New Credit Facility) plus 0.75% per annum for
drawings under the Revolving Credit Facility and the Letter of Credit
Facility, 0.50% per annum for amounts undrawn under the Revolving Credit
Facility, 2.25% per annum for amounts issued but undrawn under the Letter of
Credit Facility and a weighted average floating rate equal to LIBOR plus
2.46% or the Alternative Base Rate plus 0.96% for the Term Loan Facility.
The following table represents changes to Interest expense, net on a pro
forma basis, resulting from the Recapitalization and the Related
Transactions:
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED
1996 JUNE 29, 1997
------------- -------------
<S> <C> <C>
(IN THOUSANDS)
Elimination of interest on Old Credit Facility.......................................... $ (41,827) $ (21,213)
Reduction of interest on capital lease obligations...................................... (873) (437)
Interest on Revolving Credit Facility................................................... 237 301
Interest on Letter of Credit Facility................................................... 268 134
Interest on Term Loan Facility.......................................................... 8,279 4,165
Interest on Senior Notes................................................................ 17,938 8,969
------------- -------------
Net decrease in Interest expense, net................................................. $ (15,978) $ (8,081)
------------- -------------
------------- -------------
</TABLE>
In calculating pro forma Interest expense, net, the assumed rates on the
Revolving Credit Facility, Letter of Credit Facility, Term Loan Facility and
Senior Notes were 7.67%, 2.25%, 7.88%, and 10.25% for 1996, respectively,
and 7.72%, 2.25%, 7.93% and 10.25% for the six months ended June 29, 1997,
respectively.
(j) Represents historical net income adjusted to give effect to (i) the
reduction in interest expense, net of income taxes, of $9,427, $4,768 and
$9,449 for 1996, the six months ended June 29, 1997 and the twelve months
ended June 29, 1997, respectively, as a result of the Recapitalization and
the Related Transactions and (ii) the benefit, net of income taxes, related
to the change in accounting for pensions described in (h) above of $558, $0
and $279 for 1996, the six months ended June 29, 1997 and the twelve months
ended June 29, 1997, respectively.
(k) Represents historical weighted average shares outstanding adjusted to give
effect to the issuance of 27 shares upon consummation of the Common Stock
Offering under the Management Stock Plan, and the return of 375 net shares
to the Company in connection with the Recapitalization. Actual weighted
average shares outstanding were 2,414, 2,473 and 2,473 for 1996, the six
months ended June 29, 1997 and the twelve months ended June 29, 1997. See
"Ownership of Common Stock" and Note 17 of Notes to Consolidated Financial
Statements.
(l) Effective December 30, 1996, the Company changed the salary and expense
actuarial assumptions used to calculate pension expense. Had such changes
been effective as of July 1, 1996, pro forma EBITDA, the Ratio of EBITDA to
interest expense, net and the Ratio of total long-term debt to EBITDA would
have been $71,934, 2.5x and 4.0x, respectively for the twelve months ended
June 29, 1997.
(m) The number at June 29, 1997 includes the 34 restaurants acquired by DavCo
pursuant to the DavCo Agreement. See "Recent Developments."
(n) Average revenue per restaurant represents restaurant revenues divided by the
weighted average number of restaurants open during such period. Fiscal 1993
has been adjusted to conform to a 52-week year. The Company does not
consider six-month results meaningful for this data.
(o) When computing comparable restaurant revenues, restaurants open for at least
twelve months are compared from period to period.
(p) Adjusted to give effect to the Recapitalization and the Related
Transactions.
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 June 29, 1997, on a pro forma basis
after giving effect to the Recapitalization and the Related Transactions, the
Company's total consolidated long-term debt and capital lease obligations
(including current maturities) would have been $293.3 million and the Company's
total consolidated stockholders' deficit would have been $76.8 million. Upon
completion of the Recapitalization, the Company's total available borrowings
under the New Credit Facility are estimated to be $55.0 million, excluding $3.1
million of availability under the Letter of Credit Facility (compared to $13.7
million as of June 29, 1997 under the Old Credit Facility, excluding $2.4
million of letter of credit availability). Additional borrowings may, subject to
certain limitations, be used for capital expenditures and general corporate
purposes, thereby increasing the Company's leverage. The Company's ability to
pay principal on the Senior Notes when due or to repurchase the Senior Notes
upon a Change of Control will be dependent upon the Company's ability to
generate cash from operations sufficient for such purposes or its ability to
refinance the Senior Notes. In addition, under the New Credit Facility, in the
event of circumstances which are similar to a Change of Control, repayment of
borrowings under the New Credit Facility will be subject to acceleration. See
"Description of New Credit Facility."
The degree to which the Company is leveraged could have important
consequences, including the following: (i) the Company's ability to obtain
additional financing in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired, (ii)
a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of the principal of and interest on its indebtedness
and, because borrowings under the New Credit Facility in part will bear interest
at floating rates, the Company could be adversely affected by any increase in
prevailing rates, (iii) the New Credit Facility and the Indenture relating to
the Senior Notes will impose significant financial and operating restrictions on
the Company and its subsidiaries which, if violated, could permit the Company's
creditors to accelerate payments thereunder or foreclose upon the collateral
securing the New Credit Facility, (iv) the Company is more leveraged than
certain of its principal competitors, which may place the Company at a
competitive disadvantage and (v) the Company's substantial leverage may limit
its ability to respond to changing business and economic conditions and make it
more vulnerable to a downturn in general economic conditions. See "Use of
Proceeds," "Business--Competition," "Description of New Credit Facility" and
"Description of Senior Notes."
HISTORY OF LOSSES
The Company has reported net losses of $13.3 million, $61.4 million, $3.9
million, $58.7 million, $7.8 million and $2.4 million for 1992, 1993, 1994,
1995, 1996 and for the six months ended June 29, 1997, respectively, and there
can be no assurance that the Company will be profitable in the future, or that,
if profitability is achieved, it will be sustained. The Company's earnings were
insufficient to cover fixed charges by $12.2 million, $30.8 million, $8.8
million, $25.3 million, $13.7 million and $7.9 million for 1992, 1993, 1994,
1995, 1996 and for the six months ended June 29, 1997, respectively, and there
can be no assurance that the Company's earnings will be sufficient to cover
fixed charges in the future. See "Selected Consolidated Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related Notes thereto.
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 the United Kingdom, South Korea and the
People's Republic of China ("China"). These international operations are subject
to various risks, including changing political and economic conditions, currency
fluctuations, trade barriers, trademark rights, adverse tax consequences, import
tariffs, customs and duties and government regulations. Government regulations,
relating to, among other things, the preparation and sale of food, building and
zoning requirements, wages, working conditions and the Company's relationship
with its employees, may vary widely from those in the United States. There can
be no assurance that the Company will be successful in maintaining or expanding
its international operations.
GEOGRAPHIC CONCENTRATION
Approximately 80% of the Company's restaurants are located, and
substantially all of its retail sales are generated, in the Northeast. As a
result, a severe or prolonged economic recession or changes in demographic mix,
employment levels, population density, weather, real estate market conditions or
other factors unique to this geographic region may adversely affect the Company
more than certain of its competitors which are more geographically diverse.
RELATIONSHIPS WITH PERKINS; POTENTIAL CONFLICTS OF INTEREST
After giving effect to the Recapitalization and the Related Transactions,
approximately 10.3% and 2.1% of the Company's Common Stock would have been
owned, as of June 29, 1997, by Donald N. Smith and The Equitable Life Assurance
Society of the United States (the "Equitable"), respectively. These stockholders
indirectly own 33.2% and 28.1%, respectively, of the general partner of Perkins
Family Restaurants, L.P. ("PFR"), which, through Perkins Restaurants Operating
Company, L.P. ("Perkins"), owns and franchises family-style restaurants. Mr.
Smith, the Company's Chairman, Chief Executive Officer and President, is an
officer of the general partner of PFR. In addition, three of the directors of
the general partner of PFR serve as directors of the Company. In the ordinary
course of business, the Company enters into transactions with Perkins. See
"Certain Transactions."
After giving effect to the Recapitalization and the Related Transactions,
the directors and executive officers of the Company would have owned
approximately 13.1% of the Common Stock as of June 29, 1997. Circumstances could
arise in which the interests of such stockholders could be in conflict with the
interests of the other stockholders of the Company and the holders of the Senior
Notes. In addition, Mr. Smith serves as Chairman, Chief Executive Officer and
President of the Company and as Chairman and Chief Executive Officer of Perkins
and, consequently, devotes a portion of his time to the affairs of each Company
and may be required to limit his involvement in those areas, if any, where the
interests of the Company conflict with those of Perkins. Mr. Smith does not have
an employment agreement with the Company nor is he contractually prohibited from
engaging in other business ventures in the future, any of which could compete
with the Company or its subsidiaries. See "Ownership of Common Stock."
DEPENDENCE ON SENIOR MANAGEMENT
The Company's business is managed, and its business strategies formulated,
by a relatively small number of key executive officers and other personnel,
certain of whom have joined the Company since Mr. Smith's arrival. The loss of
these key management persons, including Mr. Smith, could have a material adverse
effect on the Company. See "Management."
HIGHLY COMPETITIVE BUSINESS ENVIRONMENT
The restaurant business is highly competitive and is affected by changes in
the public's eating habits and preferences, population trends and traffic
patterns, as well as by local and national economic 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
June 29, 1997 on a pro forma basis giving effect to the Recapitalization and the
Related Transactions as if they had occurred on such date, the Company would
have had a negative net worth as determined pursuant to generally accepted
accounting principles.
ABSENCE OF 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 (1,496,528 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 a registration statement under the Securities
Act to register all shares of Common Stock issuable pursuant to the Company's
Stock Option Plan and Restricted Stock Plan. Subject to the completion of the
360-day period described above, shares of Common Stock issued upon the exercise
of awards issued under such plans and after the effective date of such
registration statement, generally will be eligible for sale in the public
market. See "Management--Executive Compensation."
Prior to the consummation of the Common Stock Offering, the Company, its
shareholders holding Class A and Class B common shares prior to the
Recapitalization and certain warrant holders will enter 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 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
15
<PAGE>
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
$33.63 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 June 29, 1997, borrowings under the Old Credit Facility accrued
interest at a rate of 11.0% per annum, and such borrowings will become due in
May 1998, unless repaid or previously extended for an additional year pursuant
to the terms of the Old Credit Facility. Borrowings under the New Credit
Facility will bear interest at a floating rate equal to LIBOR plus 2.25% or the
Alternative Base Rate (as defined in the New Credit Facility) plus 0.75% per
annum for drawings under the Revolving Credit Facility and the Letter of Credit
Facility, 0.50% per annum for amounts undrawn under the Revolving Credit
Facility, 2.25% per annum for amounts issued but undrawn under the Letter of
Credit Facility and a weighted average floating rate equal to LIBOR plus 2.46%
or the Alternative Base Rate plus 0.96% for the Term Loan Facility. See
"Description of New Credit Facility."
The following table sets forth the estimated sources and uses of funds in
connection with the Recapitalization after giving effect to the Related
Transactions:
<TABLE>
<CAPTION>
AT CLOSING
--------------------
<S> <C>
(DOLLARS IN
THOUSANDS)
SOURCES OF FUNDS:
Available cash........................................................ $ 1,339
Term Loan Facility (a)................................................ 105,000
Senior Note Offering (b).............................................. 175,000
Common Stock Offering (c)............................................. 100,000
--------
Total Sources..................................................... $ 381,339
--------
--------
USES OF FUNDS:
Retirement of Old Credit Facility (d)................................. $ 353,089
Retirement of capital leases.......................................... 9,000
Estimated fees and expenses (e)....................................... 19,250
--------
Total Uses........................................................ $ 381,339
--------
--------
</TABLE>
- ------------------------
(a) Represents borrowing in full under the Term Loan Facility. As part of the
Recapitalization, the Company will have a $55,000 Revolving Credit Facility
which is expected to be undrawn at closing and $3,111 available under the
Letter of Credit Facility. These facilities are expected to be drawn in
part, from time to time, to finance the Company's working capital and other
general corporate requirements.
(b) Represents gross proceeds from the Senior Note Offering.
(c) Represents gross proceeds from the sale of 5,000,000 shares of Common Stock
at an assumed initial public offering price of $20.00 per share.
(d) Represents the balance of all amounts expected to be outstanding under the
Old Credit Facility ($371,327 as of June 29, 1997) after giving effect to
the application of (i) $8,238 received on July 15, 1997 pursuant to the
DavCo Agreement and (ii) $10,000 of previously restricted cash and
investments of RIC which is expected to be released to the Company in
exchange for a $11,889 letter of credit, with the $1,889 of additional
released cash and investments increasing the Company's cash balance.
(e) Includes estimated underwriting discounts and commissions and other fees and
expenses relating to the Offerings and the New Credit Facility of which
$8,427 relates to the Common Stock Offering and $10,823 relates to the
Senior Note Offering and the New Credit Facility. See "Underwriting."
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 June 29, 1997 was
$(190,909,000), or $(77.20) 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 June 29,
1997 would have been $(102,202,000), or $(13.63) per share. This represents an
immediate increase in net tangible book value of $63.57 per share to existing
stockholders and an immediate dilution of $33.63 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 June 29, 1997............... $ (77.20)
Increase per share attributable to new investors in the
Common Stock Offering.......................................... 63.57
---------
Pro forma net tangible book value per share after the Common
Stock Offering................................................. (13.63)
---------
Dilution per share to new investors................................ $ 33.63
---------
---------
</TABLE>
The following table summarizes as of June 29, 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 June 29, 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 June 29, 1997 and (ii) as of June 29,
1997, as adjusted to give effect to the Recapitalization and the Related
Transactions. This table should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 29, 1997
------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.............................................................. $ 16,899 $ 7,466(a)
----------- -----------
----------- -----------
Current maturities of long-term debt and capital lease obligations..................... $ 7,956 $ 4,201
----------- -----------
----------- -----------
Long-term debt
Old Credit Facility.................................................................. $ 371,327 $ --(b)
Revolving Credit Facility............................................................ -- --(c)
Term Loan Facility................................................................... -- 105,000
Senior Notes......................................................................... -- 175,000
Capital lease obligations and other.................................................. 14,295 9,050
----------- -----------
Total long-term debt................................................................... 385,622 289,050
----------- -----------
Stockholders' equity (d)
Preferred Stock, $0.01 par value, 1,000,000 shares authorized and none outstanding,
as adjusted........................................................................ -- --
Common Stock, $0.01 par value, 7,389 shares authorized and 2,473 shares outstanding;
50,000 shares authorized and 7,125 shares outstanding, as adjusted................. 25 71(e)
Paid-in capital...................................................................... 46,905 148,214(e)
Unrealized gain on investment securities............................................. 28 28
Accumulated deficit.................................................................. (222,563) (225,159)(f)
Cumulative translation adjustment.................................................... 71 71
----------- -----------
Total stockholders' equity (deficit)................................................... (175,534) (76,775)
----------- -----------
Total capitalization................................................................... $ 210,088 $ 212,275
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(a) Gives effect to (i) the $9,983 interest payment made on July 1, 1997 under
the Old Credit Facility, (ii) the receipt of $11,889 of previously
restricted cash from the Company's insurance subsidiary released in exchange
for a letter of credit, net of $10,000 applied to the Old Credit Facility
and (iii) $1,339 required as a source of funds for the Recapitalization.
(b) Gives effect to the application of (i) $353,089 of the gross proceeds from
the Recapitalization, (ii) $10,000 of restricted cash released from the
Company's insurance subsidiary and (iii) $8,238 received by the Company
pursuant to the DavCo Agreement on July 15, 1997. See "Use of Proceeds."
(c) As part of the Recapitalization, the Company will have a $55,000 Revolving
Credit Facility which is expected to be undrawn at closing and $3,111
available under the Letter of Credit Facility. These facilities are expected
to be drawn in part, from time to time, to finance the Company's working
capital and other general corporate requirements.
(d) Historical share information includes Class A common shares and Class B
common shares. In connection with the Recapitalization, the Class A common
shares and Class B common shares will be converted into Common Stock.
(e) Gives effect to (i) an assumed $100,000 of gross proceeds from the Common
Stock Offering, (ii) $8,427 of expenses associated with the Common Stock
Offering, (iii) the 924-for-1 stock split which will occur prior to the
Common Stock Offering and (iv) $9,782 of stock compensation expense arising
out of the issuance of certain shares to management and the vesting of
certain restricted stock previously issued to certain members of management
in connection with the Recapitalization. See Note 17 of Notes to
Consolidated Financial Statements.
(f) Gives effect to (i) $1,953 of net income associated with the DavCo
Agreement, (ii) $1,677 of net income related to deferred interest no longer
payable under the Old Credit Facility, (iii) $5,771 of stock compensation
expense, net of taxes, related to the issuance and vesting of the shares of
Common Stock discussed in (e) above and (iv) the write-off of $455 of
deferred financing and debt restructuring costs, net of taxes, related to
the Old Credit Facility.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated historical financial
information of the Company and its consolidated subsidiaries for each of the
periods presented below. This information should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein. The selected consolidated historical financial
information for each of 1994, 1995 and 1996, and as of December 31, 1995 and
December 29, 1996, has been derived from the Company's audited Consolidated
Financial Statements which are included elsewhere herein. The selected
consolidated historical financial information as of and for the six months ended
June 30, 1996 and June 29, 1997 and for the latest twelve months ended June 29,
1997 has been derived from the Company's unaudited consolidated financial
statements which, in the opinion of management, reflect all adjustments
(consisting only of normal recurring accruals) necessary to present fairly, in
accordance with GAAP, the information contained therein. See Note 3 of Notes to
Consolidated Financial Statements for a discussion of the basis of the
presentation and significant accounting policies of the consolidated historical
financial information set forth below. Results for interim periods are not
necessarily indicative of full fiscal year results. No stock dividends were
declared or paid for any period presented.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR (A) --------------------
----------------------------------------------------- JUNE 30, JUNE 29,
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Restaurant........................................ $ 542,859 $ 580,161 $ 589,383 $ 593,570 $ 596,675 $ 284,025 $ 294,518
Retail, institutional and other................... 20,346 30,472 41,631 55,579 54,132 24,759 28,310
--------- --------- --------- --------- --------- --------- ---------
Total revenues...................................... 563,205 610,633 631,014 649,149 650,807 308,784 322,828
--------- --------- --------- --------- --------- --------- ---------
Cost of sales..................................... 154,796 170,431 179,793 192,600 191,956 89,696 92,186
Labor and benefits................................ 201,431 209,522 211,838 214,625 209,260 102,674 104,898
Operating expenses................................ 108,363 120,626 132,010 143,854 143,163 70,620 71,284
General and administrative expenses............... 37,372 40,851 38,434 40,705 42,721 21,230 22,595
Non-cash write-downs (b).......................... -- 25,552 -- 7,352 227 -- 347
Depreciation and amortization..................... 35,734 35,535 32,069 33,343 32,979 16,606 16,401
--------- --------- --------- --------- --------- --------- ---------
Operating income.................................... 25,509 8,116 36,870 16,670 30,501 7,958 15,117
Interest expense, net (c)........................... 37,630 38,786 45,467 41,904 44,141 22,138 22,238
Equity in net loss of joint venture................. -- -- -- -- -- -- 743
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before (provision for) benefit from
income taxes and cumulative effect of changes in
accounting principles............................. (12,121) (30,670) (8,597) (25,234) (13,640) (14,180) (7,864)
(Provision for) benefit from income taxes........... (1,200) 11,470 4,661 (33,419) 5,868 6,154 3,224
Cumulative effect of changes in accounting
principles, net of income taxes (d)............... -- (42,248) -- -- -- -- 2,236
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)................................... $ (13,321) $ (61,448) $ (3,936) $ (58,653) $ (7,772) $ (8,026) $ (2,404)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
OTHER DATA:
EBITDA (e).......................................... $ 61,243 $ 69,203 $ 68,939 $ 57,365 $ 63,707 $ 24,564 $ 31,865
Net cash provided by operating activities........... 34,047 42,877 38,381 27,790 26,163 14,896 9,625
Capital expenditures:
Cash.............................................. 33,577 37,361 29,507 19,092 24,217 10,912 8,810
Non-cash (f)...................................... 3,121 7,129 7,767 3,305 5,951 2,811 2,057
--------- --------- --------- --------- --------- --------- ---------
Total capital expenditures.......................... $ 36,698 $ 44,490 $ 37,274 $ 22,397 $ 30,168 $ 13,723 $ 10,867
Ratio of earnings to fixed charges (g).............. -- -- -- -- -- -- --
PRO FORMA DATA:
EBITDA (e)(h)(l).................................... $ 64,653 $ 31,865
Interest expense, net (c)(i)........................ 28,163 14,157
Net income(j)....................................... 2,213 2,364
Net income per share................................ $ 0.31 $ 0.33
Weighted average shares outstanding (k)............. 7,125 7,125
Ratio of EBITDA to interest expense, net (l)........ 2.3x 2.3x
Ratio of earnings to fixed charges (g).............. 1.1x 1.0x
Ratio of total long-term debt to EBITDA (l).........
<CAPTION>
TWELVE
MONTHS
ENDED
---------
JUNE 29,
1997
---------
<S> <C>
STATEMENT OF OPERATIONS DATA:
<S> <C>
Revenues:
Restaurant........................................ $ 607,168
Retail, institutional and other................... 57,683
---------
Total revenues...................................... 664,851
---------
Cost of sales..................................... 194,446
Labor and benefits................................ 211,484
Operating expenses................................ 143,827
General and administrative expenses............... 44,086
Non-cash write-downs (b).......................... 574
Depreciation and amortization..................... 32,774
---------
Operating income.................................... 37,660
Interest expense, net (c)........................... 44,241
Equity in net loss of joint venture................. 743
---------
Income (loss) before (provision for) benefit from
income taxes and cumulative effect of changes in
accounting principles............................. (7,324)
(Provision for) benefit from income taxes........... 2,938
Cumulative effect of changes in accounting
principles, net of income taxes (d)............... 2,236
---------
Net income (loss)................................... $ (2,150)
---------
---------
OTHER DATA:
EBITDA (e).......................................... $ 71,008
Net cash provided by operating activities........... 20,892
Capital expenditures:
Cash.............................................. 22,115
Non-cash (f)...................................... 5,197
---------
Total capital expenditures.......................... $ 27,312
Ratio of earnings to fixed charges (g).............. --
PRO FORMA DATA:
EBITDA (e)(h)(l).................................... $ 71,481
Interest expense, net (c)(i)........................ 28,226
Net income(j)....................................... 7,578
Net income per share................................ $ 1.06
Weighted average shares outstanding (k)............. 7,125
Ratio of EBITDA to interest expense, net (l)........ 2.5x
Ratio of earnings to fixed charges (g).............. 1.3x
Ratio of total long-term debt to EBITDA (l)......... 4.0x
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR (A) AS OF AS OF
----------------------------------------------------- JUNE 30, JUNE 29,
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................. $ (28,451) $ (27,919) $ (35,856) $ (14,678) $ (20,700) $ (24,394) $ (19,435)
Total assets............................... 380,087 365,330 374,669 370,292 360,126 371,519 373,142
Total long-term debt and capital lease
obligations, excluding current
maturities............................... 358,102 363,028 369,549 389,144 385,977 390,083 385,622
Total stockholders' equity (deficit)....... $ (43,993) $(102,965) $(106,901) $(165,534) $(173,156) $(176,019) $(175,534)
<CAPTION>
AS
ADJUSTED(M)
------------
JUNE 29,
1997
------------
<S> <C>
BALANCE SHEET DATA:
Working capital (deficit).................. $ (19,130)
Total assets............................... 358,374
Total long-term debt and capital lease
obligations, excluding current
maturities............................... 289,050
Total stockholders' equity (deficit)....... $ (76,775)
</TABLE>
- ------------------------
(a) All fiscal years presented include 52 weeks of operations except 1993 which
includes 53 weeks of operations.
(b) Includes non-cash write-downs of approximately $16,337 in 1993 related to a
trademark license agreement as a result of new product development and the
replacement of certain trademarked menu items and $3,346 in 1995 related to
a postponed debt restructuring. All other non-cash write-downs relate to
property and equipment disposed of in the normal course of the Company's
operations. See Notes 3, 5 and 6 of Notes to Consolidated Financial
Statements.
(c) Interest expense, net is net of capitalized interest of $128, $156, $176,
$62, $49, $35, $17 and $31 and interest income of $222, $240, $187, $390,
$318, $215, $146 and $249 for 1992, 1993, 1994, 1995, 1996, the six months
ended June 30, 1996, the six months ended June 29, 1997 and the twelve
months ended June 29, 1997, respectively.
(d) Includes non-cash items, net of related income taxes, as a result of
adoption of accounting pronouncements related to income taxes of $30,968,
post-retirement benefits other than pensions of $4,140 and post-employment
benefits of $7,140 in 1993 and pensions of $2,236 in 1997.
(e) EBITDA represents consolidated Net income (loss) before (i) (Provision for)
benefit from income taxes, (ii) Interest expense, net, (iii) Depreciation
and amortization, (iv) Cumulative effect of changes in accounting
principles, net of income taxes, (v) Equity in net loss of joint venture and
(vi) Non-cash write-downs and all other non-cash items, plus cash
distributions from unconsolidated subsidiaries, each determined in
accordance with GAAP. The Company has included information concerning EBITDA
in this Prospectus because it believes that such information is used by
certain investors as one measure of an issuer's historical ability to
service debt. EBITDA should not be considered as an alternative to, or more
meaningful than, earnings from operations or other traditional indications
of an issuer's operating performance.
(f) Non-cash capital expenditures represent the cost of assets acquired through
the incurrence of capital lease obligations.
(g) The Ratio of earnings to fixed charges is computed by dividing (i) income
before interest, income taxes and other fixed charges by (ii) fixed charges,
including interest expense, amortization of debt issuance costs and the
portion of rent expense which represents interest (assumed to be one-third).
For 1992, 1993, 1994, 1995, 1996, the six months ended June 30, 1996, the
six months ended June 29, 1997 and the twelve months ended June 29, 1997,
earnings were insufficient to cover fixed charges by $12,249, $30,826,
$8,773, $25,296, $13,689, $14,215, $7,881 and $7,355, respectively.
(h) Represents historical EBITDA adjusted to give effect to the benefit from the
change in accounting for pensions related to determining the return-on-asset
component of annual pension expense of $946 in 1996 and the incremental
benefit of $473 for the twelve months ended June 29, 1997. See Note 10 of
Notes to Consolidated Financial Statements.
(i) Represents historical interest expense adjusted to give effect to the
Recapitalization. Borrowings under the New Credit Facility will bear
interest at a floating rate equal to LIBOR plus 2.25% or the Alternative
Base Rate (as defined in the New Credit Facility) plus 0.75% per annum for
drawings under the Revolving Credit Facility and the Letter of Credit
Facility, 0.50% per annum for amounts undrawn under the Revolving Credit
Facility, 2.25% per annum for amounts issued but undrawn under the Letter of
Credit Facility and a weighted average floating rate equal to LIBOR plus
2.46% or the Alternative Base Rate plus 0.96% for the Term Loan Facility.
(j) Represents historical net income adjusted to give effect to (i) the
reduction in interest expense, net of income taxes of $9,427, $4,768 and
$9,449 for 1996, the six months ended June 29, 1997 and the twelve months
ended June 29, 1997, respectively, as a result of the Recapitalization and
the Related Transactions and (ii) the benefit, net of income taxes, related
to the change in accounting for pensions described in (h) above of $558, $0
and $279 for 1996, the six months ended June 29, 1997 and the twelve months
ended June 29, 1997, respectively.
(k) Represents historical weighted average shares outstanding adjusted to give
effect to the issuance of 27 shares upon consummation of the Common Stock
Offering under the Management Stock Plan, and the return of 375 net shares
to the Company in connection with the Recapitalization. Actual weighted
average shares outstanding were 2,414, 2,473 and 2,473 for 1996, the six
months ended June 29, 1997 and the twelve months ended June 29, 1997. See
"Ownership of Common Stock" and Note 17 of Notes to Consolidated Financial
Statements.
(l) Effective December 30, 1996, the Company changed the salary and expense
actuarial assumptions used to calculate pension expense. Had such changes
been effective as of July 1, 1996, pro forma EBITDA, the Ratio of EBITDA to
interest expense, net and the Ratio of total long-term debt to EBITDA would
have been $71,934, 2.5x and 4.0x, respectively for the twelve months ended
June 29, 1997.
(m) Adjusted to give effect to the Recapitalization and the Related
Transactions.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE IN
THIS PROSPECTUS.
OVERVIEW
Friendly's owns and operates 666 restaurants, franchises 34 restaurants and
distributes a full line of frozen desserts through more than 5,000 supermarkets
and other retail locations in 15 states. The Company was publicly held from 1968
until January 1979 at which time it was acquired by Hershey. Under Hershey's
ownership, the number of Company restaurants increased from 601 to 849. Hershey
subsequently sold the Company in September 1988 to TRC in a highly-leveraged
transaction.
Beginning in 1989, the new management focused on improving operating
performance through revitalizing and renovating restaurants, upgrading and
expanding the menu and improving management hiring, training, development and
retention. Also in 1989, the Company introduced its signature frozen desserts
into retail locations in the Northeast. Since the beginning of 1989, 22 new
restaurants have been opened while 170 under-performing restaurants have been
closed.
The high leverage associated with the TRC Acquisition has severely impacted
the liquidity and profitability of the Company. As of June 29, 1997, the Company
had a stockholders' deficit of $175.5 million. Cumulative interest expense of
$373.3 million since the TRC Acquisition has significantly contributed to the
deficit. The Company's net loss in 1996 of $7.8 million included $44.1 million
of interest expense.
The Company's revenue, EBITDA and operating income have improved
significantly since the TRC Acquisition. Despite the closing of 148 restaurants
(net of restaurants opened) since the beginning of 1989, Restaurant revenues
have increased 9.0% from $557.3 million in 1989 to $607.2 million in the twelve-
months ended June 29, 1997, while average revenue per restaurant has increased
28.6% from $665,000 to $855,000 during the same period. Retail, institutional
and other revenues have also increased from $1.4 million in 1989 to $57.7
million in the twelve months ended June 29, 1997. In addition, EBITDA has
increased 49.8% from $47.4 million in 1989 to $71.0 million in the twelve-month
period ended June 29, 1997, while operating income has increased from $4.1
million to $37.7 million over the same period. As a result of the positive
impact of the Company's revitalization program, the closing of under-performing
restaurants and the growth of the retail, institutional and other businesses,
period to period comparisons may not be meaningful.
The Company's revenues are derived primarily from the operation of
full-service restaurants and from the distribution and sale of frozen desserts
through retail locations. In addition, the Company derives a small amount of
revenue from the sale of frozen desserts in the United Kingdom and South Korea
under various distribution and licensing arrangements. Furthermore, the Company
is a 50% partner in a joint venture in Shanghai, China which has manufactured
and distributed frozen desserts on a limited basis. The joint venture is
currently seeking to establish additional distribution for its products in
China.
On July 14, 1997, the Company entered into the DavCo Agreement pursuant to
which the Company received $8.2 million in cash for the sale of certain non-real
property assets and in payment of franchise and development fees, and will
receive (i) a royalty based on franchised restaurant revenues and (ii) revenues
and earnings from the sale to DavCo of Friendly's frozen desserts and other
products. The Company anticipates receiving similar fees and royalty streams in
connection with future franchising arrangements. See "Prospectus Summary--Recent
Developments."
Cost of sales includes direct food costs, the Company's costs to manufacture
frozen desserts and the Company's costs to distribute frozen desserts and other
food products to its restaurants and its retail, institutional and other
customers. Retail, institutional and other revenues have higher food costs as a
percentage of sales than Restaurant revenues. Labor and benefits include labor
and related payroll
22
<PAGE>
expenses for restaurant employees. Operating expenses include all other
restaurant-level expenses including supplies, utilities, maintenance, insurance
and occupancy-related expenses, the costs associated with Retail, institutional
and other revenues including salaries for sales personnel and other selling
expenses and advertising costs.
General and administrative expenses include costs associated with restaurant
field supervision and the Company's headquarters personnel. Non-cash write-downs
include the write-downs of long-lived assets and certain intangible assets when
circumstances indicate that the carrying amount of an asset may not be
recoverable. See Notes 3 and 6 of Notes to Consolidated Financial Statements.
Interest expense, net is net of capitalized interest and interest income.
RESULTS OF OPERATIONS
The operating results of the Company expressed as a percentage of Total
revenues are set forth below.
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS ENDED
-------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
Revenues:
Restaurant............................ 93.4% 91.4% 91.7% 92.0% 91.2%
Retail, institutional and other....... 6.6 8.6 8.3 8.0 8.8
-------- -------- -------- -------- --------
Total revenues.......................... 100.0 100.0 100.0 100.0 100.0
-------- -------- -------- -------- --------
Less:
Cost of sales......................... 28.5 29.7 29.5 29.0 28.5
Labor and benefits.................... 33.6 33.1 32.2 33.3 32.5
Operating expenses.................... 20.9 22.2 22.0 22.9 22.1
General and administrative expenses... 6.1 6.2 6.5 6.9 7.0
Non-cash write-downs.................. 0.0 1.1 0.0 0.0 0.1
Depreciation and amortization......... 5.1 5.1 5.1 5.3 5.1
-------- -------- -------- -------- --------
Operating income........................ 5.8 2.6 4.7 2.6 4.7
Interest expense, net................... 7.2 6.5 6.8 7.2 6.9
Equity in net loss of joint venture..... 0.0 0.0 0.0 0.0 0.2
-------- -------- -------- -------- --------
Loss before benefit from (provision for)
income taxes and cumulative effect of
change in accounting principle........ (1.4) (3.9) (2.1) (4.6) (2.4)
Benefit from (provision for) income
taxes................................. 0.8 (5.1) 0.9 2.0 1.0
Cumulative effect of change in
accounting principle, net of income
tax expense........................... 0.0 0.0 0.0 0.0 0.7
-------- -------- -------- -------- --------
Net income (loss)....................... (0.6)% (9.0)% (1.2)% (2.6)% (0.7)%
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
SIX MONTHS ENDED JUNE 29, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
REVENUES--Total revenues increased $14.0 million, or 4.5%, to $322.8 million
for the six months ended June 29, 1997 from $308.8 million for the six months
ended June 30, 1996. Restaurant revenues increased $10.5 million, or 3.7%, to
$294.5 million for the six months ended June 29, 1997 from $284.0 million for
the six months ended June 30, 1996. Comparable restaurant revenues increased
4.7%. The increase in Restaurant revenues and comparable restaurant revenues was
due to the introduction of higher-priced lunch and dinner entrees, selected menu
price increases, a shift in sales mix to higher-priced items, the opening of one
new restaurant, the revitalization of 21 restaurants, building expansions at
four restaurants and a milder winter in the 1997 period, which allowed for
favorable traffic comparisons. The increase was partially offset by the closing
of 22 under-performing restaurants. Retail, institutional and other revenues
increased by $3.5 million, or 14.1%, to $28.3 million for the six months ended
June 29, 1997 from $24.8 million for the six months ended June 30, 1996. The
increase was primarily due to a more effective sales promotion program.
23
<PAGE>
COST OF SALES--Cost of sales increased $2.5 million, or 2.8%, to $92.2
million for the six months ended June 29, 1997 from $89.7 million for the six
months ended June 30, 1996. Cost of sales as a percentage of Total revenues
decreased to 28.5% in the 1997 period from 29.0% in the 1996 period. The
decrease was due to a 0.8% reduction in food costs at the restaurant level
despite higher guest check averages because of reduced promotional discounts.
The decrease was offset by a 0.3% increase in food costs at the retail and
institutional level.
LABOR AND BENEFITS--Labor and benefits increased $2.2 million, or 2.1%, to
$104.9 million for the six months ended June 29, 1997 from $102.7 million for
the six months ended June 30, 1996. Labor and benefits as a percentage of Total
revenues decreased to 32.5% in the 1997 period from 33.3% in the 1996 period.
The decrease was due to an increase in Retail, institutional and other revenues
as a percent of Total revenues as these revenues have no associated labor and
benefits costs, and to an improvement in labor utilization and lower workers'
compensation insurance and pension costs.
OPERATING EXPENSES--Operating expenses increased $0.7 million, or 1.0%, to
$71.3 million for the six months ended June 29, 1997 from $70.6 million for the
six months ended June 30, 1996. Operating expenses as a percentage of Total
revenues decreased to 22.1% in the 1997 period from 22.9% in the 1996 period.
The decrease was due to reduced costs for snow removal in the 1997 period and
the allocation of fixed costs over higher Total revenues.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $1.4 million, or 6.6%, to $22.6 million for the six months ended June
29, 1997 from $21.2 million for the six months ended June 30, 1996. General and
administrative expenses as a percentage of Total revenues increased to 7.0% in
the 1997 period from 6.9% in the 1996 period. This increase was due to an
increase in management bonuses and the annual merit-based salary increases,
partially offset by reductions in pension costs and the elimination of field
management positions associated with the closing of 22 restaurants since the end
of the 1996 period.
EBITDA--As a result of the above, EBITDA increased $7.3 million, or 29.7%,
to $31.9 million for the six months ended June 29, 1997 from $24.6 million for
the six months ended June 30, 1996. EBITDA as a percentage of Total revenues
increased to 9.9% in the 1997 period from 7.9% in the 1996 period.
NON-CASH WRITE-DOWNS--Non-cash write-downs were $0.3 million for the six
months ended June 29, 1997; there were no such write-downs during the six months
ended June 30, 1996.
DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased $0.2
million, or 1.2%, to $16.4 million for the six months ended June 29, 1997 from
$16.6 million for the six months ended June 30, 1996. Depreciation and
amortization as a percentage of Total revenues decreased to 5.1% in the 1997
period from 5.3% in the 1996 period. The decrease was due to the closing of 22
units since the end of the 1996 period, partially offset by higher amortization
of debt restructuring costs incurred as a result of a debt restructuring which
was effective January 1, 1996.
INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and
interest income, increased by $0.1 million, or 0.5%, to $22.2 million for the
six months ended June 29, 1997 from $22.1 million for the six months ended June
30, 1996. The increase in interest expense was due to higher average borrowings
under the revolving portion of the Company's Old Credit Facility in the 1997
period.
EQUITY IN NET LOSS OF JOINT VENTURE--The equity in net loss of the China
joint venture of $0.7 million for the six month period ended June 29, 1997
reflected the Company's 50% share of the China joint venture's net loss for such
period. Sales for the joint venture were minimal during the 1997 period.
BENEFIT FROM (PROVISION FOR) INCOME TAXES--The benefit from income taxes
decreased $3.0 million to a benefit of $3.2 million for the six months ended
June 29, 1997 from a benefit of $6.2 million for the six months ended June 30,
1996. The decrease was due to a decrease in the loss before taxes.
24
<PAGE>
In 1997, the Company revised the method used in determining the
return-on-asset component of annual pension expense as described in Note 10 of
Notes to Consolidated Financial Statements. The cumulative effect of this change
was $2.2 million, net of income tax expense of $1.6 million.
NET INCOME (LOSS)--Net loss decreased by $5.6 million, or 70.0%, to a net
loss of $2.4 million for the six months ended June 29, 1997 from a net loss of
$8.0 million for the six months ended June 30, 1996.
1996 COMPARED TO 1995
REVENUES--Total revenues increased $1.7 million, or 0.3%, to $650.8 million
in 1996 from $649.1 million in 1995. Restaurant revenues increased $3.1 million,
or 0.5%, to $596.7 million in 1996 from $593.6 million in 1995. Comparable
restaurant revenues increased by 1.8%. The increase in Restaurant revenues and
comparable restaurant revenues was due to the introduction of higher-priced
lunch and dinner entrees in the fourth quarter of 1996, selected menu price
increases, a shift in sales mix to higher priced items, the opening of three new
restaurants, the revitalization of 17 restaurants and building expansions at
four existing locations. The increase was partially offset by the closing of 31
restaurants in 1996. Retail, institutional and other revenues declined by $1.5
million, or 2.7%, to $54.1 million in 1996 from $55.6 million in 1995. The
decrease was primarily attributable to the effects of a reduction in promotional
activities.
COST OF SALES--Cost of sales decreased $0.6 million, or 0.3%, to $192.0
million in 1996 from $192.6 million in 1995. Cost of sales as a percentage of
Total revenues decreased to 29.5% in 1996 from 29.7% in 1995. The decrease was
due to a 0.2% reduction in food costs at the restaurant level as a result of
reduced waste in food preparation.
LABOR AND BENEFITS--Labor and benefits decreased $5.3 million, or 2.5%, to
$209.3 million in 1996 from $214.6 million in 1995. Labor and benefits as a
percentage of Total revenues decreased to 32.2% in 1996 from 33.1% in 1995. The
decrease was due to a 1.1% reduction in labor and benefits as a percentage of
Restaurant revenues as a result of an improvement in labor utilization and lower
group and workers' compensation insurance costs. The decrease was offset by a
0.3% reduction in Retail, institutional and other revenues as a percentage of
Total revenues as these revenues have no associated labor and benefits.
OPERATING EXPENSES--Operating expenses decreased $0.7 million, or 0.5%, to
$143.2 million in 1996 from $143.9 million in 1995. Operating expenses as a
percentage of Total revenues decreased in 1996 to 22.0% from 22.2% in 1995. The
decrease was due to the allocation of fixed costs over higher total revenues.
GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses
increased $2.0 million, or 4.9%, to $42.7 million in 1996 from $40.7 million in
1995. General and administrative expenses as a percentage of Total revenues
increased to 6.5% in 1996 from 6.2% in 1995. This increase was due to an
increase in management bonuses and the annual merit-based salary increases,
partially offset by reductions in group medical insurance claims and the
elimination of field management positions associated with the closing of 31
restaurants in 1996. General and administrative expenses, exclusive of
management bonuses, increased $0.3 million in 1996.
EBITDA--As a result of the above, EBITDA increased by $6.3 million, or
11.0%, to $63.7 million in 1996 from $57.4 million in 1995. EBITDA as a
percentage of Total revenues increased to 9.8% in 1996 from 8.8% in 1995.
NON-CASH WRITE-DOWNS--Non-cash write-downs decreased $7.2 million to $0.2
million in 1996 from $7.4 million in 1995. The decrease was due to a reduction
in the carrying value of properties held for disposition of $0.2 million in 1996
and $4.0 million in 1995. In 1995, the Company also incurred a non-cash
write-down of $3.3 million relating to costs resulting from a postponed debt
refinancing. For further explanation of the non-cash write-downs, see Notes 3, 5
and 6 of Notes to Consolidated Financial Statements.
25
<PAGE>
DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased $0.3
million, or 0.9%, to $33.0 million in 1996 from $33.3 million in 1995. The
decrease was due to lower amortization of debt restructuring costs, partially
offset by an increase in depreciation due to the addition of three restaurants
and the ongoing implementation of the Company's revitalization program.
Depreciation and amortization as a percentage of Total revenues was 5.1% for
both periods.
INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and
interest income, increased by $2.2 million, or 5.3%, to $44.1 million in 1996
from $41.9 million in 1995. The increase was due to an increase in the interest
rate on the Company's bank debt as a result of the debt restructuring effective
January 1, 1996.
BENEFIT FROM (PROVISION FOR) INCOME TAXES--The benefit from income taxes was
$5.9 million in 1996 as compared to a provision for income taxes of $33.4
million in 1995. The benefit from income taxes of $5.9 million in 1996
represented the statutory federal and state tax benefit of the Company's loss
partially offset by the impact of the federal and state tax valuation
allowances. The income tax provision of $33.4 million in 1995 resulted primarily
from the anticipated deconsolidation from TRC. As a result, the deferred tax
asset of approximately $19 million related to the NOLs utilized by TRC as of
December 31, 1995 was written off in 1995. Additionally, as a result of the
anticipated change in ownership and Section 382 limitation, a valuation
allowance in 1995 was placed on all Federal NOL carryforwards generated through
December 31, 1995. See Note 9 of Notes to Consolidated Financial Statements. and
"Net Operating Loss Carryforwards."
NET INCOME (LOSS)--As a result of the above, net loss decreased by $50.9
million, or 86.7%, to a net loss of $7.8 million in 1996 from a net loss of
$58.7 million in 1995.
1995 COMPARED TO 1994
REVENUES--Total revenues increased $18.1 million, or 2.9%, to $649.1 million
in 1995 from $631.0 million in 1994. Restaurant revenues increased $4.2 million,
or 0.7%, to $593.6 million in 1995 from $589.4 million in 1994. Comparable
restaurant revenues increased by 0.9%. The increase in Restaurant revenues and
comparable restaurant revenues was due to the introduction of frozen yogurt,
selected menu price increases, a shift in sales mix to higher-priced items, the
opening of one new restaurant, the revitalization of 13 restaurants and building
expansions at seven existing restaurants. The increase was partially offset by
the closing of 16 restaurants in 1995. Retail, institutional and other revenues
increased $14.0 million, or 33.7%, to $55.6 million in 1995 from $41.6 million
in 1994. This increase was due to a successful promotional campaign in existing
markets and the introduction of frozen yogurt into these markets.
COST OF SALES--Cost of sales increased $12.8 million, or 7.1%, to $192.6
million in 1995 from $179.8 million in 1994. Cost of sales as a percentage of
Total revenues increased to 29.7% in 1995 from 28.5% in 1994. The increase was
due to a 0.8% rise in food costs at the restaurant level as a result of a sales
mix shift to higher quality items and increased waste in food preparation and to
a 0.4% rise in food costs at the retail and institutional level.
LABOR AND BENEFITS--Labor and benefits increased $2.8 million, or 1.3%, to
$214.6 million in 1995 from $211.8 million in 1994. Labor and benefits as a
percentage of Total revenues decreased in 1995 to 33.1% from 33.6% in 1994.
Approximately 0.7% of the decrease was due to an increase in Retail,
institutional and other revenues as a percent of Total revenues as these
revenues have no associated labor and benefits. This decrease was partially
offset by a 0.2% rise in labor and benefits as a percentage of Restaurant
revenue due to several large group medical claims and the introduction of a
restaurant leadership team concept which placed more focus on customer service
by increasing the hours of supervisory restaurant employees.
OPERATING EXPENSES--Operating expenses increased $11.9 million, or 9.0%, to
$143.9 million in 1995 from $132.0 million in 1994. Operating expenses as a
percentage of Total revenues increased to 22.2% in 1995 from 20.9% in 1994. The
increase was due to the cost of sponsoring a Ladies Professional Golf
26
<PAGE>
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
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 $9.6 million for the six months ended
June 29, 1997, $26.2 million in 1996, $27.8 million in 1995 and $38.4 million in
1994. Available borrowings under the Old Credit Facility were $13.7 million as
of June 29, 1997, excluding $2.4 million of letter of credit availability.
Additional sources of cash consist of capital and operating leases for
financing leased restaurant locations (in malls and shopping centers and land or
building leases), restaurant equipment, manufacturing equipment, distribution
vehicles and computer equipment. Additionally, sales of under-performing
existing restaurant properties and other assets (to the extent the Company's and
its subsidiaries' debt instruments,
27
<PAGE>
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 $264.3 million on
capital expenditures, including $73.5 million on the renovation and re-imaging
of restaurants under its revitalization program.
The following table presents for the periods indicated the number of (i)
restaurants opened and closed during, and the number of restaurants open at the
end of, each period, (ii) the number of restaurants in which (a) seating
capacity was expanded and (b) certain exterior and interior renovation and
re-imaging was completed under the Company's revitalization program and (iii)
the aggregate number of restaurants expanded and revitalized at the end of each
period.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED
------------------------------------------------- JUNE 29,
1994 1995 1996 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Restaurants opened............................................ 8 1 3 --
Restaurants closed............................................ 15 16 31 7
Restaurants open (end of period).............................. 750 735 707 700
Restaurants expanded.......................................... 7 5 4 3
Aggregate restaurants expanded................................ 12 17 21 24
Restaurants revitalized....................................... 67 14 16 7
Aggregate restaurants revitalized............................. 594 608 624 631
</TABLE>
Net cash used in investing activities was $8.3 million for the six months
ended June 29, 1997, $20.3 million in 1996, $18.2 million in 1995 and $28.0
million in 1994. Capital expenditures for restaurant operations, including
capitalized leases, were approximately $8.3 million in the six months ended June
29, 1997, $22.6 million in 1996, $14.5 million in 1995 and $32.6 million in
1994. Capital expenditures were offset by proceeds from the sale of property and
equipment of $0.9 million, $8.4 million, $0.9 million and $1.5 million in the
six months ended June 29, 1997, and in 1996, 1995 and 1994, respectively.
The Company also uses capital to repay borrowings when cash is sufficient to
allow for net repayments. Net cash used in financing activities to repay
borrowings was $3.1 million for the six months ended June 29, 1997, $11.0
million in 1996 and $7.9 million in 1994 as compared to net cash provided by
financing activities of $0.2 million in 1995.
The Company had a working capital deficit of $19.4 million as of June 29,
1997. The Company is able to operate with a substantial working capital deficit
because (i) restaurant operations are conducted primarily on a cash (and cash
equivalent) basis with a low level of accounts receivable, (ii) rapid turnover
allows a limited investment in inventories and (iii) cash from sales is usually
received before related accounts for food, supplies and payroll become due.
It is expected that the full amount of the Term Loan Facility will be drawn
at the closing of the Offerings. Amounts repaid or prepaid under the Term Loan
Facility may not be reborrowed. The Company's primary sources of liquidity and
capital resources in the future will be cash generated from operations and
borrowings under the Revolving Credit Facility and the Letter of Credit
Facility. The Revolving Credit Facility will be a five-year facility providing
for revolving loans to the Company in a principal amount not to exceed $55
million, including a $5 million sublimit for each of trade and standby letters
of credit. The Letter of Credit Facility will mature contemporaneously with the
Revolving Credit Facility and will provide for up to $15 million of standby
letters of credit. It is expected that no amounts will initially be drawn under
the Revolving Credit Facility and $3.1 million will be available under the
Letter of Credit Facility at the consummation of the Recapitalization. These
facilities are expected to be
28
<PAGE>
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 not re-employed within a specified period in the Company's business,
exclusive of up to $7.5 million of aggregate net proceeds received from asset
sales subsequent to the closing relating to the New Credit Facility. Such
applicable proceeds shall be applied to the Term Loan Facility in inverse order
of maturity. At the Company's option, loans may be prepaid at any time with
certain notice and breakage cost provisions.
It is expected that the obligations of the Company under the New Credit
Facility will (i) be secured by a first priority security interest in
substantially all material assets of the Company and its subsidiaries and all
other assets owned or hereafter acquired and (ii) be guaranteed, on a senior
secured basis, by the Company's Friendly's Restaurants Franchise, Inc.
subsidiary and may also be so guaranteed by certain subsidiaries created or
acquired after consummation of the Recapitalization.
It is expected that, at the Company's option, the interest rates per annum
applicable to the New Credit Facility will be either LIBOR (as defined in the
New Credit Facility), plus a margin ranging from 2.25% to 2.75%, or the
Alternative Base Rate (as defined in the New Credit Facility), plus a margin
ranging from 0.75% to 1.25%. The Alternative Base Rate is the greater of (a)
Societe Generale's Prime Rate or (b) the Federal Funds Rate plus 0.50%. It is
expected that after the first twelve calendar months of the New Credit Facility,
pricing reductions will be available in certain circumstances.
The Company anticipates requiring capital in the future principally to
maintain existing restaurant and plant facilities, to continue to renovate and
re-image existing restaurants, to convert restaurants and to construct new
restaurants. Capital expenditures for the second half of 1997 and for 1998 are
anticipated to be $66.5 million in the aggregate, of which $56.4 million will be
spent on restaurant operations. See "Business--Restaurant Operations--Capital
Investment Program" for a further description of the Company's estimated 1997
and 1998 capital expenditures. The Company's actual 1997 and 1998 capital
expenditures may vary from the estimated amounts set forth herein. See "Risk
Factors--Substantial Leverage, Stockholders' Deficit and History of Losses" for
a discussion of certain factors, many of which are beyond the Company's control,
that could affect the Company's ability to make its planned capital
expenditures.
In addition, the Company may need capital in connection with (i) commitments
as of June 29, 1997 to purchase $53.1 million of raw materials, food products
and supplies used in the normal course of business and (ii) its self-insurance
through retentions or deductibles of the majority of its workers' compensation,
automobile, general liability and group health insurance programs. The Company's
self-insurance obligations may exceed its reserves. See Notes 12 and 15 of Notes
to Consolidated Financial Statements.
The Company believes that the combination of the funds anticipated to be
generated from operating activities and borrowing availability under the New
Credit Facility will be sufficient to meet the Company's anticipated operating
and capital requirements for the foreseeable future. See "Risk
Factors--Substantial Leverage, Stockholders' Deficit and History of Losses" and
"--Restrictions Imposed Under New Credit Facility."
OLD CREDIT FACILITY
In January 1995, the Company and its lenders amended the Old Credit Facility
as a result of certain covenant violations and, in connection therewith, the
lenders were granted the right to receive a contingent payment in certain
circumstances. In January 1996, the Old Credit Facility was amended and restated
pursuant to which revolving credit and term loans totaling $373.6 million were
converted to revolving credit loans of $38.5 million and term loans of $335.1
million. In connection therewith, the lenders received
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Class B common shares which increased their interests in the Company to an
aggregate of 50% of the then-issued and outstanding common shares. As a result
of the issuance of certain stock to management and the exercise of certain
warrants, additional shares were issued to the lenders in 1996 to maintain their
minimum equity interest at 48.0%. As a result of their ownership of Class B
common shares, the lenders obtained the right to elect two of the five members
of the Company's Board of Directors. The lenders were given the right to
increased board representation and voting rights and the right to receive
additional shares upon certain events. As part of the Recapitalization, the Old
Credit Facility will be replaced by the New Credit Facility, and as the result
of the Recapitalization, the outstanding Class B common shares will be converted
into shares of Common Stock and the ownership of such lenders will decrease to
approximately 9.8% of the outstanding Common Stock (4.5% if the Underwriters'
over-allotment option is exercised in full). See "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 extent that net unrealized built-in gains which existed at
March 26, 1996 are recognized by March 26, 2001. Accordingly, a valuation
allowance has been recorded to offset the $29.7 million of the NOL carryforward.
The consolidated balance sheet of the Company as of December 29, 1996 includes
the tax effect of the remaining federal and state NOLs ("New NOLs") of $4.6
million for the periods prior to March 26, 1996 and $5.8 million for the period
from March 27, 1996 to December 29, 1996. It is expected that the Common Stock
Offering will result in the Company having another change of ownership under
Section 382 of the Internal Revenue Code. Accordingly, in tax years ending after
the Common Stock Offering, the Company will be limited in how much of its New
NOLs it can utilize. The amount of New NOLs that can be utilized in any tax year
ending after the date of the Common Stock Offering will be limited to an amount
equal to the equity value of the Company immediately prior to the Common Stock
Offering (without taking into account the proceeds of the Offerings) multiplied
by the long-term tax exempt rate in effect for the month of the Common Stock
Offering (5.6% for August, 1997). While the limitation on the use of the New
NOLs will delay when the New NOLs are utilized, the Company expects all of the
New NOLs to be utilized before they expire. Accordingly, no valuation allowance
is required related to any New NOLs. The NOLs expire, if unused, between 2001
and 2012. In addition, the NOL carryforwards are subject to adjustment upon
review by the Internal Revenue Service. See Note 9 of Notes to Consolidated
Financial Statements.
INFLATION
The inflationary factors which have historically affected the Company's
results of operations include increases in cost of milk, sweeteners, purchased
food, labor and other operating expenses. Approximately 17% of wages paid in the
Company's restaurants are impacted by changes in the federal or state minimum
hourly wage rate. Accordingly, changes in the federal or states minimum hourly
wage rate directly affect the Company's labor cost. The Company is able to
minimize the impact of inflation on occupancy costs by owning the underlying
real estate for approximately 42% of its restaurants. The Company and the
restaurant industry typically attempt to offset the effect of inflation, at
least in part, through periodic menu price increases and various cost reduction
programs. However, no assurance can be given that the Company will be able to
offset such inflationary cost increases in the future.
SEASONALITY
Due to the seasonality of frozen dessert consumption, and the effect from
time to time of weather on patronage in its restaurants, the Company's revenues
and EBITDA are typically higher in its second and third quarters.
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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 666 and franchises 34 full-service restaurants and manufactures a
complete line of packaged frozen desserts distributed through more than 5,000
supermarkets and other retail locations in 15 states. Friendly's offers its
customers a unique dining experience by serving a variety of high-quality,
reasonably-priced breakfast, lunch and dinner items, as well as its signature
frozen desserts, in a fun and casual neighborhood setting. For the twelve-month
period ended June 29, 1997, Friendly's generated $664.9 million in total
revenues and $71.0 million in EBITDA (as defined herein). During the same
period, management estimates that over $225 million of total revenues were from
the sale of approximately 20 million gallons of frozen desserts.
Friendly's restaurants target families with children and adults who desire a
reasonably-priced meal in a full-service setting. The Company's menu offers a
broad selection of freshly-prepared foods which appeal to customers throughout
all day-parts. Breakfast items include specialty omelettes and breakfast
combinations featuring eggs, pancakes and bacon or sausage. Lunch and dinner
items include a new line of wrap sandwiches, entree salads, soups, super-melts,
specialty burgers and new stir-fry, chicken, pot pie, tenderloin steak and
seafood entrees. Friendly's is also recognized for its extensive line of ice
cream shoppe treats, including proprietary products such as the
Fribble-Registered Trademark-, Candy Shoppe-Registered Trademark- Sundaes and
the Wattamelon Roll-Registered Trademark-.
The Company believes that one of its key strengths is the strong consumer
awareness of the Friendly's brand name, particularly as it relates to the
Company's signature frozen desserts. This strength and the Company's
vertically-integrated operations provide several competitive advantages,
including the ability to (i) utilize its broad, high-quality menu to attract
customer traffic across multiple day-parts, particularly the afternoon and
evening snack periods, (ii) generate incremental revenues through strong
restaurant and retail market penetration, (iii) promote menu enhancements and
extensions in combination with its unique frozen desserts and (iv) control
quality and maintain operational flexibility through all stages of the
production process.
Friendly's, founded in 1935, was publicly held from 1968 until January 1979,
at which time it was acquired by Hershey Foods Corporation ("Hershey"). While
owned by Hershey, the Company increased the total number of restaurants from 601
to 849 yet devoted insufficient resources to product development and capital
improvements. In 1988, The Restaurant Company ("TRC"), an investor group led by
Donald Smith, the Company's current Chairman, Chief Executive Officer and
President, acquired Friendly's from Hershey (the "TRC Acquisition") and
implemented a number of initiatives to restore and improve operational and
financial efficiencies. From the date of the TRC Acquisition through 1994, the
Company (i) implemented a major revitalization of its restaurants, (ii)
repositioned the Friendly's concept from a sandwich and ice cream shoppe to a
full-service, family-oriented restaurant with broader menu and day-part appeal,
(iii) elevated customer service levels by recruiting more qualified managers and
expanding the Company's training program, (iv) disposed of 123 under-performing
restaurants and (v) capitalized upon the Company's strong brand name recognition
by initiating the sale of Friendly's unique line of packaged frozen desserts
through retail locations.
Beginning in 1994, the Company began implementing several growth initiatives
including (i) testing and implementing a program to expand the Company's
domestic distribution network by selling frozen desserts and other menu items
through non-traditional locations, (ii) distributing frozen desserts
internationally by introducing dipping stores in the United Kingdom and South
Korea and (iii) implementing a franchising strategy to extend profitably the
Friendly's brand without the substantial capital required to build new
restaurants. As part of this strategy, on July 14, 1997 the Company entered into
the DavCo Agreement. See "Prospectus Summary--Recent Developments."
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<PAGE>
Implementation of these initiatives since the TRC Acquisition has resulted
in substantial improvements in revenues and EBITDA. Despite the closing of 148
restaurants (net of restaurants opened) since the beginning of 1989 and periods
of economic softness in the Northeast, the Company's restaurant revenues have
increased 9.0% from $557.3 million in 1989 to $607.2 million in the
twelve-months ended June 29, 1997, while average revenue per restaurant has
increased 28.6% from $665,000 to $855,000 during the same period. Retail,
institutional and other revenues have also increased from $1.4 million in 1989
to $57.7 million in the twelve months ended June 29, 1997. In addition, EBITDA
has increased 49.8% from $47.4 million in 1989 to $71.0 million in the
twelve-month period ended June 29, 1997, while operating income has increased
from $4.1 million to $37.7 million over the same period. However, the high
leverage associated with the TRC Acquisition has severely impacted the liquidity
and profitability of the Company. The Company has reported net losses and had
earnings that were insufficient to cover fixed charges for each fiscal year
since the TRC Acquisition and for the six months ended June 29, 1997. It is
anticipated that upon completion of the Recapitalization and the Related
Transactions, approximately 9.8% of the Company's Common Stock will be owned by
the lenders under the Company's Old Credit Facility (as defined herein) as a
group. See "Risk Factors," "Selected Consolidated Financial Information,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Ownership of Common Stock."
Friendly's intends to utilize the increased liquidity and operating and
financial flexibility resulting from consummation of the Recapitalization, in
order to continue to grow the Company's revenues and earnings by implementing
the following key business strategies: (i) continuously upgrade the menu and
introduce new products, (ii) revitalize and re-image existing Friendly's
restaurants, (iii) construct new restaurants, (iv) enhance the Friendly's dining
experience, (v) expand the restaurant base through high-quality franchisees,
(vi) increase market share through additional retail accounts and restaurant
locations, (vii) introduce modified formats of the Friendly's concept into
non-traditional locations and (viii) extend the Friendly's brand into
international markets.
COMPETITIVE STRENGTHS
THE COMPANY BELIEVES THAT, IN THE NORTHEAST, ITS LEADING POSITION IN
FULL-SERVICE RESTAURANT AND PREMIUM FROZEN DESSERT SALES IS ATTRIBUTABLE TO THE
FOLLOWING COMPETITIVE STRENGTHS:
STRONG BRAND NAME RECOGNITION. During the past 60 years, management
believes the Friendly's brand name has become synonymous with high-quality food
and innovative frozen desserts. The Company believes that the brand name
awareness created by its premium frozen dessert heritage drives customer
traffic, particularly during the afternoon and evening snack periods, promotes
menu enhancement and extension and generates incremental revenues from the
Company's retail and non-traditional distribution channels. The Company's
independent surveys indicate that, in the Northeast, over 90% of all households
recognize the Friendly's brand and that over 30% of these households visit a
Friendly's restaurant every three months.
SIGNATURE FROZEN DESSERTS. Friendly's produces an innovative line of
high-quality freshly-scooped and packaged frozen desserts, which have been cited
by customers as a key reason for choosing Friendly's. Accordingly, approximately
50% of all visits to a Friendly's restaurant include a frozen dessert purchase.
Freshly-scooped specialties served in Friendly's restaurants include the Jim
Dandy and Oreo-Registered Trademark- Brownie sundaes, and the
Fribble-Registered Trademark-, the Company's signature thick shake. Packaged
goods available for purchase in both restaurant and retail locations include
traditional and low-fat ice cream, yogurt and sorbets in half gallons, pints and
cups and a wide variety of ice cream cakes, pies and rolls such as the Jubilee
Roll-Registered Trademark- and Wattamelon Roll-Registered Trademark-. In
addition, the Company licenses from Hershey the rights to feature in its
signature desserts certain candy brands such as Almond
Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-, Reeses
Pieces-Registered Trademark-, Reeses-Registered Trademark- Peanut Butter Cups
and York-Registered Trademark- Peppermint Patties.
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<PAGE>
BROAD, HIGH-QUALITY MENU. The Company has successfully capitalized on
Friendly's reputation for high-quality, wholesome foods including the well-known
$2.22 Breakfast, Big Beef-Registered Trademark- Hamburger,
Fishamajig-Registered Trademark- Sandwich and Clamboat-Registered Trademark-
Platter by extending these offerings into a broader product line including
freshly-prepared omelettes, SuperMelt-TM- Sandwiches, Colossal Sirloin
Burgers-TM-, tenderloin steaks and stir-fry entrees. Reflecting this increased
menu variety, food products now account for over 70% of restaurant revenues, and
guest check averages have increased significantly over the last five years.
Friendly's also has an extensive Kid's Menu which encourages family dining due
to the significant appeal to children of the Friendly's concept.
MULTIPLE DAY-PART APPEAL. Due to the appeal of Friendly's frozen desserts,
the Company generates approximately 35% of its restaurant revenues during the
afternoon and evening snack periods (2:00 p.m. to 5:00 p.m. and 8:00 p.m. to
closing), providing Friendly's with the highest share of snack day-part sales in
the Northeast. Accordingly, the Company endeavors to maximize revenue across
multiple day-parts by linking sales of its high-margin frozen desserts with its
lunch and dinner entrees. The Company generates approximately 12%, 24% and 29%
of restaurant revenues from breakfast, lunch and dinner, respectively.
STRONG RESTAURANT AND RETAIL MARKET PENETRATION. The Company has the
highest market share among full-service restaurants and a leading position in
premium frozen dessert sales in the Northeast. The Company's strong restaurant
and retail market penetration provides incremental revenues and cash flow, as
multiple levels of visibility and availability provide cross promotion
opportunities and enhance consumer awareness and trial of the Company's unique
products while effectively targeting consumers for both planned and impulse
purchases. For example, the new Colossal Sirloin Burger-TM- was introduced with
a new 79 CENTS Caramel Fudge Nut Blast-TM- Sundae during the spring of 1997. In
addition to promoting sales of this new entree, this strategy increased consumer
awareness and trial of the new sundae combination, which in turn supported the
introduction of Caramel Fudge Nut Blast-TM- Sundae half gallons into restaurants
and retail locations.
VERTICALLY-INTEGRATED OPERATIONS. Friendly's vertically-integrated
operations are designed to deliver the highest quality food and frozen desserts
to its customers and to allow the Company to adapt to evolving customer tastes
and preferences. The Company formulates new products and upgrades existing food
and frozen desserts through its research and development group and controls all
stages in the production of its frozen desserts through its two manufacturing
facilities. In addition, the Company controls cost and product quality and
efficiently manages inventory levels from point of purchase through restaurant
delivery utilizing its three distribution facilities and fleet of 56 tractors
and 81 trailers. Furthermore, Friendly's maximizes its purchasing power when
sourcing materials and services for its restaurant and retail operations through
its integrated purchasing department.
MANAGEMENT EXPERIENCE AND EMPLOYEE RETENTION. The Company has a talented
senior management team with extensive restaurant industry experience and an
average tenure with the Company of 17 years. In addition, the Company minimizes
turnover of both managers and line personnel through extensive employee training
and retention programs. In 1996, the Company's turnover among its restaurant
salaried management was approximately 24%, which was significantly lower than
the industry average.
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,
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<PAGE>
home-style chicken dinners, pot pies and stir-frys, as well as several premium
frozen desserts including the new Oreo-Registered Trademark- Brownie Sundae.
Largely as a result of new premium items, guest check averages have increased
7.7% during the first six months of 1997 as compared to the same period of 1996.
REVITALIZE AND RE-IMAGE RESTAURANTS. Friendly's seeks to continue to grow
restaurant revenues and cash flow through the ongoing revitalization and
re-imaging of existing restaurants and to increase total restaurant revenues
through the addition of new restaurants. The Company has revitalized
approximately 631 restaurants since the beginning of 1989, increasing average
restaurant revenues from $665,000 in 1989 to $855,000 in the twelve months ended
June 29, 1997. Further, the Company has initiated its FOCUS 2000 program which
includes an advanced re-imaging of restaurants and the installation of custom
designed restaurant automation systems in a majority of its restaurants. In
addition, as part of its ongoing capital spending program, the Company plans to
refurbish substantially all of its restaurants every five to six years to
further enhance customer appeal. The Company also expects to increase market
share in its existing and contiguous markets through the opening of five new
Company owned restaurants in 1997 (one of which has opened to date) and between
10 and 20 new restaurants per year through 2000.
ENHANCE THE FRIENDLY'S DINING EXPERIENCE. In addition to menu upgrades and
restaurant re-imaging, the FOCUS 2000 program includes initiatives to improve
food presentation and customer service. The Company believes that implementation
of this program will create a consistent, enhanced Friendly's restaurant brand
image. This strategy recognizes that food quality, dining atmosphere and
attentive service all contribute to customer satisfaction. The Company maintains
a consistently high standard of food preparation and customer service through
stringent operational controls and intensive employee training. To help
guarantee that employees perform in this manner, Friendly's maintains a
dedicated training and development center where managers are thoroughly trained
in customer service.
EXPAND RESTAURANT BASE AND MARKET PENETRATION THROUGH HIGH-QUALITY
FRANCHISEES. Friendly's is implementing a franchising strategy to further
develop the Friendly's brand and grow both revenue and cash flow without the
substantial capital required to build new restaurants. This strategy seeks to
(i) expand its restaurant presence in under-penetrated markets, (ii) accelerate
restaurant growth in new markets, (iii) increase marketing and distribution
efficiencies and (iv) preempt the Company's competition from acquiring certain
prime real estate sites. Friendly's will receive a royalty based on total
franchisee revenues and revenues and earnings from the sale of its frozen
desserts and other products to franchisees.
INCREASE MARKET SHARE OF PREMIUM FROZEN DESSERTS. Capitalizing on its
position as a recognized leader in premium frozen desserts, Friendly's seeks to
increase its market share. The Company expects to build market share by
expanding distribution beyond its 700 Company-owned and franchised restaurants
and its more than 5,000 retail locations by (i) adding new locations, (ii)
increasing shelf space in current locations through new product introductions
and more prominent freezer displays and (iii) increasing consumer and trade
merchandising.
INTRODUCE MODIFIED FORMATS INTO NON-TRADITIONAL LOCATIONS. In order to
capitalize on both planned and impulse purchases, the Company is leveraging the
Friendly's brand name and enhancing consumer awareness by introducing modified
formats of the Friendly's concept into non-traditional locations. These modified
formats include (i) Friendly's Cafe, a quick service concept offering frozen
desserts and a limited menu, (ii) Friendly's branded ice cream shoppes offering
freshly-scooped and packaged frozen desserts and (iii) Friendly's branded
display cases and novelty carts with packaged single-serve frozen desserts. The
first Friendly's Cafe is expected to open in early 1998. The Company supplies
frozen desserts to non-traditional locations such as colleges and universities,
sports facilities, amusement parks, secondary school systems and business
cafeterias directly or through selected vendors pursuant to multi-year license
agreements.
EXTEND THE FRIENDLY'S BRAND INTERNATIONALLY. The Company's long-term
international growth strategy is to utilize local partners and establish master
franchise or licensee agreements to extend the brand
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internationally and to achieve profitable growth while minimizing capital
investment. Currently, the Company's Friendly's International, Inc. subsidiary
("FII") sells the Company's frozen desserts in several chain restaurants,
theaters and food courts in the United Kingdom. In South Korea, FII participates
in a licensing agreement with a South Korean enterprise to develop Friendly's
"Great American" ice cream shoppes. As of August 22, 1997, the licensee and its
sublicensees were operating 20 ice cream shoppes, and the Company expects such
parties to operate 45 ice cream shoppes by the end of 1997. The Company selects
its international markets based on the high quality of the Company's frozen
desserts relative to locally-produced frozen desserts and the propensity of
consumers in these regions to purchase American-branded products.
RESTAURANT OPERATIONS
MENU
Friendly's believes it provides significant value to consumers by offering a
wide variety of freshly-prepared, wholesome foods and frozen desserts at a
reasonable price. The menu currently features over 100 items comprised of a
broad selection of breakfast, lunch, dinner and afternoon and evening snack
items. Breakfast items include specialty omelettes and breakfast combinations
featuring eggs, pancakes and bacon or sausage. Breakfasts generally range from
$2.00 to $6.00 and account for approximately 12% of average restaurant revenues.
Lunch and dinner items include a new line of wrap sandwiches, entree salads,
soups, super-melts, specialty burgers, appetizers including quesadillas,
mozzarella cheese sticks and "Fronions," and stir-fry, chicken, pot pie,
tenderloin steak and seafood entrees. These lunch and dinner items generally
range from $4.00 to $9.00, and these day-parts account for approximately 53% of
average restaurant revenues. Entree selections are complemented by Friendly's
premium frozen desserts, including the Fribble-Registered Trademark-, the
Company's signature thick shake, Happy Ending-Registered Trademark- Sundaes and
fat-free Sorbet Smoothies. The Company's frozen desserts are an important
component of the success of the Company's snack day-part which accounts for 35%
of average restaurant revenues.
RESTAURANT LOCATIONS AND PROPERTIES
The table below identifies by state the location of the 700 restaurants
operating as of June 29, 1997, after giving effect to the DavCo Agreement as
though it had occurred on June 29, 1997.
<TABLE>
<CAPTION>
COMPANY-OWNED/LEASED
------------------------------------
FREESTANDING OTHER FRANCHISED TOTAL
STATE RESTAURANTS RESTAURANTS (A) RESTAURANTS (B) RESTAURANTS
- ----------------------------------------------------- --------------- ------------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Connecticut.......................................... 50 21 -- 71
Delaware............................................. -- 1 6 7
Florida.............................................. 13 2 -- 15
Maine................................................ 9(c) -- -- 9
Maryland............................................. 3 9 22 34
Massachusetts........................................ 116 37 -- 153
Michigan............................................. 2 -- -- 2
New Hampshire........................................ 14 6 -- 20
New Jersey........................................... 47 18 -- 65
New York............................................. 130 35 -- 165
Ohio................................................. 57 3 -- 60
Pennsylvania......................................... 51 13 -- 64
Rhode Island......................................... 8 -- -- 8
Vermont.............................................. 7 2 -- 9
Virginia............................................. 10 2 6 18
--- --- --- ---
Total............................................ 517 149 34 700
</TABLE>
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<PAGE>
- ------------------------
(a) Includes primarily malls and strip centers.
(b) The franchised restaurants (representing 30 freestanding and four other
restaurants) have been leased or subleased to DavCo pursuant to the DavCo
Agreement. See "Prospectus Summary--Recent Developments."
(c) Excludes the Company's new 156-seat prototype restaurant opened in
Waterville, Maine in July 1997.
The 547 freestanding restaurants, including the 30 franchised to DavCo,
range in size from approximately 2,600 square feet to approximately 5,000 square
feet. The 153 mall and strip center restaurants, including the four franchised
to DavCo, average approximately 3,000 square feet. Of the 700 restaurants
operated by the Company at June 29, 1997, the Company owned the buildings and
the land for 294 restaurants, owned the buildings and leased the land for 161
restaurants, and leased both the buildings and land for 245 restaurants. The
Company's leases generally provide for the payment of fixed monthly rentals and
related occupancy costs (e.g. property taxes, common area maintenance and
insurance). Additionally, most mall and strip center leases require the payment
of common area maintenance charges and incremental rent of between 3.0% and 6.0%
of the restaurant's sales.
RESTAURANT ECONOMICS
During the twelve-month period ended June 29, 1997, average revenue per
restaurant was $855,000, average restaurant cash flow was $155,000 (after rent
expense of $21,000) and average restaurant operating income was $122,000.
Average cash flow represents operating income before depreciation and
amortization. Average revenue per restaurant for the 243 freestanding
restaurants with more than 100 seats was $1,089,000, average revenue per
restaurant for the 304 freestanding restaurants with less than 100 seats was
$707,000 and average revenue per restaurant for the 153 other restaurants was
$812,000. The Company has opened 12 new restaurants since the beginning of 1994,
ten of which had been operating for at least 12 months as of June 29, 1997. Such
ten restaurants, which had an average of 136 seats, generated average revenue
per restaurant of $1,193,000, average restaurant cash flow of $186,000 (after
rent expense of $82,000) and average restaurant operating income of $139,000.
The average cash investment to open such ten restaurants (all of which were
conversions) was approximately $528,000, excluding pre-opening expenses, or
$1,368,000 including rent expense capitalized at 9.0%. Pre-opening expenses were
approximately $85,000 per restaurant. The Company plans to continue to convert
restaurants and estimates that the three conversions planned for 1997 will cost
approximately $500,000 to $600,000 per restaurant, excluding land and
pre-opening expenses. The Company converted a 180-seat restaurant in Burlington,
Vermont in December 1996 at a total cost including land of $1,562,000, and this
restaurant has achieved average weekly revenues of $35,000 through June 29,
1997. While conversions generally cost less than new construction, the Company
plans to selectively construct new restaurants when the anticipated return is
sufficient to warrant the increased cost of new construction. The Company has
developed two new freestanding restaurant prototypes for construction, including
108-seat and 156-seat prototypes, which are anticipated to cost approximately
$730,000 and $780,000 per restaurant, respectively, excluding pre-opening
expenses. Pre-opening expenses are estimated to be $85,000 per restaurant. The
Company opened its first 156-seat prototype restaurant in Waterville, Maine in
July 1997 at a cost of $778,000, or $1,056,000 including rent expense
capitalized at 9.0%.
CAPITAL INVESTMENT PROGRAM
A significant component of the Company's capital investment program is the
FOCUS 2000 initiative which is designed to establish a consistent, enhanced
Friendly's brand image across the Company's entire restaurant operations. The
Company's capital spending strategy seeks to increase comparable restaurant
revenues and restaurant cash flow through the on-going revitalizing and
re-imaging of existing restaurants and to increase total restaurant revenues
through the addition of new restaurants. The following illustrates the key
components of the Company's capital spending program. See "Management's
Discussion and
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<PAGE>
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Description of New Credit Facility."
RESTAURANT RE-IMAGING. The Company expects to complete the re-imaging of 70
restaurants in 1997 (two of which have been completed to date) at an estimated
cost of $120,000 per restaurant (not including $850,000 of one time costs
related to development of the prototype). This cost typically includes interior
and exterior redecoration and a new exterior lighting package. The Company
expects to complete the re-imaging of approximately 110 restaurants during 1998.
NEW RESTAURANT CONVERSION AND CONSTRUCTION. The Company expects to convert
three restaurants in 1997 (none of which has been completed to date) at an
estimated cost of $500,000 to $600,000 per restaurant. The Company also expects
to construct two new restaurants in 1997 (one of which has been completed to
date) at an estimated cost of $785,000, excluding land and pre-opening expenses.
The Company expects to complete the conversion or construction of approximately
ten restaurants during 1998.
SEATING CAPACITY EXPANSION PROGRAM. Since the TRC Acquisition and through
June 29, 1997, the Company has expanded seating capacity by an average of 50
seats at 24 restaurants at an average cost of $310,000 per restaurant. Revenue
per restaurant increased approximately 24% in the full year following completion
of this expansion compared to the comparable prior period. The Company expects
to complete the expansion of six restaurants in 1997 (four of which have been
completed to date) at an estimated cost of $250,000 per restaurant. This cost
typically includes adding 50 seats per restaurant, relocating certain equipment
and increasing parking capacity where necessary. The Company expects to complete
the expansion of approximately four restaurants during 1998.
INSTALLATION OF RESTAURANT AUTOMATION SYSTEMS. Since the TRC Acquisition
and through June 29, 1997, the Company has installed touch-screen point of sale
("POS") register systems in approximately 340 restaurants at an average cost of
$34,000 per restaurant. These POS register systems are designed to improve
revenue realization, food cost management and labor scheduling while increasing
the speed and accuracy of processing customer orders. The Company expects to
install POS register systems in approximately 40 restaurants during 1998.
FRANCHISING PROGRAM
The Company recently initiated a franchising strategy to expand its
restaurant presence in under-penetrated markets, accelerate restaurant growth in
new markets, increase marketing and distribution efficiencies and preempt
competition by acquiring restaurant locations in the Company's targeted markets.
With the substantial completion of the Company's restaurant revitalization
program, the development and initial deployment of its two new freestanding
restaurant prototypes and the successful introduction of its new dinner line,
the Company believes it is in a position to maximize the value of its brand
appeal to prospective franchisees. The Company's wholly owned subsidiary,
Friendly's Restaurants Franchise, Inc. ("FRFI") commenced operations in 1996 for
the purpose of franchising various restaurant concepts. Since it began
operations, FRFI has developed and now offers a franchise program for both
Friendly's restaurants and Friendly's Cafes. The Company seeks franchisees who
have related business experience, capital adequacy to build-out the Friendly's
concept and no operations which have directly competitive restaurant or food
concepts. On July 14, 1997, the Company entered into the DavCo Agreement
pursuant to which DavCo purchased certain assets and rights in 34 existing
Friendly's restaurants in Maryland, Delaware, the District of Columbia and
northern Virginia, committed to open an additional 74 restaurants over the next
six years and, subject to the fulfillment of certain conditions, further agreed
to open 26 additional restaurants, for a total of 100 new restaurants in this
franchising region over the next ten years.
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QUALITY CONTROL PROGRAMS
The Company's high quality standards are promoted through strict product
specifications, guest service programs and defined daily operating systems and
procedures for maintenance, cleanliness and safety. Policy and operating manuals
and video support materials for employee training are maintained in all
Friendly's restaurants. The Company uses a variety of guest feedback systems to
measure, monitor and react to service performance including comment cards, "800"
telephone call-in lines, guest commentary follow-up systems, focus groups and an
independent quarterly consumer tracking study conducted by National Purchase
Diary, Inc. The Company's customer service center is implementing a chainwide
program to receive and log customer feedback by restaurant and to report monthly
to field management. All levels of field management are directly responsible for
and evaluated according to guest satisfaction levels.
CARRYOUT OPERATIONS
Through dedicated carryout areas, Friendly's restaurants offer the Company's
full line of frozen desserts and certain of its food menu items. Reserved
parking is available at many of the Company's free-standing restaurants to
facilitate quick carryout service. Approximately 15% of the Company's average
free standing restaurant revenues are derived from its carryout business with a
significant portion of these sales occurring during the afternoon and evening
snack periods. Of this 15%, approximately 5% comes from sales of packaged frozen
desserts in display cases within its restaurants.
RETAIL AND RELATED OPERATIONS
RETAIL OPERATIONS
In 1989, the Company extended its premium packaged frozen dessert line from
its restaurants into retail locations. The Company has profitably grown its
revenue from the sale of such products to retail outlets from $1.4 million in
1989 to $53.9 million in the twelve months ended June 29, 1997. The Company
offers a branded product line that includes approximately 60 half gallon
varieties featuring premium ice cream shoppe flavors and unique sundae
combinations, low and no fat frozen yogurt, low fat ice cream and sherbet.
Specialty flavors include Royal Banana Split, Cappuccino Dream-TM- and Caramel
Fudge Nut Blast-TM-, and proprietary products include the Jubilee
Roll-Registered Trademark-, Wattamelon Roll-Registered Trademark- and Friendly's
branded ice cream cakes and pies. The Company also licenses from Hershey the
right to feature certain candy brands including Almond
Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-, Reese's
Pieces-Registered Trademark-, Reese's-Registered Trademark- Peanut Butter Cups
and York-Registered Trademark- Peppermint Patties on packaged sundae cups and
pints. See "Licenses and Trademarks."
The Company focuses its marketing and distribution efforts in areas where it
has higher restaurant penetration and consumer awareness. During the initial
expansion of its retail business in 1989 and 1990, Albany, Boston and
Hartford/Springfield were primary markets of opportunity, currently with 35, 118
and 95 restaurant locations, respectively. Targeting other markets with high
growth potential and strong Friendly's brand awareness, the Company added the
New York and Philadelphia markets, currently with 135 and 64 restaurants,
respectively, to its retail distribution efforts in 1992 and 1993. According to
recent A.C. Nielsen reports, the Company currently maintains a weighted average
market share of approximately 11% in the Albany, Boston and Hartford/Springfield
markets and 4% in the New York and Philadelphia markets.
The Company expects to continue building its retail distribution business by
increasing market share in its current retail markets. In these markets, the
Company intends to increase shelf space with existing accounts and add new
accounts by (i) capitalizing on its integrated restaurant and retail consumer
advertising and promotion programs, (ii) continuing new product introductions
and (iii) improving trade merchandising initiatives. Additionally, the Company
expects to continue to selectively enter new markets where its brand awareness
is high according to market surveys. In Pittsburgh, where the Company currently
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has no restaurants, the Company has a packaged frozen dessert market share of
approximately 4%, according to A.C. Nielsen.
The Company has developed a broker/distributor network designed to protect
product quality through proper product handling and to enhance the merchandising
of the Company's frozen desserts. The Company's experienced sales force manages
this network to serve specific retailer needs on a market-by-market basis. In
addition, the Company's retail marketing and sales departments coordinate market
development plans and key account management programs.
NON-TRADITIONAL LOCATIONS
In order to capitalize on both planned and impulse purchases, the Company is
leveraging the Friendly's brand name and enhancing consumer awareness by
introducing modified formats of the Friendly's concept into non-traditional
locations. These modified formats include (i) Friendly's Cafe, a quick service
concept offering frozen desserts and a limited menu, (ii) Friendly's branded ice
cream shoppes offering freshly-scooped and packaged frozen desserts and (iii)
Friendly's branded display cases and novelty carts with packaged single-serve
frozen desserts. The first Friendly's Cafe is expected to open in early 1998.
The Company supplies frozen desserts to non-traditional locations such as
colleges and universities, sports facilities, amusement parks, secondary school
systems and business cafeterias directly or through selected vendors pursuant to
multi-year license agreements.
INTERNATIONAL OPERATIONS
The Company, through its FII subsidiary, has a master license agreement with
a South Korean enterprise to develop Friendly's "Great American" ice cream
shoppes offering freshly-scooped and packaged frozen desserts. As of August 22,
1997, the licensee and its sublicensees were operating 20 ice cream shoppes, and
the Company expects such parties to operate 45 ice cream shoppes by the end of
1997. FII also has various licensing arrangements with several companies in the
United Kingdom under which certain of the Company's frozen desserts are
distributed in the United Kingdom. The Company's strategy in the United Kingdom
is to sell Friendly's branded frozen deserts in full and quick-service
restaurants, movie theaters, railway and bus stations, shopping malls and
airport locations pursuant to license agreements. Non-restaurant locations will
vary from full dipping stations to sundae station kiosks or sundae carts. In
addition, the Company's products will be distributed to selected retailers for
resale. In addition, the Company is a 50% partner in a joint venture in
Shanghai, China which has manufactured and distributed frozen desserts on a
limited basis. The joint venture is currently seeking additional distribution
for its products in China. In markets where a capital investment by the Company
is required to introduce its brand, the Company seeks to monetize such
investment by entering into franchising or licensing arrangements, and
subsequently to redeploy its capital, if necessary, into new international
markets. The Company believes that there are significant growth opportunities
within South Korea, the United Kingdom and China, as well as in other countries,
in particular those within the Pacific Rim.
MARKETING
The Company's marketing strategy is to continue to strengthen Friendly's
brand equity and further capitalize on its strong consumer awareness to
profitably build revenues across all businesses. The primary advertising
message, built around its "Leave room for the ice cream-TM-" slogan, focuses on
introducing new lunch and dinner products or line extensions in combination with
unique frozen desserts. For example, in 1996, Friendly's introduced a new line
of steak dinners and promoted trial of the line with a free Happy
Ending-Registered Trademark- Sundae. Management utilizes this strategy to
encourage consumer trial of new products and increase the average guest check
while reinforcing Friendly's unique "food with ice cream" experience. The
Company's food-with-ice-cream promotions also build sales of packaged frozen
desserts in its restaurants and in retail locations.
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The Company's media plan is designed to build awareness and increase trial
among key target audiences while optimizing spending by market based on media
cost efficiencies. The Company classifies markets based upon restaurant
penetration and the resulting advertising and promotion costs per restaurant.
The Company's 19 most highly-penetrated markets are supported with regular spot
television advertisements from March through December. The Company augments its
marketing efforts in these markets with radio advertising to target the
breakfast day-part or to increase the frequency of the promotional message. In
addition, the Company supports certain of these highly-penetrated markets
(Albany, Boston, Hartford-Springfield and Providence) during the peak summer
season with additional television media focusing on freshly-scooped and packaged
frozen desserts. In its secondary markets, the Company utilizes more cost
effective local store marketing initiatives such as radio, direct mail and
newspaper advertising. All of the Company's markets are supported with an
extensive promotional coupon program.
The Company believes that its integrated restaurant and retail marketing
efforts provide a significant competitive advantage supporting development of
its retail business. Specifically, the retail business benefits from the
awareness and trial of Friendly's product offerings generated by 32 weeks of
food-with-ice-cream advertising and couponing efforts. The Company believes that
this approach delivers a significantly higher level of consumer exposure and
usage compared to the Company's packaged frozen dessert 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
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workforce of approximately 250 employees. The Company's truck fleet delivers all
but locally-sourced produce, milk and selected bakery products to its
restaurants at least weekly, and during the highest-sales periods, delivers to
over 50% of Friendly's restaurants twice-per-week. The Chicopee, Wilbraham and
Troy warehouses encompass 54,000 square feet, 109,000 square feet and 42,000
square feet, respectively. The Company believes that these distribution
facilities operate at or above industry standards with respect to timeliness and
accuracy of deliveries.
The Company has distributed its products since its inception to protect the
product integrity of its frozen desserts. The Company delivers products to its
restaurants on its own fleet of 56 tractors and 81 trailers which display
large-scale images of the Company's featured products. The entire fleet is
specially built to be compatible with storage access doors, thus protecting
frozen desserts from "temperature shock." Recently acquired trailers have an
innovative design which provides individual temperature control for three
distinct compartments. To provide additional economies to the Company, the truck
fleet backhauls on over 50% of its delivery trips, bringing the Company's
purchased raw materials and finished products back to the distribution centers.
HUMAN RESOURCES AND TRAINING
The average Friendly's restaurant employs between two and four salaried team
members, which may include one General Manager, one Assistant Manager, one Guest
Service Supervisor and one Manager-in-Training. The General Manager is directly
responsible for day-to-day operations. General Managers report to a District
Manager who typically has responsibility for an average of seven restaurants.
District Managers report to a Division Manager who typically has responsibility
for approximately 50 restaurants. Division Managers report to a Regional Vice
President who typically has responsibility for six or seven Division Managers
covering approximately 350 restaurants.
The average Friendly's restaurant is staffed with four to ten employees per
shift, including the salaried restaurant management. Shift staffing levels vary
by sales volume level, building configuration and time of day. The average
restaurant typically utilized approximately 37,500 hourly-wage labor hours in
1996 in addition to salaried management.
To maintain its high service and quality standards, Friendly's has developed
its Restaurant Leadership Team ("RLT"). The RLT is comprised of highly-qualified
management employees, each of whom has received extensive training in Company
policies and procedures, as well as applicable federal, state and local
regulations. This team approach helps to ensure that the Company has the strong
leadership and management staff required to efficiently operate Friendly's
restaurants, provide quality service to customers and develop a pool of
well-qualified management candidates. These management candidates undergo
extensive training at the Company's dedicated training and development center.
Moreover, the Company has significantly improved its human resources training to
include sexual harassment, racial discrimination, diversity, employment
practices, government regulations, selection and assessment and other programs.
The Company also requires its District and Division Managers to participate in
training and development programs, provides courses to improve management skills
and offers development support for its headquarters employees.
EMPLOYEES
The total number of employees at the Company varies between 25,000 and
28,000 depending on the season of the year. As of June 29, 1997, the Company
employed approximately 28,000 employees, of which approximately 27,000 were
employed in Friendly's restaurants (including 130 in field management),
approximately 550 were employed at the Company's two manufacturing and three
distribution facilities and approximately 450 were employed at the Company's
corporate headquarters and other offices. None of the Company's employees is a
party to a collective bargaining agreement.
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HEADQUARTERS AND OTHER NON-RESTAURANT PROPERTIES
In addition to the Company's restaurants, the Company owns (i) an
approximately 260,000 square foot facility on 46 acres in Wilbraham,
Massachusetts which houses the corporate headquarters, a manufacturing facility
and a warehouse, (ii) an approximately 77,000 square foot office, manufacturing
and warehouse facility on 13 acres in Troy, Ohio and (iii) an approximately
18,000 square foot restaurant construction and maintenance service facility
located in Wilbraham, Massachusetts. The Company leases (i) an approximately
60,000 square foot distribution facility in Chicopee, Masschusetts, (ii) an
approximately 38,000 square foot restaurant construction and maintenance support
facility in Ludlow, Massachusetts and (iii) on a short-term basis, space for its
division and regional offices, its training and development center and other
support facilities.
LICENSES AND TRADEMARKS
The Company is the owner or licensee of the trademarks and service marks
(the "Marks") used in its business. The Marks "Friendly-Registered Trademark-"
and "Friendly's-Registered Trademark-" are owned by the Company pursuant to
registrations with the U.S. Patent and Trademark office.
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.
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GOVERNMENT REGULATION
The Company is subject to various Federal, state and local laws affecting
its business. Each Friendly's restaurant is subject to licensing and regulation
by a number of governmental authorities, which include health, safety,
sanitation, building and fire agencies in the state or municipality in which the
restaurant is located. Difficulties in obtaining or failures to obtain required
licenses or approvals, or the loss of such licences and approvals once obtained,
can delay, prevent the opening of, or close, a restaurant in a particular area.
The Company is also subject to Federal and state environmental regulations, but
these have not had a material adverse effect on the Company's operations.
The Company's relationships with its current and potential franchisees is
governed by the laws of its several states which regulate substantive aspects of
the franchisor-franchisee relationship. Substantive state laws that regulate the
franchisor-franchisee relationship presently exist or are being considered in a
substantial number of states, and bills have been introduced in Congress (one of
which is now pending) which would provide for Federal regulation of substantive
aspects of the franchisor-franchisee relationship. These current and proposed
franchise relationship laws limit, among other things, the duration and scope of
non-competition provisions, the ability of a franchisor to terminate or refuse
to renew a franchise and the ability of a franchisor to designate sources of
supply.
The Company's restaurant operations are also subject to Federal and state
laws governing such matters as wages, working conditions, citizenship
requirements and overtime. Some states have set minimum wage requirements higher
than the Federal level, and the Federal government recently increased the
Federal minimum wage. In September 1997, the second phase of an increase in the
minimum wage was implemented in accordance with the Federal Fair Labor Standards
Act of 1996. Significant numbers of hourly personnel at the Company's
restaurants are paid at rates related to the Federal minimum wage and,
accordingly, increases in the minimum wage will increase labor costs at the
Company's restaurants. Other governmental initiatives such as mandated health
insurance, if implemented, could adversely affect the Company as well as the
restaurant industry in general. The Company is also subject to the Americans
with Disabilities Act of 1990, which, among other things, may require certain
minor renovations to its restaurants to meet federally-mandated requirements.
The cost of these renovations is not expected to be material to the Company.
LEGAL PROCEEDINGS
From time to time the Company is named as a defendant in legal actions
arising in the ordinary course of its business. The Company is not party to any
pending legal proceedings other than routine litigation incidental to its
business. The Company does not believe that the resolutions of these claims
should have a material adverse effect on the Company's financial condition or
results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The executive officers and directors of the Company and their respective
ages and positions with the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ------------------------------ --- ---------------------------------------------------------------------------
<S> <C> <C>
Donald N. Smith 56 Chairman, Chief Executive Officer and President
Paul J. McDonald 53 Senior Executive Vice President, Chief Administrative Officer and Assistant
Secretary
Joseph A. O'Shaughnessy 61 Senior Executive Vice President
Larry W. Browne 51 Executive Vice President, Corporate Finance, General Counsel and Secretary
Gerald E. Sinsigalli 58 President, Food Service Division
Dennis J. Roberts 48 Senior Vice President, Restaurant Operations
Scott D. Colwell 39 Vice President, Marketing
Henry V. Pettis III 52 Vice President, Franchising and Operations Services
George G. Roller 49 Vice President, Finance, Chief Financial Officer and Treasurer
Garrett J. Ulrich 46 Vice President, Human Resources
Michael J. Daly* 53 Director
Steven L. Ezzes 50 Director
Barry Krantz* 53 Director
Charles Ledsinger / / Director
Burt Manning* / / Director
Gregory L. Segall* 34 Director
</TABLE>
* Messrs. Krantz and Segall, currently on the Board of Directors as the
nominees of the lenders under the Old Credit Facility, will be replaced as
directors by Messrs. Daly and Manning upon consummation of the Offerings.
DONALD N. SMITH has been Chairman, Chief Executive Officer and President of
the Company since September 1988. Mr. Smith has also been Chairman of the Board
and Chief Executive Officer of TRC and Perkins since November 1985. Prior to
joining TRC, Mr. Smith was President and Chief Executive Officer for
Diversifoods, Inc. from 1983 to October 1985. From 1980 to 1983, Mr. Smith was
Senior Vice President, PepsiCo., Inc. and was President of its Food Service
Division. He was responsible for the operations of Pizza Hut Inc. and Taco Bell
Corp., as well as North American Van Lines, Lee Way Motor Freight, Inc.,
PepsiCo. Foods International and La Petite Boulangerie. Prior to 1980, Mr. Smith
was President and Chief Executive Officer of Burger King Corporation and Senior
Executive Vice President and Chief Operations Officer for McDonald's
Corporation.
PAUL J. MCDONALD has been Senior Executive Vice President, Chief
Administrative Officer and Assistant Secretary since January 1996. Mr. McDonald
has been employed in various capacities with the Company since 1976. Mr.
McDonald has held the positions of Director of Management Information Systems,
Vice President/Controller and Vice President Corporate Development. Mr. McDonald
is a certified public accountant.
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JOSEPH A. O'SHAUGHNESSY has been Senior Executive Vice President since
October 1988. Mr. O'Shaughnessy has been employed in various capacities with the
Company since 1957. Mr. O'Shaughnessy's duties have included District and
Division Manager, Director and Vice President of Operations and Executive Vice
President.
LARRY W. BROWNE has been Executive Vice President, Corporate Finance,
General Counsel and Secretary of the Company since September 1988. Mr. Browne
has also been President and Managing Director of Friendly's International, Inc.
since 1996. Mr. Browne has been the Executive Vice President, Corporate Finance,
General Counsel and Secretary of TRC since November 1985 and was with Perkins
from 1985 until 1996, most recently holding the position of Senior Vice
President, Corporate Finance.
GERALD E. SINSIGALLI has been President, Food Service Division of the
Company since January 1989. Mr. Sinsigalli has been employed in various
capacities with the Company since 1965. Mr. Sinsigalli's duties have included
District and Division Manager, Director and Vice President of Operations and
Senior Vice President.
DENNIS J. ROBERTS has been Senior Vice President, Restaurant Operations of
the Company since January 1996. Mr. Roberts has been employed in various
capacities with the Company since 1969. Mr. Roberts' duties have included
Restaurant, District and Division Manager, Regional Training Manager, Director
and Vice President of Restaurant Operations.
SCOTT D. COLWELL has been Vice President, Marketing of the Company since
January 1996. Mr. Colwell has been employed in various capacities with the
Company since 1982 including Director, New Business Development; Senior
Director, Marketing and Sales and Senior Director, Retail Business.
HENRY V. PETTIS III has been employed by the Company since 1990 and became
Vice President, Franchising and Operations Services in 1996. Mr. Pettis was
President and Chief Executive Officer of Florida Food Industries from 1988 to
1990.
GEORGE G. ROLLER has been Vice President, Finance and Chief Financial
Officer and Treasurer of the Company since January 1996. Mr. Roller was Vice
President and Treasurer of the Company from 1989 until January 1996. Mr. Roller
is a certified public accountant.
GARRETT J. ULRICH has been Vice President, Human Resources since September
1991. Mr. Ulrich held the position of Vice President, Human Resources for Dun &
Bradstreet Information Services, North America from 1988 to 1991. From 1978 to
1988, Mr. Ulrich held various Human Resource executive and managerial positions
at Pepsi Cola Company, a division of PepsiCo.
MICHAEL J. DALY will become a director of the Company upon consummation of
the Common Stock Offering. Mr. Daly has been President and CEO of Baystate
Health System since December 1981.
STEVEN L. EZZES was reelected as a director of the Company in December 1995.
Mr. Ezzes previously served as a director of the Company from January 1991 to
May 1992. Mr. Ezzes has been a Managing Director of Scotia Capital Markets
(USA), an investment banking firm, since November 1996. Prior to that he was a
partner of the Airlie Group, a private investment firm, since 1988. Mr. Ezzes
has also been a Managing Director of Lehman Brothers, an investment banking
firm.
BARRY KRANTZ has been a director of the Company since April 1996. From
January 1994 to August 1995, Mr. Krantz served as President and Chief Operating
Officer of Family Restaurants, Inc. Mr. Krantz served at Restaurant Enterprises
Group, Inc. from December 1988 until January 1994 where he held the positions of
Chief Operating Officer and President of the Family Restaurant Division.
CHARLES LEDSINGER [insert bio].
BURT MANNING [insert bio].
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<PAGE>
GREGORY L. SEGALL has been a director of the Company since April 1996. Mr.
Segall has served as Chairman, President & CEO of Consolidated Vision Group,
Inc. since April 1997. Since October 1992, Mr. Segall has also been Managing
Director and Principal of Chrysalis Management Group, LLC. Prior to 1992, Mr.
Segall was a Managing Director of Sigoloff & Associates, Inc. Mr. Segall has
also served as Chief Executive Officer of a number of retail, real estate and
technology companies. In connection with his management consulting practice, Mr.
Segall has, over the past ten years, served as an officer and/or director of a
variety of companies which have either filed petitions or had petitions filed
against them under the U.S. Bankruptcy Code. Mr. Segall's involvement in these
companies was required by his employment by Chrysalis Management Group, LLC and
Sigoloff & Associates, Inc., both of which are management consulting groups
which specialize in restructuring and reorganizing businesses. In each case, Mr.
Segall became an officer and/or director only after his employer had been
retained for the purpose of taking a company through the reorganization process.
The executive officers of the Company serve at the discretion of the Board
of Directors.
INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES
CLASSES OF DIRECTORS
Following the closing of the Common Stock Offering, the Board of Directors
will be divided into three classes, each of whose members will serve for a
staggered three-year term. At this time, Messrs. Daly and Manning will join the
Board of Directors, replacing Messrs. Krantz and Segall who currently serve as
directors as the nominees of the lenders under the Old Credit Facility. Messrs.
Daly and Manning will serve in the class whose term expires in 1998; Messrs.
Ezzes and Ledsinger will serve in the class whose term expires in 1999; and Mr.
Smith will serve in the class whose term expires in 2000. Upon the expiration of
the term of a class of directors, directors within such class will be elected
for a three-year term at the annual meeting of stockholders in the year in which
such term expires.
BOARD COMMITTEES
The Company's Board of Directors has established an Audit Committee, a
Compensation Committee and a Nominating Committee. The Audit Committee is
responsible for nominating the Company's independent accountants for approval by
the Board of Directors, reviewing the scope, results and costs of the audit by
the Company's independent accountants and reviewing the financial statements of
the Company. Messrs. Ledsinger and Segall are currently the members of the Audit
Committee. Mr. Ezzes will replace Mr. Segall on the Audit Committee following
the consummation of the Common Stock Offering. The Compensation Committee is
responsible for recommending compensation and benefits for the executive
officers of the Company to the Board of Directors and for administering the
Company's stock plans. Upon the consumation of the Common Stock Offering, a
Compensation Committee will be installed whose members shall be Messrs.
Ledsinger and Manning. The Nominating Committee is responsible for nominating
individuals to stand for election to the Board of Directors. Messrs. Ledsinger,
Ezzes and Smith are the members of the Nominating Committee.
The Company's Restated Articles empower the Board of Directors to fix the
number of directors and to fill any vacancies on the Board of Directors.
Each Director of the Company who is not an employee of the Company will
receive a fee of $2,500 per month and $1,500 per board and special board meeting
attended, plus expenses.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
After consideration of the recommendations of Mr. Smith, compensation
matters of the Company are currently determined by Messrs. Ezzes, Segall, Krantz
and Ledsinger, members of the Company's Board of Directors.
46
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Summary Compensation Table below sets forth the annual base salary and
other annual compensation paid during the last three fiscal years to the
Company's chief executive officer and each of the other four most highly
compensated executive officers whose cash compensation exceeded $100,000 in a
combination of salary and bonus (the "named executive officers"). During 1994,
1995 and 1996, no long-term compensation was paid to the named executive
officers.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------------
RESTRICTED
STOCK OTHER ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS AWARDS(A) COMPENSATION COMPENSATION
- ---------------------------------- ------------- ---------- ---------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Donald N. Smith (b)............... 1996 $ 495,355 $ 150,000 $ 0 $ 0 $ 0
Chairman, Chief Executive 1995 472,640
Officer and President 1994 450,736
Larry W. Browne................... 1996 265,822 30,000 201 0 0
Executive Vice President, 1995 257,788
Corporate Finance, General 1994 249,619
Counsel and Secretary
Joseph A. O'Shaughnessy........... 1996 255,974 37,000 201 0 0
Senior Executive Vice President 1995 253,348
1994 245,720
Gerald E. Sinsigalli.............. 1996 249,552 40,000 201 0 0
President, Food Service Division 1995 239,646
1994 229,582
Paul J. McDonald.................. 1996 246,145 47,000 201 0 0
Senior Executive Vice President, 1995 236,780
Chief Administrative Officer and 1994 213,076
Assistant Secretary
</TABLE>
- ------------------------
(a) Represents the value of restricted stock awarded on March 25, 1996 under the
Company's management stock plan (the "Management Stock Plan"), which was
issued in substitution of stock rights awarded under a subsequently
terminated stock rights plan. As of December 29, 1996, Messrs. Browne,
O'Shaughnessy, Sinsigalli and McDonald each had 3,765 shares with a value of
$151 as of such date. Twenty-five percent of the shares of restricted stock
vested on December 29, 1996 upon the attainment of a minimum operating cash
flow target. The remaining shares of restricted stock will vest upon
consummation of the Common Stock Offering. No dividends were payable on the
restricted shares.
(b) The Company paid a management fee to TRC in the amount of $800,000, $785,000
and $773,000 in 1996, 1995 and 1994, respectively. From these fees, TRC paid
Mr. Smith the salary and bonus amounts listed above. Mr. Smith serves as
Chairman, Chief Executive Officer and President of the Company and as
Chairman and Chief Executive Officer of Perkins and, consequently, devotes a
portion of his time to the affairs of each of the Company and Perkins.
47
<PAGE>
PENSION PLAN TABLE
The following table sets forth the estimated annual benefits payable, based
on the indicated credited years of service and the indicated average annual
remuneration used in calculating benefits, under the Pension Plan (as defined
below).
<TABLE>
<CAPTION>
ESTIMATED BENEFIT BASED ON YEARS OF SERVICE (A)
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REMUNERATION 15 20 25 30 35
- ------------- ---------- ---------- ---------- ---------- ----------
$ 125,000 $ 11,171 $ 17,544 $ 24,444 $ 31,475 $ 39,031
150,000 13,405 21,053 29,333 37,770 46,837
175,000 15,639 24,562 34,222 44,065 54,643
200,000 17,873 28,071 39,111 50,360 62,451
300,000 26,809 42,106 58,664 75,539 93,675
400,000 35,746 56,142 78,221 100,720 124,901
500,000 44,682 70,177 97,775 125,899 156,123
600,000 53,619 84,214 117,330 151,078 187,350
700,000 62,555 98,249 136,885 176,259 218,573
</TABLE>
- ------------------------------
(a) Benefits under the Friendly Ice Cream Corporation Cash Balance Pension Plan
(the "Pension Plan") are generally determined based on the value of a
participant's cash balance account under the plan. Each year, a percentage
of compensation (limited to $150,000 for 1996 in accordance with rules
promulgated under the Internal Revenue Code of 1986 (the "Code")) is
contributed to an individual's cash balance account under the Pension Plan
based on his years of credited service. Interest credits are also
contributed to each cash balance account annually. The cash balance formula
was implemented effective January 1, 1992, at which time the accrued
benefits of participants were converted to the opening balance in the cash
balance account. The above amounts are annual straight life annuity amounts
(which are not reduced for social security benefits) payable upon retirement
at age 65 and assume salary increases of 5.0% per year, interest credits of
5.0% per year and that the cash balance formula under the Pension Plan has
always been in effect. The foregoing amounts also reflect amounts
attributable to benefits payable under the Friendly Ice Cream Corporation
Supplemental Executive Retirement Plan, (the "SERP"), which provides
benefits to the covered individuals which cannot be provided under the
Pension Plan due to the certain limitations of the Internal Revenue Code,
including the limitation on compensation. The SERP was implemented effective
as of January 1, 1995. Mr. Smith did not become a participant in the SERP
until January 1, 1996. As of January 1, 1997, Messrs. Brown, McDonald and
Smith had 8, 21 and 8 years of credited service, respectively, under the
Pension Plan. Benefits under the Pension Plan for Messrs. O'Shaughnessy and
Sinsigalli are determined primarily on final compensation and years of
credited service although such individuals would be entitled to a benefit
under the formula described above if such formula resulted in a larger
benefit. As of January 1, 1996, the estimated annual benefit payable upon
retirement at age 65 (expressed in the form of a straight life annuity) for
Messrs. O'Shaughnessy and Sinsigalli is $63,825 and $89,773, respectively,
taking into account benefits provided to such individuals under the SERP. As
of January 1, 1997, Messrs. O'Shaughnessy and Sinsigalli had 40 and 32 years
of credited service, respectively, under the Pension Plan.
LIMITED STOCK COMPENSATION PROGRAMS
In connection with the Common Stock Offering, the Company established a
program pursuant to which a one-time award of Common Stock will be made to
approximately 70 employees of the Company in recognition of their services to
the Company. Approximately 300,000 shares of Common Stock will be awarded under
the program (after giving effect to the Recapitalization). The Common Stock
awards will vest upon consummation of the Common Stock Offering, however, the
shares will be subject to transfer restrictions for a period of four years. The
shares will become transferable on a pro rata basis on the first through fourth
anniversaries of the Common Stock Offering. Messrs. O'Shaughnessy, Sinsigalli
and McDonald will be awarded 14,011, 17,284 and 17,284 shares respectively under
the program.
Under a separate component of this program, Mr. Smith will be awarded
approximately 100,742 shares of Common Stock which will vest upon consummation
of the Common Stock Offering. This one-time award was made in recognition of his
services to the Company.
48
<PAGE>
RESTRICTED STOCK PLAN
The Company currently maintains a restricted stock plan for the benefit of
eligible employees. All outstanding awards under such restricted stock plan will
vest upon consummation of the Common Stock Offering, and no new awards will be
issued under that plan. Prior to the Common Stock Offering, the Company will
adopt a new restricted stock plan (the "Restricted Stock Plan"), pursuant to
which 375,000 shares of Common Stock will be reserved for issuance, subject to
adjustment in the case of certain corporate transactions affecting the number or
type of shares of outstanding common stock. The Restricted Stock Plan will
provide for the award of Common Stock, the vesting of which will be subject to
such conditions and limitations as shall be established by the Board of
Directors, which may include conditions relating to continued employment with
the Company or the achievement of performance measures. Unless the Board of
Directors determines otherwise, any shares of restricted stock which are not
vested upon the participant's termination of employment with the Company shall
be forfeited. Upon a change in control of the Company, all restrictions on
outstanding shares of restricted stock shall lapse and such shares shall become
nonforfeitable.
The Restricted Stock Plan shall be administered by the Board of Directors,
which shall have the authority to determine the employees who will receive
awards under the Restricted Stock Plan and the terms and conditions of such
awards. Approximately 70 employees of the Company who are classified as salary
grade 109 and above will initially be eligible for participation in the
Restricted Stock Plan. The Board of Directors, in its sole discretion, may
designate other employees and persons providing material services to the Company
as eligible for participation in the Restricted Stock Plan.
STOCK OPTION PLAN
The Company does not currently maintain a stock option plan, although
certain employees of the Company participated in a previously terminated stock
rights plan. See Note 13 of Notes to Consolidated Financial Statements.
In connection with the Common Stock Offering, the Company will adopt a stock
option plan (the "Stock Option Plan"), pursuant to which approximately 400,000
shares of Common Stock will be reserved for issuance, subject to adjustment in
the case of certain corporate transactions affecting the number or type of
shares of outstanding Common Stock. The Stock Option Plan will provide for the
issuance of nonqualified stock options and incentive stock options which are
intended to satisfy the requirements of section 422 of the Code and stock
appreciation rights.
The Stock Option Plan will be administered by the Board of Directors. The
Board of Directors will determine the employees who will receive awards under
the Stock Option Plan and the terms of such awards. The award of a stock option
will entitle the recipient thereof to purchase a specified number of shares of
Common Stock at the exercise price specified by the Board of Directors. The
award of a stock appreciation right entitles the recipient thereof to a payment
equal to the excess of the fair market value of a share of Common Stock on the
date of exercise over the exercise price specified by the Board of Directors.
The exercise price of a stock option or stock appreciation right shall not be
less than the fair market value of a share of Common Stock on the date the stock
option or stock appreciation right is granted. The Board of Directors may
delegate its authority under the Stock Option Plan to a committee of the Board
of Directors.
Stock options and stock appreciation rights shall become exercisable in
accordance with the terms established by the Board of Directors, which terms may
relate to continued service with the Company or attainment of performance goals.
Stock options awarded in connection with the Common Stock Offering will become
exercisable over a five-year period, subject to the optionee's continued
employment with the Company. All awards under the Stock Option Plan will become
fully vested and exercisable upon a change in control of the Company.
49
<PAGE>
Approximately 120 employees of the Company who are classified as salary
grade 107 or 108 will initially be eligible for participation in the Stock
Option Plan. The Board of Directors, in its sole discretion, may designate other
employees and persons providing material services to the Company as eligible for
participation in the Stock Option Plan.
Generally, a participant who is granted a stock option or stock appreciation
right will not be subject to federal income tax at the time of the grant, and
the Company will not be entitled to a corresponding tax deduction. Upon the
exercise of a nonqualified stock option, generally the difference between the
option price and the fair market value of the Common Stock will be considered
ordinary income to the participant, and generally the Company will be entitled
to a tax deduction.
Upon exercise of an incentive stock option, no taxable income will be
recognized by the participant, and the Company will not be entitled to a tax
deduction. However, if the Common Stock purchased upon exercise of the incentive
stock option is sold within two years of the option's grant date or within one
year after the exercise, then the difference, with certain adjustments, between
the fair market value of the Common Stock at the date of exercise and the option
price will be considered ordinary income to the participant, and generally the
Company will be entitled to a tax deduction. If the participant disposes of the
Common Stock after such holding periods, any gain or loss upon such disposition
will be treated as a capital gain or loss and the Company will not be entitled
to a deduction.
Upon exercise of a stock appreciation right, the participant will recognize
ordinary income in an amount equal to the payment received, and generally the
Company will be entitled to a corresponding tax deduction.
50
<PAGE>
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding beneficial
ownership of (i) the Class A and Class B common shares of the Company prior to
the Recapitalization, and (ii) the Common Stock, after giving effect to the
Common Stock Offering, by (a) each person who is known by the Company to own
beneficially more than 5% of the outstanding (1) Class A and Class B common
shares as of October , 1997 or (2) shares of the Common Stock after giving
effect to the Common Stock Offering, (b) each director of the Company, (c) each
of the named executives officers and (d) all directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
COMMON STOCK
COMMON SHARES BENEFICIALLY OWNED
PRIOR TO THE RECAPITALIZATION BENEFICIALLY
--------------------------------------- OWNED AFTER THE
RECAPITALIZATION (A)
NUMBER ----------------------
------------------------ PERCENTAGE PERCENTAGE
NAME CLASS A (B) CLASS B (B) OF TOTAL NUMBER OF TOTAL
- ---------------------------------------------------- ----------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Lenders under Old Credit Facility as a
group (c)(d)...................................... -- 1,187,503 48.0% 701,036 9.8%
Donald N. Smith..................................... 759,680 -- 30.7 736,164 10.3
Equitable........................................... 256,375 -- 10.4 151,349 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 (e)................................. -- -- * -- *
Steven L. Ezzes..................................... -- -- * -- *
Barry Krantz (e).................................... -- -- * 924 *
Charles Ledsinger................................... -- -- * -- *
Burt Manning (e).................................... -- -- * -- *
Gregory L. Segall (e)............................... -- -- * 924 *
All directors and executive officers as a group (14
persons).......................................... 843,012 -- 34.1 934,544 13.1
</TABLE>
- ------------------------
* Represents less than 1% of the outstanding (i) Class A and Class B common
shares prior to the Recapitalization and (ii) Common Stock after the
Recapitalization.
(a) Gives effect to the Common Stock Offering, and the following, which will
occur in connection with the Recapitalization: (i) the return of 124,258,
105,026, 8,593, 486,467 and 51,398 shares of Common Stock to the Company by
Mr. Smith, Equitable, Mr. Browne, the lenders under the Old Credit Facility
as a group and the other existing non-management shareholders, respectively,
(ii) the issuance of 100,742 and 300,000 of such shares to Mr. Smith and
certain members of management under the Company's Limited Stock Compensation
Program, respectively and (iii) the issuance of 27,113 shares of Common
Stock under the Management Stock Plan. Of the 300,000 shares issued under
the Company's Limited Stock Compensation Program, 17,284, 5,000, 17,284 and
114,532 shares have been allocated to Messrs. McDonald, O'Shaughnessy,
Sinsigalli and to all directors and executive officers as a group,
respectively. Of the 27,113 shares of Common Stock to be issued under the
Management Stock Plan, each of Messrs. 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 Company's Stock Option Plan
and Restricted Stock Plan, respectively. See Note 17 of Notes to
Consolidated Financial Statements.
(b) In connection with the Recapitalization, each outstanding Class A common
share and Class B common share of the Company will be converted into one
share of Common Stock.
(c) Prior to the Recapitalization, the Bank of Boston, as agent for the lenders
under the Old Credit Facility, holds the Class B common shares for the
benefit of the lenders under the Old Credit Facility, having received Class
B common shares of the Company in 1996 in connection with the restructuring
of the Old Credit Facility. In connection with the Recapitalization, these
shares will automatically convert into shares of Common Stock and will be
distributed to the then existing lenders under the Old Credit Facility pro
rata according to the respective amounts of indebtedness thereunder held by
them. See Note 7 of Notes to Consolidated Financial Statements.
(d) Foothill Capital Corporation, Baker Nye Special Credits, Inc., D K
Acquisition Partners, L.P., Contrarian Capital Advisors, L.L.C., CoMac
Partners L.P., CoMac International N.V., Tribeca Investments L.L.C., Carl
Marks Management Company, L.P., Sanwa Business Credit Corporation, Halcyon
Distressed Securities L.P., Bedrock Asset Trust I and Morgan Stanley & Co.
International Limited, each of which is a lender under the Old Credit
Facility, and Equitable, Quidnet Partners, BMA Limited Partnership, Mr.
Browne and Peter Joost, other stockholders of the Company, have granted to
the Underwriters a 30-day option to purchase 86,788, 11,707, 65,337, 8,973,
23,344, 8,973, 25,532, 57,275, 15,212, 48,442, 12,268, 15,072, 151,349,
46,893, 19,085, 21,130 and 8,092 shares of Common Stock beneficially owned
by such lenders and other stockholders, respectively, as part of the
Underwriters' over-allotment option. If such over-allotment option is
exercised in full, the lenders under the Old Credit Facility as a group
would beneficially own 4.5%, and such other stockholders would no longer own
any, of the outstanding Common Stock after the Recapitalization. See
"Underwriting."
(e) Messrs. Krantz and Segall, currently on the Board of Directors as nominees
of the lenders under the Old Credit Facility, will be replaced as directors
by Messrs. Daly and Manning upon consummation of the Offerings. See
"Management."
51
<PAGE>
CERTAIN TRANSACTIONS
The Company's policy is to only enter into a transaction with an affiliate
in the ordinary course of, and pursuant to the reasonable requirements of, its
business and upon terms that are no less favorable to the Company than could be
obtained if the transaction was entered into with an unaffiliated third party.
Set forth below is a description of certain transactions between the Company and
its affiliates during 1994, 1995 and 1996 and ongoing transactions between the
Company and its affiliates. The Company believes that the terms of such
transactions were or are no less favorable to the Company than could have been
obtained if the transaction was entered into with an unaffiliated third party.
In March 1996, the Company's pension plan acquired three restaurant
properties from the Company. The land, buildings and improvements were purchased
by the plan at their appraised value of $2.0 million and are located in
Connecticut, Vermont and Virginia. Simultaneously with the purchase, the pension
plan leased back the three properties to the Company at an aggregate annual base
rent of $214,000 for the first five years and $236,000 for the following five
years. The pension plan was represented by independent legal and financial
advisors. The Company realized a net gain of approximately $675,000 on this
transaction which is being amortized into income over the initial ten-year term
of the lease.
In 1993, the Company subleased certain land, buildings, and equipment from
Perkins Restaurants Operating Company, L.P. ("Perkins"), a subsidiary of TRC.
During 1996, 1995 and 1994, rent expense related to the subleases was
approximately $278,000, $266,000 and $245,000, respectively.
During 1996 and 1995, an insurance subsidiary of TRC, Restaurant Insurance
Corporation ("RIC"), assumed from a third party insurance company reinsurance
premiums related to insurance liabilities of the Company of approximately $4.2
million and $6.4 million, respectively. In addition, RIC had reserves of
approximately $13.0 million and $12.8 million related to Company claims at
December 29, 1996 and December 31, 1995, respectively. On March 19, 1997, the
Company acquired all of the outstanding shares of common stock of RIC from TRC
for $1.3 million in cash and a $1.0 million promissory note payable to TRC
bearing interest at an annual rate of 8.25%. The promissory note and accrued
interest aggregating approximately $1.0 million was paid on June 30, 1997. RIC,
which was formed in 1993, reinsures certain of the Company's risks (i.e.
workers' compensation, employer's liability, general liability and product
liability) from a third party insurer.
In fiscal 1994, TRC Realty Co. (a subsidiary of TRC) entered into a 10-year
operating lease for an aircraft, for use by both the Company and Perkins. The
Company shares equally with Perkins in reimbursing TRC Realty Co. for leasing,
tax and insurance expenses. In addition, the Company also incurs actual usage
costs. Total expense for 1996, 1995 and 1994 was approximately $590,000,
$620,000 and $336,000, respectively.
The Company purchased certain food products used in the normal course of
business from a division of Perkins. For 1996, 1995 and 1994, purchases were
approximately $1.4 million, $1.9 million and $1.3 million, respectively.
The Company currently pays TRC an annual management fee pursuant to a
management fee letter agreement between the Company and TRC dated March 19, 1996
(the "TRC Management Contract"). The fee serves as compensation for (i) the
services performed by Mr. Smith for the benefit of the Company (ii) office and
secretarial services attributable to the Company and (iii) other related
expenses. TRC was paid $800,000, $785,000 and $773,000 for such management
services in 1996, 1995 and 1994, respectively. See "Management--Executive
Compensation."
During 1996, the Company incurred approximately $69,000 of expense related
to fees and other reimbursements to the two board of directors members who
represented the Company's lenders. In addition, for 1996, 1995 and 1994, the
Company expensed approximately $196,000, $763,000 and $200,000, respectively,
for fees paid to the lenders' agent bank.
52
<PAGE>
The Company is a party to two agreements with TRC relating to taxes. In
connection with the distribution by TRC to its shareholders of the Common Stock
in the Company immediately prior to the 1996 bank restructuring, the Company
entered into a Tax Disaffiliation Agreement dated March 25, 1996. Under the Tax
Disaffiliation Agreement, TRC must indemnify the Company for all income taxes
during periods when the Company and its affiliates were includible in a
consolidated federal income tax return with TRC and for any income taxes due as
a result of the Company ceasing to be a member of the TRC consolidated group.
TRC does not retain any liability for periods when the Company and its
affiliates were not includible in the TRC consolidated federal income tax return
and the Company must indemnify TRC if any such income taxes are assessed against
TRC. TRC also does not indemnify the Company for a reduction of the Company's
existing NOLs or for NOLs previously utilized by TRC. The Tax Disaffiliation
Agreement terminates 90 days after the statute of limitations expires for each
tax covered by the agreement including unfiled returns as if such returns had
been filed by the appropriate due date.
The Company also entered into a Tax Responsibility Agreement dated as of
March 19, 1997 in connection with the sale of RIC to the Company. Under the Tax
Responsibility Agreement, the Company must indemnify TRC for any income taxes
that are assessed against TRC as a result of the operations of RIC. The Tax
Responsibility Agreement terminates 90 days after the statute of limitations
expires for each tax covered by the agreement.
DESCRIPTION OF NEW CREDIT FACILITY
The Company expects, contingent upon completion of the Offerings, to enter
into a senior secured credit facility with Societe Generale in an aggregate
principal amount of $175 million (the "New Credit Facility"). The following
description, which sets forth the material terms of the New Credit Facility,
does not purport to be complete and is qualified in its entirety by reference to
the agreements setting forth the principal terms of the New Credit Facility,
which will be filed as exhibits to the Registration Statement of which this
Prospectus is a part.
It is expected that the senior, secured New Credit Facility will consist of
(a) the $105 million Term Loan Facility, (b) the five-year Revolving Credit
Facility providing for revolving loans to the Company in a principal amount not
to exceed $55 million (including a $5 million sublimit for each of trade and
standby letters of credit) and (c) the $15 million Letter of Credit Facility
providing for standby letters of credit in the normal course of business and
having a maturity contemporaneous with that of the Revolving Credit Facility.
It is expected that the full amount of the Term Loan Facility will be drawn
on the closing date of the Recapitalization (the "Closing Date"). Amounts repaid
or prepaid under the Term Loan Facility may not be reborrowed. Loans under the
Revolving Credit Facility will be available at any time on and after the Closing
Date and prior to the date which is five years after the Closing Date. Letters
of credit shall expire annually, but shall have a final expiration date no later
than thirty days prior to final maturity, which for the Letter of Credit
Facility will also be five years from the Closing Date.
It is expected that the Term Loan Facility will require quarterly
amortization payments beginning on April 15, 1999. Annual amortization payments
will total $4.7 million, $10.7 million, $12.7 million, $14.7 million, $18.7
million, $20.3 million and $23.5 million in 1999 through 2005, respectively. In
addition to the scheduled amortization, it is expected that the Term Loan
Facility will be permanently reduced by (i) specified percentages of each year's
Excess Cash Flow (as defined in the New Credit Facility) and (ii) 100% of the
aggregate net proceeds from asset sales not in the ordinary course of business
and not re-employed or committed to be re-employed within a specified period in
the Company's business, exclusive of up to $7.5 million of aggregate net
proceeds received from asset sales subsequent to the closing relating to the New
Credit Facility. Such applicable proceeds shall be applied to the Term Loan
Facility in inverse order of maturity. At the Company's option, loans may be
prepaid at any time with certain notice and breakage cost provisions.
53
<PAGE>
It is expected that the obligations of the Company under the New Credit
Facility will be (i) secured by a first priority security interest in
substantially all material assets of the Company and all other assets owned or
hereafter acquired and (ii) guaranteed, on a senior secured basis, by the
Company's Friendly's Restaurants Franchise, Inc. subsidiary and may also be so
guaranteed by certain subsidiaries of the Company created or acquired after
consummation of the Recapitalization.
It is expected that, at the Company's option, the interest rates per annum
applicable to the New Credit Facility will be either LIBOR (as defined in the
New Credit Facility), plus a margin ranging from 2.25% to 2.75%, or the
Alternative Base Rate (as defined in the New Credit Facility), plus a margin
ranging from 0.75% to 1.25%. The Alternative Base Rate is the greater of (a)
Societe Generale's Prime Rate or (b) the Federal Funds Rate plus 0.50%. It is
expected that after the first twelve calendar months of the New Credit Facility,
pricing reductions will be available in certain circumstances.
It is expected that the New Credit Facility will contain a number of
significant covenants that among other things, will operate as limitations on
indebtedness; liens; guarantee obligations; mergers; consolidations, formation
of subsidiaries, liquidations and dissolutions; sales of assets; leases;
payments of dividends; capital expenditures; investments; optional payments and
modifications of subordinated and other debt instruments; transactions with
affiliates; sale and leaseback transactions; changes in fiscal year; negative
pledge clauses; changes in lines of business; and the ability to amend material
agreements. In addition, under the New Credit Facility, the Company will be
required to comply with specified minimum fixed charge coverage ratios, interest
expense coverage ratios, cash flow leverage ratios and minimum net worth
requirements.
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 $ 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 (1,496,528 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
Montgomery Securities, 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 a registration statement under the Securities
Act to register all shares of Common Stock issuable pursuant to the Company's
Stock Option Plan and Restricted Stock Plan. Subject to the completion of the
360-day period described above, shares of Common Stock issued upon the exercise
of awards issued under such plans and after the effective date of such
registration statement, generally will be eligible for sale in the public
market. See "Management--Executive Compensation."
Prior to the consummation of the Common Stock Offering, the Company, its
shareholders holding Class A and Class B common shares prior to the
Recapitalization and certain warrant holders will enter 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. (the "Representative"), 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. ..........................................................
--------------
Total......................................................................................... 5,000,000
--------------
--------------
</TABLE>
The Representative has 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 Representative. 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 of such shares of Common
Stock from the Company pursuant to such option only after all of the
shares of Common Stock subject to such 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 Representative has 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 Representative and the Company. Among the
factors to be considered in such negotiations are the history of, and the
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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 Representative is 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 Representative may also impose a
penalty bid on certain Underwriters and selling group members. This means that
if the Representative purchases 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 Representative 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 expected to be a lender
under the New 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
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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 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.
63
<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 June 29, 1997
(unaudited)......................................................................................... F-3
Consolidated Statements of Operations for the Years Ended January 1, 1995, December 31, 1995 and
December 29, 1996 and for the Six Months Ended June 30, 1996 (unaudited) and June 29, 1997
(unaudited)......................................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended January 1,
1995, December 31, 1995 and December 29, 1996 and for the Six Months Ended June 29, 1997
(unaudited)......................................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended January 1, 1995, December 31, 1995 and
December 29, 1996 and for the Six Months Ended June 30, 1996 (unaudited) and June 29, 1997
(unaudited)......................................................................................... F-6
Notes to Consolidated Financial Statements........................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Friendly Ice Cream Corporation:
We have audited the accompanying consolidated balance sheets of Friendly Ice
Cream Corporation and subsidiaries as of December 31, 1995 and December 29,
1996, and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 29, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Friendly Ice Cream
Corporation and subsidiaries as of December 31, 1995 and December 29, 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 29, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 14, 1997 (except with respect to the matter
discussed in Note 16, as to which
the date is July 14, 1997)
F-2
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................ $ 23,690 $ 18,626 $ 16,899
Restricted cash and investments...................................................... -- -- 4,000
Trade accounts receivable............................................................ 5,233 4,992 7,056
Inventories.......................................................................... 15,079 15,145 17,490
Deferred income taxes................................................................ 9,885 12,375 12,381
Prepaid expenses and other current assets............................................ 3,985 1,658 7,308
------------ ------------ -----------
TOTAL CURRENT ASSETS................................................................... 57,872 52,796 65,134
RESTRICTED CASH AND INVESTMENTS........................................................ -- -- 7,889
INVESTMENT IN JOINT VENTURE............................................................ -- 4,500 3,757
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization............... 295,448 286,161 279,265
INTANGIBLES AND DEFERRED COSTS, net of accumulated amortization of $3,419, $4,790 and
$5,510 (unaudited) at December 31, 1995, December 29, 1996 and June 29, 1997,
respectively......................................................................... 16,607 16,019 15,375
OTHER ASSETS........................................................................... 365 650 1,722
------------ ------------ -----------
TOTAL ASSETS........................................................................... $ 370,292 $ 360,126 $ 373,142
------------ ------------ -----------
------------ ------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt................................................. $ 3,204 $ 1,289 $ 2,953
Current maturities of capital lease obligations...................................... 6,466 6,353 5,003
Accounts payable..................................................................... 20,972 20,773 26,272
Accrued salaries and benefits........................................................ 13,525 13,855 15,971
Accrued interest payable............................................................. 5,940 9,838 10,007
Insurance reserves................................................................... 6,605 3,973 6,927
Other accrued expenses............................................................... 15,838 17,415 17,436
------------ ------------ -----------
TOTAL CURRENT LIABILITIES.............................................................. 72,550 73,496 84,569
------------ ------------ -----------
DEFERRED INCOME TAXES.................................................................. 51,908 48,472 46,802
CAPITAL LEASE OBLIGATIONS, less current maturities..................................... 15,375 14,182 14,193
LONG-TERM DEBT, less current maturities................................................ 373,769 371,795 371,429
OTHER LONG-TERM LIABILITIES............................................................ 22,224 25,337 31,683
COMMITMENTS AND CONTINGENCIES (Notes 2, 6, 7, 8, 12, 15, 16 and 17)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value -
Class A, authorized 150,000, 150,000 and 4,000 shares at December 31, 1995,
December 29, 1996 and June 29, 1997, respectively; 1,090,969, 1,285,384 and
1,285,384 (unaudited) shares issued and outstanding at December 31, 1995, December
29, 1996 and June 29, 1997, respectively.......................................... 11 13 13
Class B, authorized -0-, 2,000 and 2,000 shares at December 31, 1995, December 29,
1996 and June 29, 1997, respectively; -0-, 1,187,503 and 1,187,503 (unaudited)
shares issued and outstanding at December 31, 1995, December 29, 1996 and June 29,
1997, respectively................................................................ -- 12 12
Class C, authorized -0-, 2,000 and 2,000 shares at December 31, 1995, December 29,
1996 and June 29, 1997, respectively; -0- shares issued and outstanding at
December 31, 1995, December 29, 1996 and June 29, 1997............................ -- -- --
Additional paid-in capital........................................................... 46,842 46,905 46,905
Unrealized gain on investment securities, net of taxes............................... -- -- 28
Accumulated deficit.................................................................. (212,387) (220,159) (222,563)
Cumulative translation adjustment.................................................... -- 73 71
------------ ------------ -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)................................................... (165,534) (173,156) (175,534)
------------ ------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)................................... $ 370,292 $ 360,126 $ 373,142
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
FOR THE YEARS ENDED ENDED
----------------------------------------- -----------
JANUARY 1, DECEMBER 31, DECEMBER 29, JUNE 30,
1995 1995 1996 1996
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
REVENUES.......................................................... $ 631,014 $ 649,149 $ 650,807 $ 308,784
COSTS AND EXPENSES:
Cost of sales................................................. 179,793 192,600 191,956 89,696
Labor and benefits............................................ 211,838 214,625 209,260 102,674
Operating expenses............................................ 132,010 143,854 143,163 70,620
General and administrative expenses........................... 38,434 40,705 42,721 21,230
Debt restructuring expenses (Note 5).......................... -- 3,346 -- --
Write-down of property and equipment (Note 6)................. -- 4,006 227 --
Depreciation and amortization................................. 32,069 33,343 32,979 16,606
----------- ------------- ------------- -----------
OPERATING INCOME.................................................. 36,870 16,670 30,501 7,958
Interest expense, net of capitalized interest of $176, $62, $49,
$35 (unaudited) and $17 (unaudited) and interest income of $187,
$390, $318, $215 (unaudited) and $146 (unaudited) for the years
ended January 1, 1995, December 31, 1995 and December 29, 1996
and the six months ended June 30, 1996 and June 29, 1997,
respectively.................................................... 45,467 41,904 44,141 22,138
Equity in net loss of joint venture............................... -- -- -- --
----------- ------------- ------------- -----------
LOSS BEFORE BENEFIT FROM (PROVISION FOR) INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............. (8,597) (25,234) (13,640) (14,180)
Benefit from (provision for) income taxes......................... 4,661 (33,419) 5,868 6,154
----------- ------------- ------------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE... (3,936) (58,653) (7,772) (8,026)
Cumulative effect of change in accounting principle, net of income
tax expense of $1,554 (Note 10)................................. -- -- -- --
----------- ------------- ------------- -----------
NET LOSS.......................................................... $ (3,936) $ (58,653) $ (7,772) $ (8,026)
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
PRO FORMA NET LOSS PER SHARE (NOTE 17) (UNAUDITED):
Loss before cumulative effect of change in accounting
principle................................................... $ (1.09) $ (1.13)
Cumulative effect of change in accounting principle, net of
income tax expense.......................................... -- --
------------- -----------
Net loss...................................................... $ (1.09) $ (1.13)
------------- -----------
------------- -----------
PRO FORMA AMOUNTS ASSUMING NEW PENSION METHOD IS RETROACTIVELY
APPLIED:
Net loss (Note 10)............................................ $ (3,506) $ (58,134) $ (7,214) $ (7,747)
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
Net loss per share (unaudited)................................ $ (1.01) $ (1.09)
------------- -----------
------------- -----------
PRO FORMA SHARES USED IN NET LOSS PER SHARE CALCULATION (NOTE 17)
(UNAUDITED)..................................................... 7,125 7,125
------------- -----------
------------- -----------
<CAPTION>
JUNE 29,
1997
-----------
<S> <C>
(UNAUDITED)
REVENUES.......................................................... $ 322,828
COSTS AND EXPENSES:
Cost of sales................................................. 92,186
Labor and benefits............................................ 104,898
Operating expenses............................................ 71,284
General and administrative expenses........................... 22,595
Debt restructuring expenses (Note 5).......................... --
Write-down of property and equipment (Note 6)................. 347
Depreciation and amortization................................. 16,401
-----------
OPERATING INCOME.................................................. 15,117
Interest expense, net of capitalized interest of $176, $62, $49,
$35 (unaudited) and $17 (unaudited) and interest income of $187,
$390, $318, $215 (unaudited) and $146 (unaudited) for the years
ended January 1, 1995, December 31, 1995 and December 29, 1996
and the six months ended June 30, 1996 and June 29, 1997,
respectively.................................................... 22,238
Equity in net loss of joint venture............................... 743
-----------
LOSS BEFORE BENEFIT FROM (PROVISION FOR) INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............. (7,864)
Benefit from (provision for) income taxes......................... 3,224
-----------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE... (4,640)
Cumulative effect of change in accounting principle, net of income
tax expense of $1,554 (Note 10)................................. 2,236
-----------
NET LOSS.......................................................... $ (2,404)
-----------
-----------
PRO FORMA NET LOSS PER SHARE (NOTE 17) (UNAUDITED):
Loss before cumulative effect of change in accounting
principle................................................... $ (0.65)
Cumulative effect of change in accounting principle, net of
income tax expense.......................................... 0.31
-----------
Net loss...................................................... $ (0.34)
-----------
-----------
PRO FORMA AMOUNTS ASSUMING NEW PENSION METHOD IS RETROACTIVELY
APPLIED:
Net loss (Note 10)............................................ $ (4,640)
-----------
-----------
Net loss per share (unaudited)................................ $ (0.65)
-----------
-----------
PRO FORMA SHARES USED IN NET LOSS PER SHARE CALCULATION (NOTE 17)
(UNAUDITED)..................................................... 7,125
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------------------------------------------
CLASS A CLASS B CLASS C ADDITIONAL
---------------------- ---------------------- -------------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ----------- --------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 2, 1994...... 1,090,969 $ 11 -- $ -- -- $ -- $ 46,822
Net loss.................... -- -- -- -- -- -- --
--
--------- --- --------- --- --- -------
BALANCE, JANUARY 1, 1995...... 1,090,969 11 -- -- -- -- 46,822
Net loss.................... -- -- -- -- -- -- --
Contribution of capital..... -- -- -- -- -- -- 20
--
--------- --- --------- --- --- -------
BALANCE, DECEMBER 31, 1995.... 1,090,969 11 -- -- -- -- 46,842
Net loss.................... -- -- -- -- -- -- --
Issuance of common stock to
lenders................... -- -- 1,187,503 12 -- -- 38
Proceeds from exercise of
warrants.................. 71,527 1 -- -- -- -- 21
Compensation expense
associated with management
stock plan................ 122,888 1 -- -- -- -- 4
Translation adjustment...... -- -- -- -- -- -- --
--
--------- --- --------- --- --- -------
BALANCE, DECEMBER 29, 1996.... 1,285,384 13 1,187,503 12 -- -- 46,905
Net loss (unaudited)........ -- -- -- -- -- -- --
Change in unrealized gain on
investment securities, net
of tax (unaudited)........ -- -- -- -- -- -- --
Translation adjustment
(unaudited)............... -- -- -- -- -- -- --
--
--------- --- --------- --- --- -------
BALANCE, JUNE 29, 1997
(unaudited)................. 1,285,384 $ 13 1,187,503 $ 12 -- $ -- $ 46,905
--
--
--------- --- --------- --- --- -------
--------- --- --------- --- --- -------
<CAPTION>
UNREALIZED
GAIN ON
INVESTMENT CUMULATIVE
SECURITIES, ACCUMULATED TRANSLATION
NET OF TAXES DEFICIT ADJUSTMENT TOTAL
------------------- ----------------- ------------------- ---------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 2, 1994...... $ -- $ (149,798) $ -- $(102,965)
Net loss.................... -- (3,936) -- (3,936)
--- ----------------- --- ---------
BALANCE, JANUARY 1, 1995...... -- (153,734) -- (106,901)
Net loss.................... -- (58,653) -- (58,653)
Contribution of capital..... -- -- -- 20
--- ----------------- --- ---------
BALANCE, DECEMBER 31, 1995.... -- (212,387) -- (165,534)
Net loss.................... -- (7,772) -- (7,772)
Issuance of common stock to
lenders................... -- -- -- 50
Proceeds from exercise of
warrants.................. -- -- -- 22
Compensation expense
associated with management
stock plan................ -- -- -- 5
Translation adjustment...... -- -- 73 73
--- ----------------- --- ---------
BALANCE, DECEMBER 29, 1996.... -- (220,159) 73 (173,156)
Net loss (unaudited)........ -- (2,404) -- (2,404)
Change in unrealized gain on
investment securities, net
of tax (unaudited)........ 28 -- -- 28
Translation adjustment
(unaudited)............... -- -- (2) (2)
--- ----------------- --- ---------
BALANCE, JUNE 29, 1997
(unaudited)................. $ 28 $ (222,563) $ 71 $(175,534)
--- ----------------- --- ---------
--- ----------------- --- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
FOR THE YEARS ENDED ENDED
----------------------------------------- -----------
JANUARY 1, DECEMBER 31, DECEMBER 29, JUNE 30,
1995 1995 1996 1996
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss........................................................ $ (3,936) $ (58,653) $ (7,772) $ (8,026)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Cumulative effect of change in accounting principle........... -- -- -- --
Depreciation and amortization................................. 32,069 33,343 32,979 16,606
Write-down of property and equipment.......................... -- 4,006 227 --
Deferred income tax (benefit) expense......................... (4,207) 33,419 (5,926) (6,154)
(Gain) loss on asset retirements.............................. (259) 595 (916) (264)
Equity in net loss of joint venture........................... -- -- -- --
Changes in operating assets and liabilities:
Receivables................................................. (2,071) 679 241 (960)
Inventories................................................. 1,635 (1,044) (66) (2,302)
Other assets................................................ (1,603) 587 1,309 373
Accounts payable............................................ 2,333 (1,714) (199) 8,166
Accrued expenses and other long-term liabilities............ 14,420 16,572 6,286 7,457
----------- ------------- ------------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................... 38,381 27,790 26,163 14,896
----------- ------------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................. (29,507) (19,092) (24,217) (10,912)
Proceeds from sales of property and equipment................... 1,475 926 8,409 3,481
Proceeds from sales and maturities of investment securities..... -- -- -- --
Cash acquired from Restaurant Insurance Corporation, net of cash
paid.......................................................... -- -- -- --
Advances to or investments in joint venture..................... -- -- (4,500) (4,500)
----------- ------------- ------------- -----------
NET CASH USED IN INVESTING ACTIVITIES........................... (28,032) (18,166) (20,308) (11,931)
----------- ------------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution of capital......................................... -- 20 -- --
Proceeds from exercise of stock purchase warrants............... -- -- 22 22
Proceeds from borrowings........................................ 67,629 80,162 48,196 19,674
Repayments of debt.............................................. (69,338) (72,713) (52,084) (18,799)
Repayments of capital lease obligations......................... (6,190) (7,293) (7,131) (3,797)
----------- ------------- ------------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES............. (7,899) 176 (10,997) (2,900)
----------- ------------- ------------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH........................... -- -- 78 --
----------- ------------- ------------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. 2,450 9,800 (5,064) 65
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................... 11,440 13,890 23,690 23,690
----------- ------------- ------------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................... $ 13,890 $ 23,690 $ 18,626 $ 23,755
----------- ------------- ------------- -----------
----------- ------------- ------------- -----------
SUPPLEMENTAL DISCLOSURES
Interest paid................................................... $ 29,430 $ 25,881 $ 36,000 $ 16,029
Capital lease obligations incurred.............................. 7,767 3,305 5,951 2,811
Capital lease obligations terminated............................ 391 288 128 126
Conversion of accrued interest payable to debt.................. 11,217 14,503 -- --
Issuance of common stock to lenders............................. -- -- 50 --
Issuance of note payable in connection with the acquisition of
Restaurant Insurance Corporation.............................. -- -- -- --
<CAPTION>
JUNE 29,
1997
-----------
<S> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss........................................................ $ (2,404)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Cumulative effect of change in accounting principle........... (2,236)
Depreciation and amortization................................. 16,401
Write-down of property and equipment.......................... 347
Deferred income tax (benefit) expense......................... (3,224)
(Gain) loss on asset retirements.............................. 778
Equity in net loss of joint venture........................... 743
Changes in operating assets and liabilities:
Receivables................................................. (1,015)
Inventories................................................. (2,345)
Other assets................................................ (3,199)
Accounts payable............................................ 5,499
Accrued expenses and other long-term liabilities............ 280
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................... 9,625
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................. (8,810)
Proceeds from sales of property and equipment................... 919
Proceeds from sales and maturities of investment securities..... 73
Cash acquired from Restaurant Insurance Corporation, net of cash
paid.......................................................... 965
Advances to or investments in joint venture..................... (1,400)
-----------
NET CASH USED IN INVESTING ACTIVITIES........................... (8,253)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Contribution of capital......................................... --
Proceeds from exercise of stock purchase warrants............... --
Proceeds from borrowings........................................ 29,191
Repayments of debt.............................................. (28,893)
Repayments of capital lease obligations......................... (3,395)
-----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES............. (3,097)
-----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH........................... (2)
-----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. (1,727)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................... 18,626
-----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......................... $ 16,899
-----------
-----------
SUPPLEMENTAL DISCLOSURES
Interest paid................................................... $ 20,063
Capital lease obligations incurred.............................. 2,057
Capital lease obligations terminated............................ --
Conversion of accrued interest payable to debt.................. --
Issuance of common stock to lenders............................. --
Issuance of note payable in connection with the acquisition of
Restaurant Insurance Corporation.............................. 1,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 29, 1997
IS UNAUDITED)
1. ORGANIZATION
In September 1988, The Restaurant Company ("TRC") and another investor
acquired Friendly Ice Cream Corporation ("FICC") for $297,500,000. Subsequent to
the acquisition, Friendly Holding Corporation ("FHC") was organized to hold the
outstanding common stock of FICC and in March 1996, FHC was merged into FICC.
The accompanying consolidated financial statements include the accounts of FICC
and its wholly-owned subsidiaries (collectively, "FICC").
Under the terms of the TRC acquisition financing agreements, warrants to
purchase shares of FICC's common stock were issued to the lenders. These
warrants were exercisable on or before September 2, 1998. In connection with
FICC's debt restructuring in 1991 (see Note 7), these warrants were cancelled
and one of the lenders was issued new warrants for 13,836 shares of FICC's
(formerly FHC's) Class A Common Stock, subject to dilution, at an exercise price
of $445,000 or $32.16 per share. These warrants expire on September 2, 1998. As
of December 29, 1996 and June 29, 1997, none of these warrants had been
exercised.
As of December 29, 1996 and June 29, 1997, three classes of common stock
were authorized: Class A ("voting"), Class B ("limited voting") and Class C
("non-voting"). Prior to the occurrence of a Special Rights Default (see Note
7), lenders with limited voting common stock have voting rights only for certain
transactions as defined in the loan documents. Common stock held by the lenders
will automatically convert to voting common stock upon an underwritten public
offering by FICC of at least $30,000,000 (see Note 17).
As of December 31, 1995, TRC owned 913,632 shares or 83.75% of FICC's voting
common stock. In March 1996, TRC distributed its shares of FICC's voting common
stock to TRC's shareholders and FICC deconsolidated from TRC. As of December 29,
1996 and June 29, 1997, TRC's shareholders and FICC's lenders (see Note 7) owned
36.95% and 48.03%, respectively, of FICC's outstanding common stock.
As part of the debt restructuring in 1991 (see Note 7), certain officers of
FICC purchased 97,906 shares of Class A Common Stock and warrants convertible
into an additional 71,527 shares of voting common stock for an aggregate
purchase price of $55,550. These warrants were exercised on April 19, 1996 at an
aggregate exercise price of $22,000.
2. NATURE OF OPERATIONS
FICC owns and operates full-service restaurants in fifteen states. The
restaurants offer a wide variety of reasonably priced breakfast, lunch and
dinner menu items as well as frozen dessert products. FICC manufactures
substantially all of the frozen dessert products it sells, which are also
distributed to supermarkets and other retail locations. For the years ended
January 1, 1995, December 31, 1995 and December 29, 1996 and the six months
ended June 30, 1996 and June 29, 1997, restaurant sales were approximately 93%,
91%, 92%, 92% and 91%, respectively, of FICC's revenues. As of January 1, 1995,
December 31, 1995, December 29, 1996 and June 29, 1997, approximately 80% of
FICC's restaurants were located in the Northeast United States. As a result, a
severe or prolonged economic recession in this geographic area may adversely
affect FICC more than certain of its competitors which are more geographically
diverse. Commencing in 1997, FICC has franchised restaurants (see Note 16).
F-7
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION --
The consolidated financial statements include the accounts of FICC and its
subsidiaries after elimination of intercompany accounts and transactions.
FISCAL YEAR --
FICC's fiscal year ends on the last Sunday in December, unless that day is
earlier than December 27 in which case the fiscal year ends on the following
Sunday.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS --
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Future facts
and circumstances could alter management's estimates with respect to the
carrying value of long-lived assets and the adequacy of insurance reserves.
REVENUE RECOGNITION --
FICC recognizes restaurant revenue upon receipt of payment from the customer
and retail revenue upon shipment of product. Franchise royalty income, based on
gross sales of franchisees, is payable monthly and is recorded on the accrual
method as earned. Initial franchise fees are recorded upon completion of all
significant services, generally upon opening of the restaurant.
CASH AND CASH EQUIVALENTS --
FICC considers all investments with an original maturity of three months or
less when purchased to be cash equivalents.
INVENTORIES --
Inventories are stated at the lower of first-in, first-out cost or market.
Inventories at December 31, 1995, December 29, 1996 and June 29, 1997 were (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ ---------
<S> <C> <C> <C>
Raw Materials......................................... $ 2,129 $ 1,436 $ 2,135
Goods In Process...................................... 114 58 324
Finished Goods........................................ 12,836 13,651 15,031
------------ ------------ ---------
Total........................................... $ 15,079 $ 15,145 $ 17,490
------------ ------------ ---------
------------ ------------ ---------
</TABLE>
INVESTMENT IN JOINT VENTURE --
In February 1996, FICC and another entity entered into a joint venture,
Shanghai Friendly Food Co., Ltd., a Chinese corporation. FICC has a 50%
ownership interest in the venture. Operations commenced in April 1997. FICC
accounts for the investment using the equity method. As of June 29, 1997, FICC
had a
F-8
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
receivable for approximately $1.4 million from the joint venture related to
advances made to the venture in 1997 and net accounts receivable of
approximately $650,000.
INVESTMENTS --
FICC, through its wholly-owned subsidiary Restaurant Insurance Corporation
("RIC") (see Note 4), has invested in a diversified fixed income portfolio of
federal agency issues and United States Treasury issues ($11,461,000 fair market
value at June 29, 1997). FICC classifies all of these investments as available
for sale. Accordingly, these investments are reported at estimated fair market
value with unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity, net of related income taxes.
RESTRICTED CASH AND INVESTMENTS --
RIC is required by the third party insurer of FICC to hold assets in trust
whose value is at least equal to certain of RIC's outstanding estimated
insurance claim liabilities. As of June 29, 1997, cash of $428,000 and
investments of $11,461,000 were restricted.
PROPERTY AND EQUIPMENT --
Property and equipment are carried at cost except for impaired assets which
are carried at fair value less cost to sell (see Note 6). Depreciation of
property and equipment is computed using the straight-line method over the
following estimated useful lives:
Buildings--30 years
Building improvements and leasehold improvements--20 years
Equipment--3 to 10 years
At December 31, 1995, December 29, 1996 and June 29, 1997, property and
equipment included (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Land................................................ $ 77,765 $ 75,004 $ 74,446
Buildings and Improvements.......................... 110,231 112,359 112,966
Leasehold Improvements.............................. 37,703 39,120 38,964
Assets Under Capital Leases......................... 37,307 42,893 42,728
Equipment........................................... 206,266 216,536 217,106
Construction In Progress............................ 6,147 6,424 11,224
------------ ------------ -----------
Property and Equipment.............................. 475,419 492,336 497,434
Less: Accumulated Depreciation and Amortization..... (179,971) (206,175) (218,169)
------------ ------------ -----------
Property and Equipment--Net......................... $ 295,448 $ 286,161 $ 279,265
------------ ------------ -----------
</TABLE>
Major renewals and betterments are capitalized. Replacements and maintenance
and repairs which do not extend the lives of the assets are charged to
operations as incurred.
F-9
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
LONG-LIVED ASSETS --
Effective January 2, 1995, FICC adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" which had no impact.
FICC reviews the license agreement for the right to use various trademarks
and tradenames (see Note 5) for impairment on a quarterly basis. FICC recognizes
an impairment has occurred when the carrying value of the license agreement
exceeds the estimated future cash flows of the trademarked products.
FICC reviews each restaurant property quarterly to determine which
properties should be disposed of. This determination is made based on poor
operating results, deteriorating property values and other factors. FICC
recognizes an impairment has occurred when the carrying value of property
exceeds its estimated fair value, which is estimated based on FICC's experience
with similar properties and local market conditions, less costs to sell. (see
Note 6).
RESTAURANT CLOSURE COSTS --
Restaurant closure costs are recognized when a decision is made to close a
restaurant. Restaurant closure costs include the cost of writing-down the
carrying amount of a restaurant's assets to 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 six months ended June 30, 1996 and June 29, 1997,
advertising expense was approximately $15,430,000, $17,459,000, $18,231,000,
$9,168,000 and $9,008,000, respectively.
F-10
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS --
Effective December 30, 1996, FICC adopted SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities",
which had no effect. This statement requires that after a transfer of financial
assets, an entity should recognize all financial assets and servicing assets it
controls and liabilities it has incurred, derecognize financial assets when
control has been surrendered, and derecognize liabilities when extinguished.
This statement also provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings and is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share", which establishes new standards for
computing and presenting earnings per share. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997 and
earlier application is not permitted. Upon adoption, all prior period earnings
per share data presented will be restated.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting and display of comprehensive
income (net income (loss) together with other non-owner changes in equity) and
its components in a full set of general purpose financial statements. SFAS No.
130 is effective for financial statements issued for periods ending after
December 15, 1997 and earlier application is permitted. Comprehensive income is
not materially different than net income (loss) for all periods presented.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which requires disclosures for each
segment of an enterprise that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. SFAS No. 131 is effective for financial
statements issued for periods ending after December 15, 1997 and earlier
application is encouraged. Under the terms of the new standard, FICC will report
segment information for restaurant and retail operations when material.
RECLASSIFICATIONS --
Certain prior year amounts have been reclassified to conform with current
year presentation.
INTERIM FINANCIAL INFORMATION --
The accompanying financial statements as of June 29, 1997 and for the six
months ended June 30, 1996 and June 29, 1997 are unaudited, but, in the opinion
of management, include all adjustments which are necessary for a fair
presentation of the financial position and the results of operations and cash
flows of FICC. Such adjustments consist solely of normal recurring accruals.
Operating results for the six months ended June 30, 1996 and June 29, 1997 are
not necessarily indicative of the results that may be expected for the entire
year due to the seasonality of the business. Historically, higher revenues and
profits are experienced during the second and third fiscal quarters.
F-11
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ACQUISITION OF RESTAURANT INSURANCE CORPORATION
On March 19, 1997, FICC acquired all of the outstanding shares of common
stock of Restaurant Insurance Corporation ("RIC"), a Vermont corporation, from
TRC for cash of $1,300,000 and a $1,000,000 promissory note payable to TRC
bearing interest at an annual rate of 8.25%. The promissory note and accrued
interest of approximately $1,024,000 was paid on June 30, 1997. RIC, which was
formed in 1993, reinsures certain FICC risks (i.e. workers' compensation,
employer's liability, general liability and product liability) from a third
party insurer (see Note 12).
The acquisition was accounted for as a purchase. Accordingly, the results of
operations for RIC for the period subsequent to March 20, 1997 are included in
the accompanying consolidated financial statements. No pro forma information is
included since the effect of the acquisition is not material. The purchase price
was allocated to net assets acquired based on the estimated fair market values
at the date of acquisition. The purchase price was allocated as follows (in
thousands):
<TABLE>
<S> <C>
Cash and Cash Equivalents......................................... $ 2,265
Restricted Cash and Investments................................... 12,061
Receivables and Other Assets...................................... 3,090
Loss Reserves..................................................... (13,231)
Other Liabilities................................................. (1,885)
---------
$ 2,300
---------
---------
</TABLE>
5. INTANGIBLE ASSETS AND DEFERRED COSTS
Intangible assets and deferred costs net of accumulated amortization as of
December 31, 1995, December 29, 1996 and June 29, 1997 were (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ ---------
<S> <C> <C> <C>
License agreement for the right to use
various trademarks and tradenames amortized over a
40 year life on a straight line basis............... $ 15,231 $ 14,764 $ 14,531
Deferred financing costs amortized over
the terms of the loans on an effective yield
basis............................................... 1,376 1,255 771
Deferred financing costs related to pending
registration statement (see Note 17)................ -- -- 73
------------ ------------ ---------
$ 16,607 $ 16,019 $ 15,375
------------ ------------ ---------
------------ ------------ ---------
</TABLE>
In November 1994, FHC filed a Form S-1 Registration Statement and in 1995
elected not to proceed with the registration. Accordingly, previously deferred
costs totaling $3,346,000 related to this registration were expensed during the
year ended December 31, 1995.
6. WRITE-DOWN OF PROPERTY AND EQUIPMENT
At December 31, 1995, December 29, 1996 and June 29, 1997, there were 81, 50
and 49 restaurant properties held for disposition, respectively. The restaurants
held for disposition generally have poor operating results, deteriorating
property values or other adverse factors. FICC determined that the
F-12
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. WRITE-DOWN OF PROPERTY AND EQUIPMENT (CONTINUED)
carrying values of certain of these properties exceeded their estimated fair
values less costs to sell. Accordingly, during the year ended December 31, 1995,
the carrying values of 51 properties were reduced by an aggregate of $4,006,000;
during the year ended December 29, 1996, the carrying values of 6 properties
were reduced by an aggregate of $227,000 and during the six months ended June
29, 1997, the carrying values of 6 properties were reduced by an aggregate of
$347,000. FICC plans to dispose of the 49 properties by December 31, 1998. The
operating loss, prior to depreciation expense which is not reported at the
restaurant level, for the properties held for disposition was $1,972,000,
$1,129,000 and $673,000 for the years ended December 31, 1995 and December 29,
1996 and the six months ended June 29, 1997, respectively. The carrying value of
the properties held for disposition at December 31, 1995, December 29, 1996 and
June 29, 1997 was approximately $7,491,000, $4,642,000 and $3,876,000,
respectively.
7. DEBT
Effective January 1, 1991, FICC and its lenders entered into an Amended and
Restated Revolving Credit and Term Loan Agreement (the "Credit Agreement"), and
effective January 1, 1996, the Credit Agreement was again amended and restated.
In connection with the January 1, 1996 amendment (the "Amendment"), revolving
credit loans and term loans totaling $373,622,000 at December 31, 1995 were
converted to revolving credit loans of $38,549,000 and term loans of
$335,073,000. For the year ended December 29, 1996 and the six months ended June
29, 1997, interest was accrued on the revolving credit and term loans at an
annual rate of 11%, with .5% of the accrued interest which is not currently
payable being accrued and classified as other long-term liabilities in the
accompanying consolidated balance sheet. The deferred interest will be waived if
the revolving credit and term loans are repaid in full in cash on or before the
due date. The deferred interest as of June 29, 1997 was approximately
$2,842,000.
Under the terms of the Amendment, as of December 29, 1996, principal of
$371,678,000 is due on May 1, 1998. FICC may extend the due date to May 1, 1999
by paying a fee equal to 1% of the aggregate of the revolver commitment of
$50,000,000, the letters of credit commitment (see below) and the principal
amount of the term loan. FICC does not expect to generate sufficient cash flow
to make all of the principal payments required by May 1, 1998; therefore, FICC
will exercise its option to extend the due date to May 1, 1999 if the pending
recapitalization is not consummated (see Note 17). Accordingly, these loans are
classified as long-term in the accompanying consolidated financial statements.
In connection with the Amendment, in March 1996 the lenders received
1,090,972 shares of FICC's Class B Common Stock, which represented 50% of the
issued and outstanding equity of FICC. As a result of the issuance of stock
under the Management Stock Plan (see Note 13) and the exercise of certain
warrants (see Note 1), additional shares of FICC's Class B Common Stock were
issued to the lenders in 1996 to maintain their minimum equity interest in FICC
of 47.50% on a fully diluted basis in accordance with the Amendment. Total
shares issued to the lenders as of December 29, 1996 were 1,187,503. The
estimated fair market value of the shares issued of $50,000 was recorded as a
deferred financing cost during the year ended December 29, 1996. Prior to the
occurrence of a Special Rights Default (see below), lenders with limited voting
stock may elect two of the five members to FICC's board of directors. In the
event of a Special Rights Default, lenders with limited voting stock may appoint
two additional directors to FICC's board. Additionally, in the event of a
Special Rights Default, the lenders are entitled to receive additional shares of
FICC's limited voting common stock thereby increasing their equity interest in
FICC by 5% initially, with additional shares of limited voting common stock
issued quarterly thereafter for a maximum of eight quarters. Each quarterly
issuance of limited voting common stock would increase the
F-13
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
lenders' equity interest in FICC by 2.5%. A Special Rights Default occurs if (i)
FICC files for bankruptcy or enters into any insolvency proceeding, (ii) FICC
fails to pay principal or interest on the revolving credit and term loans when
due, (iii) FICC fails to comply with financial covenants for two consecutive
quarters, or (iv) certain other conditions relating to ownership of FICC's
subsidiaries and ownership of FICC are not met. As of June 29, 1997, a Special
Rights Default had not occurred.
Covenant violations prior to December 31, 1995 were waived by the lenders.
The Amendment provided for new covenant requirements effective December 31, 1995
(see below). Under the terms of the Amendment, covenants require attainment of
minimum earnings, as defined, debt service coverage ratios, as defined, and
minimum net worth, as defined. Restrictions also have been placed on capital
expenditures, asset dispositions, proceeds from asset dispositions, investments,
pledging of assets, sale and leasebacks and the incurrence of additional
indebtedness. The covenant requirements, as defined under the Amendment, and
actual ratios/amounts as of and for the twelve months ended December 31, 1995
and December 29, 1996 and as of and for the twelve months ended June 29, 1997
were:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 29, 1996 JUNE 29, 1997
-------------------------- -------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
REQUIREMENT ACTUAL REQUIREMENT ACTUAL REQUIREMENT ACTUAL
------------ ------------ ------------ ------------ ------------ -------------
Consolidated Earnings Before
Interest, Taxes, Depreciation
and Amortization, as defined.... $ 55,000,000 $ 58,094,000 $ 58,000,000 $ 64,001,000 $ 58,000,000 $ 71,921,000
Ratio of Consolidated Adjusted
EBITDA to Consolidated Debt
Service Payments................ .95 to 1 1.11 to 1 .73 to 1 .99 to 1 .72 to 1 1.12 to 1
Consolidated Net Worth............ $(168,000,000) $(165,534,000) $(181,000,000) $(173,156,000) $(196,000,000) $(175,534,000)
</TABLE>
FICC has a commitment from a bank to issue letters of credit totaling
$5,815,000 through May 1, 1998, or through May 1, 1999 if the Credit Agreement
is extended. As of December 31, 1995, December 29, 1996 and June 29, 1997, total
letters of credit issued were $5,815,000, $4,390,000 and $3,445,000,
respectively. An annual fee of 2% is charged on the maximum drawing amount of
each letter of credit issued. During the years ended January 1, 1995, December
31, 1995 and December 29, 1996 and the six months ended June 30, 1996 and June
29, 1997, there were no drawings against the letters of credit. Under the terms
of the Amendment, interest will be charged at 13.5%, compounded monthly, on
drawings against letters of credit issued.
F-14
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
Debt at December 31, 1995, December 29, 1996 and June 29, 1997 consisted of
the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ ----------
<S> <C> <C> <C>
Revolving Credit Loan, 12% through December 31, 1995
and 11% thereafter; due May 1, 1998 unless FICC
extends to May 1, 1999............................ $ 210,984 $ 36,605 $ 36,254
Term Loan, 8.5% compounded monthly through December
31, 1995 and 11% thereafter; due May 1, 1998
unless FICC extends to May 1, 1999................ 162,638 335,073 335,073
Insurance Premium Finance Loans, 5.55%-8.35%; due
August 15, 1997-July 10, 1998..................... 3,177 1,259 1,923
Other............................................... 174 147 1,132
------------ ------------ ----------
376,973 373,084 374,382
Less: Current Portion............................... 3,204 1,289 2,953
------------ ------------ ----------
Total Long-Term Debt................................ $ 373,769 $ 371,795 $ 371,429
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
The revolving credit and term loans are collateralized by a lien on
substantially all of FICC's assets and by a pledge of FICC's shares of its
subsidiaries' stock.
At December 29, 1996, aggregate future annual principal payments of debt,
exclusive of capitalized leases (see Note 8), were: 1997, $1,289,000; 1998,
$33,000; 1999, $371,715,000; and 2000, $47,000. The payments for the revolving
credit and term loans are reflected in 1999, since, as discussed above, FICC
will not repay the loans in 1998.
At December 31, 1995, December 29, 1996 and June 29, 1997, the unused
portion of the revolving credit loan was $11,451,000, $13,395,000 and
$13,746,000, respectively. A 0.5% annual commitment fee was charged on the
unused portions of the revolver and letters of credit commitments. The total
average unused portions of the revolver and letters of credit commitments was
$10,685,000, $12,796,000 and $8,471,000 for the years ended December 31, 1995
and December 29, 1996 and the six months ended June 29, 1997, respectively.
In October 1994, FICC paid a fee of approximately $3,582,000 to the lenders
to facilitate a refinancing of the obligations under the Credit Agreement. This
amount was included in interest expense for the year ended January 1, 1995
since, under the proposed refinancing, the Credit Agreement would have been
repaid.
FICC's revolving credit and term loans are not publicly traded and prices
and terms of the few transactions which were completed are not available to
FICC. Since no information is available on prices of completed transactions, the
terms of the loans are complex and the relative risk involved is difficult to
evaluate, management believes it is not practicable to estimate the fair value
of the revolving credit and term loans without incurring excessive costs.
Additionally, since the letters of credit are associated with the
F-15
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
revolving credit and term loan agreement, management believes it is also not
practicable to estimate the fair value of the letters of credit without
incurring excessive costs.
8. LEASES
As of December 31, 1995, December 29, 1996 and June 29, 1997, FICC operated
735, 707 and 700 restaurants, respectively. These operations were conducted in
premises owned or leased as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
----------------- ----------------- -----------
<S> <C> <C> <C>
Land and Building Owned................................ 313 296 294
Land Leased and Building Owned......................... 164 161 161
Land Leased and Building Leased........................ 258 250 245
--- --- ---
735 707 700
--- --- ---
--- --- ---
</TABLE>
Restaurants in shopping centers are generally leased for a term of 10 to 20
years. Leases of freestanding restaurants generally are for a 15 or 20 year
lease term and provide for renewal options for three or four five-year renewals.
Most leases provide for minimum payments plus a percentage of sales in excess of
stipulated amounts. Additionally, FICC leases certain restaurant equipment over
lease terms from three to seven years.
Future minimum lease payments under non-cancellable leases with an original
term in excess of one year as of December 29, 1996 were (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR LEASES LEASES
- ------------------------------------------------------------------------ ----------- ---------
<S> <C> <C>
1997.................................................................... $ 13,366 $ 8,446
1998.................................................................... 12,524 6,445
1999.................................................................... 11,635 3,429
2000.................................................................... 10,277 2,354
2001.................................................................... 8,401 1,815
2002 and thereafter..................................................... 26,096 7,163
----------- ---------
Total Minimum Lease Payments............................................ $ 82,299 29,652
-----------
Less: Amounts Representing Interest..................................... 9,117
---------
Present Value of Minimum Lease Payments................................. $ 20,535
---------
---------
</TABLE>
F-16
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LEASES (CONTINUED)
Capital lease obligations reflected in the accompanying consolidated balance
sheets have effective rates ranging from 8% to 12% and are payable in monthly
installments through 2016. Maturities of such obligations at December 29, 1996
were (in thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
- --------------------------------------------------------------- ---------
<S> <C>
1997........................................................... $ 6,353
1998........................................................... 4,967
1999........................................................... 2,371
2000........................................................... 1,539
2001........................................................... 1,187
2002 and thereafter............................................ 4,118
---------
Total.................................................... $ 20,535
---------
---------
</TABLE>
Rent expense included in the accompanying consolidated financial statements
for operating leases was (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29, JUNE 30, JUNE 29,
1995 1995 1996 1996 1997
----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Minimum Rentals................. $ 14,767 $ 15,175 $ 16,051 $ 8,037 $ 8,102
Contingent Rentals.............. 2,003 2,012 1,918 735 710
----------- ------------ ------------ ----------- -----------
Total..................... $ 16,770 $ 17,187 $ 17,969 $ 8,772 $ 8,812
----------- ------------ ------------ ----------- -----------
----------- ------------ ------------ ----------- -----------
</TABLE>
9. INCOME TAXES
Prior to March 23, 1996 (see below), FICC and its subsidiaries were included
in the consolidated Federal income tax return of TRC. Under a tax sharing
agreement between TRC and FICC (formerly FHC) (the "TRC/FICC Agreement"), FICC
and its subsidiaries (the "FICC Group") were obligated to pay TRC its allocable
share of the TRC group tax liability, determined as if the FICC Group were
filing a separate consolidated income tax return.
On March 23, 1996, TRC distributed its shares of FICC's voting common stock
to TRC's shareholders (see Note 1), the FICC Group deconsolidated from the TRC
group and the TRC/FICC Agreement expired. In addition, on March 26, 1996, shares
of Class B Common Stock were issued to FICC's lenders which resulted in an
ownership change pursuant to Internal Revenue Code Section 382.
As a result of the deconsolidation from TRC, the FICC Group is required to
file two short year Federal income tax returns for 1996. For the period from
January 1, 1996 through March 23, 1996, the FICC Group was included in the
consolidated Federal income tax return of TRC and for the period from March 24,
1996 through December 29, 1996, the FICC Group will file a consolidated return
for its group only.
Under the TRC/FICC Agreement, NOLs generated by the FICC Group and utilized
or allocated to TRC were available to the FICC Group on a separate company basis
to carryforward. Pursuant to the TRC/FICC Agreement, as of March 23, 1996,
$99,321,000 of carryforwards would have been available to the FICC Group to
offset future taxable income of the FICC Group. However, as a result of the
deconsolidation from TRC, the deferred tax asset of approximately $23 million
related to the $65,034,000
F-17
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
of NOLs utilized by TRC was written off. Approximately $19.0 million of the
write-off was recorded in fiscal 1995, which amount approximated the benefit of
NOLs utilized by TRC as of December 31, 1995, and the balance was recorded in
fiscal 1996, which amount approximated the benefit of the NOLs utilized by TRC
for the period from January 1, 1996 to the deconsolidation. Additionally, as a
result of the change in ownership and Section 382 limitation, a valuation
allowance of approximately $10 million has been placed on $29,686,000 of the
$34,287,000 remaining Federal NOL carryforwards generated for the period prior
to March 23, 1996. The amount of pre-change NOLs not reserved for represents the
amount of NOLs which have become available as a result of FICC realizing gains
which were unrealized as of the date of the ownership change. FICC will reduce
the valuation allowance on pre-change NOLs if they become available to FICC via
realization of additional unrealized gains. FICC does not believe that it is
more likely than not that such NOLs will become available, and therefore the
valuation allowance is appropriate. For the period from March 23, 1996 to
December 29, 1996, FICC generated a net operating loss carryforward of
$5,765,000. Due to restrictions similar to Section 382 in most of the states
FICC operates in and short carryforward periods, FICC has fully reserved for all
state NOL carryforwards generated through March 26, 1996 as of December 29,
1996.
The benefit from (provision for) income taxes for the years ended January 1,
1995, December 31, 1995 and December 29, 1996 and the six months ended June 30,
1996 and June 29, 1997 was as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29, JUNE 30, JUNE 29,
1995 1995 1996 1996 1997
----------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current Benefit (Provision)
Federal................................. $ 454 $ -- $ -- $ -- $ --
State................................... -- -- -- -- --
Foreign................................. -- -- (58) -- --
----------- ------------ ------ ----------- -----------
Total Current Benefit (Provision)......... 454 -- (58) -- --
----------- ------------ ------ ----------- -----------
Deferred Benefit (Provision)
Federal................................. 3,608 (27,465) 5,126 5,332 3,224
State................................... 599 (5,954) 800 822 --
Foreign................................. -- -- -- -- --
----------- ------------ ------ ----------- -----------
Total Deferred Benefit (Provision)........ 4,207 (33,419) 5,926 6,154 3,224
----------- ------------ ------ ----------- -----------
Total Benefit From (Provision
For) Income Taxes....................... $ 4,661 $ (33,419) $ 5,868 $ 6,154 $ 3,224
----------- ------------ ------ ----------- -----------
----------- ------------ ------ ----------- -----------
</TABLE>
F-18
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
A reconciliation of the differences between the statutory Federal income tax
rate and the effective income tax rates follows:
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
------------- --------------- -----------------
<S> <C> <C> <C>
Statutory Federal Income Tax Rate.................... 35% 35 % 35 %
State Income Taxes Net of Federal Benefit............ 17 11 14
Write-off of Intercompany NOL Carryforwards and Tax
Credits............................................ -- (85 ) (13 )
Increase (Decrease) in Federal NOL Valuation
Allowance.......................................... -- (57 ) 10
Increase in State NOL Valuation Allowance............ (4 ) (30 ) (8 )
Tax Credits.......................................... 8 3 3
Nondeductible Expenses............................... (2 ) (1 ) (1 )
Other................................................ -- (8 ) 3
-- --
---
Effective Tax Rate................................... 54 % (132 )% 43%
-- --
-- --
---
---
</TABLE>
Deferred tax assets and liabilities are determined as the difference between
the financial statement and tax bases of the assets and liabilities multiplied
by the enacted tax rates in effect for the year in which the differences are
expected to reverse. Significant deferred tax assets (liabilities) at December
31, 1995 and December 29, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
Property and Equipment........................................... $ (51,903) $ (50,866)
Federal and State NOL Carryforwards (net of valuation allowance
of $23,026 and $21,220 at December 31, 1995 and December 29,
1996, respectively)............................................ -- 4,355
Insurance Reserves............................................... 6,311 5,788
Inventories...................................................... 2,450 1,862
Accrued Pension.................................................. 3,272 4,388
Intangible Assets................................................ (3,600) (6,037)
Tax Credit Carryforwards......................................... -- 1,001
Other............................................................ 1,447 3,412
------------ ------------
Net Deferred Tax Liability....................................... $ (42,023) $ (36,097)
------------ ------------
------------ ------------
</TABLE>
At December 31, 1995, December 29, 1996 and June 29, 1997, the
classification of deferred taxes was as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ ----------
<S> <C> <C> <C>
Current Asset........................................ $ 9,885 $ 12,375 $ 12,381
Long-term Liability.................................. (51,908) (48,472) (44,997)
------------ ------------ ----------
$ (42,023) $ (36,097) $ (32,616)
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
F-19
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS
Substantially all of the employees of FICC are covered by a non-contributory
defined benefit pension plan. Effective January 1, 1992, the plan was changed to
a defined benefit cash balance plan. Plan benefits are based on years of service
and participant compensation during their years of employment. FICC accrues the
cost of its pension plan over its employees' service lives.
Under the cash balance plan, a nominal account for each participant is
established. The plan administrator makes an annual contribution to each account
based on current wages and years of service. Each account earns a specified rate
of interest which is adjusted annually.
FICC's policy is to make contributions to the plan which provide for
benefits and pay plan expenses. Contributions are intended to provide not only
for benefits attributable to service to date, but also for those benefits
expected to be earned in the future.
For the years ended January 1, 1995, December 31, 1995 and December 29,
1996, net pension expense was (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Service Cost......................................... $ 4,011 $ 3,877 $ 4,202
Interest Cost........................................ 5,106 5,420 5,781
Actual Loss (Gain) on Plan Assets.................... 5,180 (17,438) (9,428)
Deferral of Asset (Loss) Gain........................ (11,725) 10,850 2,377
Net Amortization of Deferral of Asset Gain........... (548) (770) (651)
----------- ------------ ------------
Net Pension Expense.................................. $ 2,024 $ 1,939 $ 2,281
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
The funded status of the plan as of December 31, 1995 and December 29, 1996
was (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
Actuarial Present Value of Benefit Obligations:
Vested......................................................... $ 49,581 $ 56,752
Non-vested..................................................... 1,081 1,316
------------ ------------
Accumulated Benefit Obligations.................................. $ 50,662 $ 58,068
------------ ------------
------------ ------------
Projected Benefit Obligations.................................... $ 69,188 $ 76,768
Plan Assets at Market Value...................................... 86,477 90,626
------------ ------------
Plan Assets in Excess of Projected Benefit Obligation............ 17,289 13,858
Unrecognized Prior Service Costs................................. (3,486) (3,077)
Unrecognized Net Gain............................................ (21,785) (21,044)
------------ ------------
Accrued Pension Liability........................................ $ (7,982) $ (10,263)
------------ ------------
------------ ------------
</TABLE>
For the years ended January 1, 1995, December 31, 1995 and December 29,
1996, the weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 8.50%, 8.00% and 7.75%,
respectively. The rate of annual increase in future compensation levels used
ranged from 5.0% to 6.5% for the year ended January 1, 1995, from 4.5% to 6.0%
for the year ended
F-20
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
December 31, 1995 and 4.0% to 5.5% for the year ended December 29, 1996,
depending on the employee group. The expected long-term rate of return on plan
assets was 9.5% for each of the three years.
Effective December 30, 1996, FICC changed its method of calculating the
market-related value of plan assets used in determining the return-on-asset
component of annual pension expense and the cumulative net unrecognized gain or
loss subject to amortization. Under the previous accounting method, the
calculation of the market-related value of assets reflected amortization of the
actual realized and unrealized capital return on assets on a straight-line basis
over a five-year period. Under the new method, the calculation of the
market-related value of assets reflects the long-term rate of return expected by
FICC and amortization of the difference between the actual return (including
capital, dividends and interest) and the expected return over a five-year
period. FICC believes the new method is widely used in practice and preferable
because it results in calculated plan asset values that more closely approximate
fair value, while still mitigating the effect of annual market-value
fluctuations. Under both methods, only the cumulative net unrecognized gain or
loss which exceeds 10% of the greater of the projected benefit obligation or the
market-related value of plan assets is subject to amortization. This change
resulted in a noncash benefit for the six months ended June 29, 1997 of
$2,236,000 (net of taxes of $1,554,000) which represents the cumulative effect
of the change related to years prior to fiscal 1997 and $303,000 (net of taxes
of $211,000) in lower pension expense related to the six months ended June 29,
1997 as compared to the previous accounting method. Had this change been applied
retroactively, pension expense would have been reduced by $729,000, $879,000 and
$946,000 for the years ended January 1, 1995, December 31, 1995 and December 29,
1996, respectively.
FICC's Employee Savings and Investment Plan (the "Plan") covers all eligible
employees and is qualified under Section 401(k) of the Internal Revenue Code.
For the years ended January 1, 1995, December 31, 1995 and December 29, 1996,
FICC made discretionary matching contributions at the rate of 75% of a
participant's first 2% of his/her contributions and 50% of a participant's next
2% of his/her contributions. All employee contributions are fully vested.
Employer contributions are vested at the completion of five years of service or
at retirement, death, disability or termination at age 65 or over, as defined by
the Plan. Contribution and administrative expenses for the Plan were
approximately $1,032,000, $1,086,000 and $1,002,000 for the years ended January
1, 1995, December 31, 1995 and December 29, 1996, respectively.
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
FICC provides health care and life insurance benefits to certain groups of
employees upon retirement. Eligible employees may continue their coverages if
they are receiving a pension benefit, are 55 years of age, and have completed 10
years of service. The plan requires contributions for health care coverage from
participants who retired after September 1, 1989. Life insurance benefits are
non-contributory. The plan is not funded.
F-21
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
FICC accrues the cost of postretirement benefits over the years employees
provide services to the date of their full eligibility for such benefits. The
components of the net postretirement benefit cost for the years ended January 1,
1995, December 31, 1995 and December 29, 1996 were (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, DECEMBER 31, DECEMBER 29,
1995 1995 1996
------------- --------------- ---------------
<S> <C> <C> <C>
Service Cost of Benefits Earned...................... $ 108 $ 105 $ 125
Interest Cost on Accumulated Postretirement Benefit
Obligation, net of Amortization.................... 405 478 374
----- ----- -----
Net Postretirement Benefit Expense................... $ 513 $ 583 $ 499
----- ----- -----
----- ----- -----
</TABLE>
The postretirement benefit liability as of December 31, 1995 and December
29, 1996 included the following components (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------- -------------
<S> <C> <C>
Actuarial Present Value of Postretirement Benefit Obligation:
Retirees..................................................... $ 4,267 $ 3,837
Other fully eligible plan participants....................... 428 358
Other active plan participants............................... 1,480 1,514
------ ------
Accumulated Postretirement Benefit Obligation.................... 6,175 5,709
Plan Changes..................................................... 1,175 1,113
Unrecognized Net (Loss) Gain..................................... (293) 328
------ ------
Postretirement Benefit Liability................................. $ 7,057 $ 7,150
------ ------
------ ------
</TABLE>
The discount rate used to determine the accumulated postretirement benefit
obligation was 8.50%, 8.00% and 7.75% for the years ended January 1, 1995,
December 31, 1995 and December 29, 1996, respectively. The assumed health care
cost trend rate used to measure the accumulated postretirement benefit
obligation was 14% gradually declining to 6% in 2000 and thereafter for the year
ended January 1, 1995, 11.5% gradually declining to 5.5% in 2000 and thereafter
for the year ended December 31, 1995 and 9.25% gradually declining to 5.25% in
2000 and thereafter for the year ended December 29, 1996. A one-percentage-point
increase in the assumed health care cost trend rate would have increased the
postretirement benefit expense by approximately $56,000, $55,000 and $49,000,
and would have increased the accumulated postretirement benefit obligation by
approximately $484,000, $478,000 and $411,000 for the years ended January 1,
1995, December 31, 1995 and December 29, 1996, respectively.
FICC increased the required contributions from participants who retired
after July 31, 1994, for health coverage. This and other plan changes are being
amortized over the expected remaining employee service period of active plan
participants.
12. INSURANCE RESERVES
At December 31, 1995, December 29, 1996 and June 29, 1997, insurance
reserves of approximately $20,847,000, $16,940,000 and $28,937,000,
respectively, had been recorded. Insurance reserves at June 29,
F-22
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INSURANCE RESERVES (CONTINUED)
1997 included RIC's reserve for FICC's insurance liabilities of approximately
$13,044,000. Reserves at December 31, 1995, December 29, 1996 and June 29, 1997
also included accruals related to postemployment benefits and postretirement
benefits other than pensions. While management believes these reserves are
adequate, it is reasonably possible that the ultimate liabilities will exceed
such estimates.
Classification of the reserves was as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
------------ ------------ ---------
<S> <C> <C> <C>
Current............................................... $ 6,605 $ 3,973 $ 6,927
Long-term............................................. 14,242 12,967 22,010
------------ ------------ ---------
Total............................................. $ 20,847 $ 16,940 $ 28,937
------------ ------------ ---------
------------ ------------ ---------
</TABLE>
Following is a summary of the activity in the insurance reserves for the
years ended January 1, 1995, December 31, 1995 and December 29, 1996 and for the
six months ended June 29, 1997 (in thousands):
<TABLE>
<CAPTION>
JANUARY 1,
1995 DECEMBER 31, 1995 DECEMBER 29, 1996 JUNE 29, 1997
-------------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
Beginning balance........................... $ 24,977 $ 23,216 $ 20,847 $ 16,940
Provision................................... 11,727 11,336 8,363 4,872
Payments.................................... (13,488) (13,705) (12,270) (6,106)
Acquisition of RIC.......................... -- -- -- 13,231
------- ------- ------- -------------
Ending balance.............................. $ 23,216 $ 20,847 $ 16,940 $ 28,937
------- ------- ------- -------------
------- ------- ------- -------------
</TABLE>
13. STOCK PLANS
A Stock Rights Plan ("SRP") was adopted by FICC in 1991. Under the SRP,
certain eligible individuals were granted rights to purchase shares of voting
common stock of FICC for $.01 per share, subject to certain vesting,
anti-dilution and exercise requirements. As of December 31, 1995, the aggregate
number of shares which could have been issued under the SRP was 88,801 of which
41,316 rights were issued and vested. The estimated fair value of the rights
vested was not material and no compensation expense was recorded. On March 25,
1996, FICC established the Management Stock Plan ("MSP"). The MSP provided for
persons with rights granted under the SRP to waive their rights under such plan
and receive shares of FICC's Class A Common Stock. Accordingly, in April 1996,
all of the participants in the SRP made this election and the SRP rights then
outstanding were cancelled and 122,888 shares of Class A Common Stock were
issued, of which 61,650 were vested as of December 29, 1996. The estimated fair
value of the 20,334 additional shares vested in 1996 of $5,000 was recorded as
compensation expense in the year ended December 29, 1996. The remaining issued,
non-vested shares of 61,238 will vest based on the Company achieving certain
performance measurements. As of June 29, 1997, 27,113 additional shares are
available for grant under the MSP (see Note 17).
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation" which was adopted by FICC effective January 1, 1996.
SFAS No. 123 requires the measurement of the fair value of stock options or
warrants granted to be included in the statement of operations or that pro forma
information related to the fair value be disclosed in the notes to financial
statements. FICC has determined that it will continue to account for stock-based
compensation for employees under Accounting Principles Board Opinion No. 25
F-23
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK PLANS (CONTINUED)
and elect the disclosure-only alternative under SFAS No. 123. Since no options
were granted since January 2, 1995, the pro forma disclosures required by SFAS
No. 123 are not applicable.
14. RELATED PARTY TRANSACTIONS
In March 1996, the FICC pension plan acquired three restaurant properties
from FICC. The land, buildings and improvements were purchased by the plan at
their appraised value of $2,043,000 and are located in Connecticut, Vermont and
Virginia. Simultaneous with the purchase, the pension plan leased back the three
properties to FICC at an aggregate annual base rent of $214,000 for the first
five years and $236,000 for the following five years. The pension plan was
represented by independent legal and financial advisors. FICC realized a net
gain of approximately $675,000 on this transaction which is being amortized into
income over the initial ten year term of the lease.
FICC's Chairman and President is an officer of the general partner of
Perkins Family Restaurant L.P. ("PFR"), a subsidiary of TRC (formerly FICC's
majority shareholder). Three of FICC's directors are also directors of PFR. FICC
entered into subleases for certain land, buildings, and equipment with Perkins
Restaurants Operating Company, L.P. (Perkins), a subsidiary of TRC. During the
years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the six
months ended June 30, 1996 and June 29, 1997, rent expense related to the
subleases was approximately $245,000, $266,000, $278,000, $138,000 and $139,000,
respectively. Additionally, during the year ended January 1, 1995, FICC
purchased leasehold improvements and personal property at one of the locations
for approximately $303,000 from Perkins.
On March 19, 1997, FICC acquired all of the outstanding shares of common
stock of Restaurant Insurance Corporation ("RIC") from TRC (see Note 4). Prior
to the acquisition, RIC assumed, from a third party insurance company,
reinsurance premiums related to insurance liabilities of FICC of approximately
$7,046,000, $6,409,000 and $4,198,000 during the years ended January 1, 1995,
December 31, 1995 and December 29, 1996, respectively. In addition, RIC had
reserves of approximately $10,456,000, $12,830,000 and $13,038,000 related to
FICC claims at January 1, 1995, December 31, 1995 and December 29, 1996,
respectively.
In fiscal 1994, TRC Realty Co. (a subsidiary of TRC) entered into a ten year
operating lease for an aircraft, for use by both FICC and Perkins. FICC shares
equally with Perkins in reimbursing TRC Realty Co. for leasing, tax and
insurance expenses. In addition, FICC also incurs actual usage costs. Total
expense for the years ended January 1, 1995, December 31, 1995 and December 29,
1996 and the six months ended June 30, 1996 and June 29, 1997 was approximately
$336,000, $620,000, $590,000, $276,000 and $316,000, respectively.
FICC purchased certain food products used in the normal course of business
from a division of Perkins. For the years ended January 1, 1995, December 31,
1995 and December 29, 1996 and the six months ended June 30, 1996 and June 29,
1997, purchases were approximately $1,335,000, $1,909,000, $1,425,000, $719,000
and $475,000, respectively.
TRC provided FICC with certain management services for which TRC was
reimbursed approximately $773,000, $785,000, $800,000, $400,000 and $412,000 for
the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the
six months ended June 30, 1996 and June 29, 1997, respectively. Expenses were
charged to FICC on a specific identification basis. FICC believes the allocation
method 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.
F-24
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
During the year ended December 29, 1996 and the six months ended June 30,
1996 and June 29, 1997, FICC paid approximately $69,000, $25,000 and $93,000,
respectively, for fees and other reimbursements to four of FICC's board of
directors members, two of whom represented FICC's lenders.
For the years ended January 1, 1995, December 31, 1995 and December 29, 1996
and the six months ended June 30, 1996 and June 29, 1997, FICC expensed
approximately $200,000, $763,000, $196,000, $96,000 and $100,000, respectively,
for fees paid to the lenders' agent bank. The expense for the year ended
December 31, 1995 included approximately $563,000 related to the filing of a
Form S-1 Registration Statement (see Note 5).
15. COMMITMENTS AND CONTINGENCIES
FICC is a party to various legal proceedings arising in the ordinary course
of business which management believes, after consultation with legal counsel,
will not have a material adverse effect on FICC's financial position or future
operating results.
As of December 29, 1996, FICC had commitments to purchase approximately
$50,587,000 of raw materials, food products and supplies used in the normal
course of business that cover periods of one to twelve months. Most of these
commitments are non-cancellable.
16. FRANCHISE AGREEMENT
On July 14, 1997, FICC entered into an agreement which granted a franchisee
exclusive rights to operate, manage and develop Friendly's full-service
restaurants in the franchising region of Maryland, Delaware, the District of
Columbia and northern Virginia (the "Agreement"). Pursuant to the Agreement, the
franchisee purchased certain assets and rights in 34 existing Friendly's
restaurants in this franchising region, has committed to open an additional 74
restaurants over the next six years and, subject to the fulfillment of certain
conditions, has further agreed to open 26 additional restaurants, for a total of
100 new restaurants in this franchising region over the next ten years. Proceeds
from the sale were approximately $8,238,000, of which $3,310,000 was recorded as
income in July 1997 ($860,000 represents initial franchise fees for the 34
initial restaurants), $500,000 relates to development rights and $930,000
represents franchise fees for certain of the additional restaurants described
above. The development and franchise fees received will be amortized into income
over the initial ten-year term of the Agreement and as additional restaurants
are opened, respectively. The proceeds were allocated between the assets sold
and the development rights by FICC and the franchisee based on the estimated
fair market values. As part of the Agreement, the franchisee will also manage 14
other Friendly's restaurants located in the same area with an option to acquire
these restaurants in the future. The franchisee is required by the terms of the
Agreement to purchase from FICC all of the frozen dessert products it sells in
the franchised restaurants.
17. PROPOSED INITIAL PUBLIC OFFERING (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").
F-25
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. PROPOSED INITIAL PUBLIC OFFERING (UNAUDITED) (CONTINUED)
The Company will amend its articles of organization in connection with the
Common Stock Offering to give effect to a 923.6442-for-1 split of Class A and
Class B Common Stock and increase the number of authorized shares. The
accompanying consolidated financial statements have been restated to reflect the
anticipated share split.
Pursuant to a stockholder rights plan FICC plans to adopt (the "Plan"),
prior to the consummation of the Common Stock Offering, the Board will declare a
dividend distribution of one purchase right (a "Right") for each outstanding
share of Common Stock. The Plan provides, in substance, that should any person
or group (other than Mr. Smith, Equitable, senior management and their
respective affiliates) acquire 15% or more of FICC's Common Stock, each Right,
other than Rights held by the acquiring person or group, would entitle its
holder to purchase a specified number of shares of Common Stock for 50% of their
then current market value. Unless a 15% acquisition has occurred, the Rights may
be redeemed by FICC at any time prior to the termination date of the Plan.
In connection with the offerings, the 27,113 shares in the MSP not
previously allocated will be allocated and immediately vested and the 61,238
shares previously issued but not vested will become vested (see Note 13).
Additionally, 775,742 shares of Class A Common Stock will be returned to FICC
from certain shareholders for no consideration. The shares are being returned in
accordance with an agreement with FICC's existing lenders as a condition to the
offerings. Of such shares, 100,742 shares will be issued to FICC's Chief
Executive Officer and vest immediately, 375,000 shares will be reserved for
issuance under a restricted stock option plan (the "Restricted Stock Plan") to
be adopted by FICC in connection with the offerings and 300,000 shares will be
issued to certain employees. The 300,000 shares issued under the Restricted
Stock Plan will vest immediately. In connection with the offerings, FICC also
plans to adopt a stock option plan.
Pro forma net loss per share amounts assume the issuance of 5,000,000
additional shares of Common Stock in connection with the Common Stock Offering
and the return of 375,000 net shares to FICC in connection with the offerings.
In addition, pursuant to the requirements of the Securities and Exchange
Commission, common stock to be issued at prices below the anticipated public
offering price during the twelve months immediately preceding the initial public
offering are to be included in the calculation of weighted average number of
common shares outstanding. Therefore, the 27,113 incremental shares issued to
management in connection with the offerings have been included in the pro forma
shares used in computing net loss per share. Historical net loss per share is
not presented in the accompanying consolidated financial statements, as such
amounts are not meaningful.
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION
FICC's obligation related to the $175,000,000 of Senior Notes (see Note 17)
are guaranteed fully and unconditionally by one of FICC's subsidiaries. There
are no restrictions on FICC's ability to obtain dividends or other distributions
of funds from this subsidiary except those imposed by applicable law. The
following supplemental financial information sets forth, on a condensed
consolidating basis, statements of operations, balance sheets and statements of
cash flows for Friendly Ice Cream Corporation ("the Parent 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
F-26
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
accompanying consolidating financial statements. Stockholders' equity (deficit),
total assets and net income (loss) of the Non-guarantor Subsidiaries are
insignificant to consolidated amounts for prior periods. Accordingly,
supplemental condensed consolidating financial information is not presented for
prior periods. Separate complete financial statements and other disclosures of
the respective Guarantor Subsidiary as of December 29, 1996 and June 29, 1997
and for the year and six months then ended is not presented because management
has determined that such information is not material to investors.
Investments in subsidiaries are accounted for by the Parent Company on the
equity method for purposes of the supplemental consolidating presentation.
Earnings of the subsidiaries are, therefore, reflected in the Parent Company's
investment accounts and earnings. The principal elimination entries eliminate
the Parent Company's investments in subsidiaries and intercompany balances and
transactions.
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 29, 1996
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues.................................... $ 650,024 $ 145 $ 638 $ -- $ 650,807
Costs and expenses:
Cost of sales............................. 191,578 51 327 -- 191,956
Labor and benefits........................ 209,145 115 -- -- 209,260
Operating expenses and write-down of
property and equipment.................. 143,046 -- 344 -- 143,390
General and administrative expenses....... 41,061 106 1,554 -- 42,721
Depreciation and amortization............. 32,953 6 20 -- 32,979
Interest expense.......................... 44,141 -- -- -- 44,141
---------- ----------- ------------- ------ ------------
Loss before benefit from (provision for)
income taxes and equity in net loss of
consolidated subsidiaries................. (11,900) (133) (1,607) -- (13,640)
Benefit from (provision for) income taxes... 5,594 (2) 276 -- 5,868
---------- ----------- ------------- ------ ------------
Loss before equity in net loss of
consolidated subsidiaries................. (6,306) (135) (1,331) -- (7,772)
Equity in net loss of consolidated
subsidiaries.............................. (1,466) -- -- 1,466 --
---------- ----------- ------------- ------ ------------
Net loss.................................... $ (7,772) $ (135) $ (1,331) $ 1,466 $ (7,772)
---------- ----------- ------------- ------ ------------
---------- ----------- ------------- ------ ------------
</TABLE>
F-27
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 29, 1996
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
<CAPTION>
Assets
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................. $ 17,754 $ 268 $ 604 $ -- $ 18,626
Trade accounts receivable.................. 4,765 -- 227 -- 4,992
Inventories................................ 14,796 24 325 -- 15,145
Deferred income taxes...................... 12,366 9 -- -- 12,375
Prepaid expenses and other current
assets................................... 4,805 -- 517 (3,664) 1,658
---------- ----- ------ ------------ ------------
Total current assets......................... 54,486 301 1,673 (3,664) 52,796
Investment in joint venture.................. -- -- 4,500 -- 4,500
Property and equipment, net.................. 285,460 522 179 -- 286,161
Intangibles and deferred costs, net.......... 16,019 -- -- -- 16,019
Investments in subsidiaries.................. 3,531 -- -- (3,531) --
Other assets................................. 650 -- -- -- 650
---------- ----- ------ ------------ ------------
Total assets................................. $ 360,146 $ 823 $ 6,352 $ (7,195) $ 360,126
---------- ----- ------ ------------ ------------
---------- ----- ------ ------------ ------------
<CAPTION>
Liabilities and Stockholders' Equity
(Deficit)
<S> <C> <C> <C> <C> <C>
Current liabilities:
Current maturities of long-term
obligations.............................. $ 7,642 $ -- $ -- $ -- $ 7,642
Accounts payable........................... 20,773 -- -- -- 20,773
Accrued expenses........................... 44,780 141 3,824 (3,664) 45,081
---------- ----- ------ ------------ ------------
Total current liabilities.................... 73,195 141 3,824 (3,664) 73,496
Deferred income taxes........................ 48,793 11 (332) -- 48,472
Long-term obligations, less current
maturities................................. 385,977 -- -- -- 385,977
Other liabilities............................ 25,337 -- -- -- 25,337
Stockholders' equity (deficit)............... (173,156) 671 2,860 (3,531) (173,156)
---------- ----- ------ ------------ ------------
Total liabilities and stockholders' equity
(deficit).................................. $ 360,146 $ 823 $ 6,352 $ (7,195) $ 360,126
---------- ----- ------ ------------ ------------
---------- ----- ------ ------------ ------------
</TABLE>
F-28
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 29, 1996
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities.................................. $ 25,519 $ (38) $ 682 $ -- $ 26,163
---------- ----------- ------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment......... (24,043) -- (174) -- (24,217)
Proceeds from sales of property and
equipment................................. 8,409 -- -- -- 8,409
Investments in joint venture................ (4,500) -- -- -- (4,500)
Investments in consolidated subsidiaries.... (306) -- -- 306 --
---------- ----------- ------ ------------ ------------
Net cash used in investing activities......... (20,440) -- (174) 306 (20,308)
---------- ----------- ------ ------------ ------------
Cash flows from financing activities:
Contribution of capital..................... -- 306 -- (306) --
Proceeds from exercise of stock purchase
warrants.................................. 22 -- -- -- 22
Proceeds from borrowings.................... 48,196 -- -- -- 48,196
Repayments of long-term obligations......... (59,215) -- -- -- (59,215)
---------- ----------- ------ ------------ ------------
Net cash (used in) provided by financing
activities.................................. (10,997) 306 -- (306) (10,997)
---------- ----------- ------ ------------ ------------
Effect of exchange rate changes on cash....... 5 -- 73 -- 78
---------- ----------- ------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents................................. (5,913) 268 581 -- (5,064)
Cash and cash equivalents, beginning of
period...................................... 23,667 -- 23 -- 23,690
---------- ----------- ------ ------------ ------------
Cash and cash equivalents, end of period...... $ 17,754 $ 268 $ 604 $ -- $ 18,626
---------- ----------- ------ ------------ ------------
---------- ----------- ------ ------------ ------------
Supplemental disclosures:
Interest paid............................... $ 36,000 $ -- $ -- $ -- $ 36,000
Capital lease obligations incurred.......... 5,923 28 -- -- 5,951
Capital lease obligations terminated........ 128 -- -- -- 128
Issuance of common stock to lenders......... 50 -- -- -- 50
</TABLE>
F-29
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 29, 1997
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues..................................... $ 322,530 $ -- $ 298 $ -- $ 322,828
Costs and expenses:
Cost of sales.............................. 91,971 -- 215 -- 92,186
Labor and benefits......................... 104,898 -- -- -- 104,898
Operating expenses and write-down of
property and equipment................... 71,863 -- (232) -- 71,631
General and administrative expenses........ 21,961 142 492 -- 22,595
Depreciation and amortization.............. 16,401 -- -- -- 16,401
Interest expense (income).................. 22,268 -- (30) -- 22,238
Equity in net loss of joint venture........ -- -- 743 -- 743
---------- ----- ------------- ------------ ------------
(Loss) income before benefit from (provision
for) income taxes, cumulative effect of
change in accounting principle and equity
in net loss of consolidated subsidiaries... (6,832) (142) (890) -- (7,864)
Benefit from (provision for) income taxes.... 3,343 -- (119) -- 3,224
---------- ----- ------------- ------------ ------------
(Loss) income before cumulative
effect of change in accounting
principle and equity in net loss of
consolidated subsidiaries.................. (3,489) (142) (1,009) -- (4,640)
Cumulative effect of change in accounting
principle.................................. 2,236 -- -- -- 2,236
---------- ----- ------------- ------------ ------------
Loss before equity in net loss of
consolidated subsidiaries.................. (1,253) (142) (1,009) -- (2,404)
Equity in net loss of consolidated
subsidiaries............................... (1,151) -- -- 1,151 --
---------- ----- ------------- ------------ ------------
Net loss..................................... $ (2,404) $ (142) $ (1,009) $ 1,151 $ (2,404)
---------- ----- ------------- ------------ ------------
---------- ----- ------------- ------------ ------------
</TABLE>
F-30
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 29, 1997
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents................. $ 15,550 $ 202 $ 1,147 $ -- $ 16,899
Restricted cash and investments........... -- -- 4,000 -- 4,000
Trade accounts receivable................. 6,659 -- 397 -- 7,056
Inventories............................... 16,996 -- 494 -- 17,490
Deferred income taxes..................... 12,375 -- 6 -- 12,381
Prepaid expenses and other current
assets.................................. 10,053 -- 1,311 (4,056) 7,308
----------- ----------- ------------- ------------ ------------
Total current assets........................ 61,633 202 7,355 (4,056) 65,134
Restricted cash and investments............. -- -- 7,889 -- 7,889
Investment in joint venture................. -- -- 3,757 -- 3,757
Property and equipment, net................. 279,043 -- 222 -- 279,265
Intangibles and deferred costs, net......... 15,375 -- -- -- 15,375
Investments in subsidiaries................. 4,275 -- -- (4,275) --
Other assets................................ 475 -- 2,147 (900) 1,722
----------- ----------- ------------- ------------ ------------
Total assets................................ $ 360,801 $ 202 $ 21,370 $ (9,231) $ 373,142
----------- ----------- ------------- ------------ ------------
----------- ----------- ------------- ------------ ------------
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Current maturities of long-term
obligations............................. $ 8,356 $ -- $ -- $ (400) $ 7,956
Accounts payable.......................... 26,272 -- -- -- 26,272
Accrued expenses.......................... 45,531 2 8,464 (3,656) 50,341
----------- ----------- ------------- ------------ ------------
Total current liabilities................... 80,159 2 8,464 (4,056) 84,569
Deferred income taxes....................... 47,015 -- (213) -- 46,802
Long-term obligations, less current
maturities................................ 386,522 -- -- (900) 385,622
Other liabilities........................... 22,639 -- 9,044 -- 31,683
Stockholders' equity (deficit).............. (175,534) 200 4,075 (4,275) (175,534)
----------- ----------- ------------- ------------ ------------
Total liabilities and stockholders' equity
(deficit)................................. $ 360,801 $ 202 $ 21,370 $ (9,231) $ 373,142
----------- ----------- ------------- ------------ ------------
----------- ----------- ------------- ------------ ------------
</TABLE>
F-31
<PAGE>
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 29, 1997
(In thousands)
<TABLE>
<CAPTION>
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities.................................. $ 10,283 $ (208) $ (450) $ -- $ 9,625
---------- ----------- ------------- ----- ------------
Cash flows from investing activities:
Purchases of property and equipment......... (8,767) -- (43) -- (8,810)
Proceeds from sales of property and
equipment................................. 919 -- -- -- 919
Proceeds from sales and maturities of
investment securities..................... -- -- 73 -- 73
Cash (paid) received in acquisition of
Restaurant Insurance Corporation.......... (1,300) -- 2,265 -- 965
Advances to joint venture................... (1,400) -- -- -- (1,400)
Investments in consolidated subsidiaries.... (142) -- -- 142 --
---------- ----------- ------------- ----- ------------
Net cash used in investing activities......... (10,690) -- 2,295 142 (8,253)
---------- ----------- ------------- ----- ------------
Cash flows from financing activities:
Contribution of capital..................... -- 142 -- (142) --
Proceeds from borrowings (advances to
parent)................................... 30,491 -- (1,300) -- 29,191
Repayments of long-term obligations......... (32,288) -- -- -- (32,288)
---------- ----------- ------------- ----- ------------
Net cash used in financing activities......... (1,797) 142 (1,300) (142) (3,097)
---------- ----------- ------------- ----- ------------
Effect of exchange rate changes on cash....... -- -- (2) -- (2)
---------- ----------- ------------- ----- ------------
Net (decrease) increase in cash and cash
equivalents................................. (2,204) (66) 543 -- (1,727)
Cash and cash equivalents, beginning of
period...................................... 17,754 268 604 -- 18,626
---------- ----------- ------------- ----- ------------
Cash and cash equivalents, end of period...... $ 15,550 $ 202 $ 1,147 $ -- $ 16,899
---------- ----------- ------------- ----- ------------
---------- ----------- ------------- ----- ------------
Supplemental disclosures:
Interest paid............................... $ 20,063 $ -- $ -- $ -- $ 20,063
Capital lease obligations incurred.......... 2,057 -- -- -- 2,057
Issuance of note payable in connection with
the acquisition of Restaurant Insurance
Corporation............................... 1,000 -- -- -- 1,000
</TABLE>
F-32
<PAGE>
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THIS OFFERING AND, IF GIVEN OR MADE, SUCH
INFORMATION OR 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.......................................... 31
MANAGEMENT........................................ 44
OWNERSHIP OF COMMON STOCK......................... 51
CERTAIN TRANSACTIONS.............................. 52
DESCRIPTION OF NEW CREDIT FACILITY................ 53
DESCRIPTION OF SENIOR NOTES....................... 54
DESCRIPTION OF CAPITAL STOCK...................... 55
SHARES ELIGIBLE FOR FUTURE SALE................... 59
UNDERWRITING...................................... 61
LEGAL MATTERS..................................... 63
EXPERTS........................................... 63
AVAILABLE INFORMATION............................. 63
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]
FRIENDLY ICE CREAM
CORPORATION
COMMON STOCK
-----------------
PROSPECTUS
-----------------
NATIONSBANC
MONTGOMERY
SECURITIES, INC.
, 1997
- ---------------------------------------------
---------------------------------------------
- ---------------------------------------------
---------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of the expenses payable by the Company in
connection with issuance and distribution of the securities being registered
hereby. All amounts shown are estimates, except the SEC registration fee and the
NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 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).
99.1 Consent of Michael J. Daly, as a person about to become a director.
*99.2 Consent of Burt Manning, as a person about to become a director.
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed
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 3rd day of October, 1997.
<TABLE>
<S> <C> <C>
FRIENDLY ICE CREAM CORPORATION
By: /s/ GEORGE G. ROLLER
-----------------------------------------
Name: George G. Roller
Title:Vice President, Finance,
Chief Financial Officer
and Treasurer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement, or amendment thereto, has been signed by the following
persons in the capacities and on the date indicated.
SIGNATURES TITLE (CAPACITY) DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board,
* Chief Executive Officer
- ------------------------------ and President (Principal October 3, 1997
Donald N. Smith Executive Officer and
Director)
Vice President, Finance,
/s/ GEORGE G. ROLLER Chief Financial Officer
- ------------------------------ and Treasurer October 3, 1997
George G. Roller (Principal Financial and
Accounting Officer)
/s/ CHARLES LEDSINGER
- ------------------------------ Director October 3, 1997
Charles Ledsinger
*
- ------------------------------ Director October 3, 1997
Steven L. Ezzes
- ------------------------------ Director
Barry Krantz
- ------------------------------ Director
Gregory L. Segall
* /s/ GEORGE G. ROLLER
-------------------------
George G. Roller
ATTORNEY-IN-FACT
II-5
<PAGE>
Exhibit 1.1
STB Draft: October 3, 1997
5,000,000 SHARES
FRIENDLY ICE CREAM CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
DATED OCTOBER __, 1997
<PAGE>
TABLE OF CONTENTS
PAGE
----
Introductory............................................................... 1
Section 1. Representations and Warranties of the Company................ 2
Section 2. Purchase, Sale and Delivery of the Common Shares............. 12
Section 3. Additional Covenants of the Company.......................... 15
Section 4. Payment of Expenses.......................................... 17
Section 5. Conditions of the Obligations of the Underwriters............ 18
Section 6. Reimbursement of Underwriters' Expenses...................... 22
Section 7. Effectiveness of this Agreement.............................. 22
Section 8. Indemnification.............................................. 23
Section 9. Contribution................................................. 27
Section 10. Default of One or More of the Several Underwriters........... 29
Section 11. Termination of this Agreement................................ 29
Section 12. Representations and Indemnities to Survive Delivery.......... 30
Section 13. Notices...................................................... 30
Section 14. Successors................................................... 31
Section 15. Partial Unenforceability..................................... 31
Section 16. Governing Law Provisions..................................... 32
Section 17. Failure of One or More of the Selling Stockholders to
Sell and Deliver Common Shares.......................... 32
Section 18. General Provisions........................................... 32
-i-
<PAGE>
Schedule A
Exhibit A-1
Exhibit A-2
Exhibit B
Exhibit C-1
Exhibit C-2
Exhibit D
Exhibit E
-ii-
<PAGE>
UNDERWRITING AGREEMENT
October __, 1997
NATIONSBANC MONTGOMERY SECURITIES, INC.
600 Montgomery Street
San Francisco, California 94111
As Representative of the several Underwriters
Ladies and Gentlemen:
INTRODUCTORY. Friendly Ice Cream Corporation, a Massachusetts
corporation (the "Company), proposes to issue and sell to the several
underwriters named in SCHEDULE A (the "Underwriters") an aggregate of 5,000,000
shares (the "Firm Common Shares") of its Common Stock, par value $.01 per share
(the "Common Stock"). In addition, (i) the Company has granted to the
Underwriters an option to purchase up to an additional [_____] shares of Common
Stock and (ii) the stockholders of the Company named in Schedule B
(collectively, the "Selling Stockholders") have granted to the Underwriters an
option to purchase up to an additional [_______] shares of Common Stock, as
provided in Section 2 (collectively, the "Optional Common Shares"). The Firm
Common Shares and, if and to the extent such option is exercised, the Optional
Common Shares are collectively called the "Common Shares". Montgomery
Securities has agreed to act as representative of the several Underwriters (in
such capacity, the "Representative") in connection with the offering and sale of
the Common Shares. Concurrently with the issuance of the Common Shares, the
Company is offering to the public $175 million aggregate principal amount of its
Senior Notes due 2007 (the "Senior Notes") (the "Senior Note Offering") and will
enter into a new $175 million senior secured credit facility (the "New Credit
Facility") and an Indenture to be dated the issue date of the Senior Notes among
the Company, its subsidiary who will guarantee the Senior Notes and The Bank of
New York, as trustee (the "Indenture").
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File
No. 333-34633), which contains a form of prospectus to be used in connection
with the public offering and sale of the Common Shares. Such registration
statement, as amended, including the financial statements, exhibits and
schedules thereto, in the form in which it was declared effective by the
Commission under the Securities Act of 1933 and the rules and regulations
promulgated thereunder (collectively, the "Securities Act"), including any
information deemed to be a part thereof at the time of effectiveness pursuant to
Rule 430A or Rule 434 under the Securities Act, is called the "Registration
Statement". Any registration statement filed by the Company pursuant to
Rule 462(b) under the Securities Act is called the "Rule 462(b) Registration
Statement", and from and after the date and time of filing of the Rule 462(b)
Registration Statement the term "Registration Statement" shall include the
Rule 462(b) Registration Statement. Such prospectus, in the form first used by
the Underwriters to confirm sales of the Common Shares, is called the
<PAGE>
2
"Prospectus"; PROVIDED, HOWEVER, if the Company has, with the consent of
Montgomery Securities, elected to rely upon Rule 434 under the Securities Act,
the term "Prospectus" shall mean the Company's prospectus subject to completion
(each, a "preliminary prospectus") dated October __, 1997 (such preliminary
prospectus is called the "Rule 434 preliminary prospectus"), together with the
applicable term sheet (the "Term Sheet") prepared and filed by the Company with
the Commission under Rules 434 and 424(b) under the Securities Act and all
references in this Agreement to the date of the Prospectus shall mean the date
of the Term Sheet. All references in this Agreement to the Registration
Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the
Prospectus or the Term Sheet, or any amendments or supplements to any of the
foregoing, shall include any copy thereof filed with the Commission pursuant to
its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR").
The Company and each of the Selling Stockholders hereby confirm their
respective agreements with the Underwriters as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents, warrants and covenants to each Underwriter as follows:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has complied
to the Commission's satisfaction with all requests of the Commission for
additional or supplemental information. No stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement is in effect and no proceedings for such purpose have been instituted
or are pending or, to the knowledge of the Company, are contemplated or
threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Common Shares.
Each of the Registration Statement, any Rule 462(b) Registration Statement and
any post-effective amendment thereto, at the time it became effective, complied
in all material respects with the Securities Act and did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading. The
Prospectus, as amended or supplemented, as of its date, did not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. The representations and warranties set
forth in the two immediately preceding sentences do not apply to statements in
or omissions from the Registration Statement, any Rule 462(b) Registration
Statement, or any post-effective amendment thereto, or the Prospectus, or any
amendments or supplements thereto, made in reliance upon and in conformity with
information relating to any Underwriter furnished to the Company in writing by
the Representative expressly for use therein.
<PAGE>
3
(b) OFFERING MATERIALS FURNISHED TO UNDERWRITERS. The Company has
delivered to the Representative one complete manually signed copy of the
Registration Statement and of each consent and certificate of experts filed as a
part thereof, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the Prospectus, as amended or
supplemented, in such quantities and at such places as the Representative has
reasonably requested for each of the Underwriters.
(c) DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. The Company
has not distributed and will not distribute, prior to the later of the Second
Closing Date (as defined below) and the completion of the Underwriters'
distribution of the Common Shares, any offering material in connection with the
offering and sale of the Common Shares other than a preliminary prospectus, the
Prospectus or the Registration Statement.
(d) THE UNDERWRITING AGREEMENT. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement of,
the Company, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law or public policy and
except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
rights and remedies of creditors or by general equitable principles.
(e) AUTHORIZATION OF THE COMMON SHARES. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized for
issuance and sale pursuant to this Agreement and, when issued and delivered by
the Company pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) INCORPORATION AND GOOD STANDING OF THE COMPANY AND ITS
SUBSIDIARIES. Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation and has corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Prospectus and, in the case of the Company, to enter into
and perform its obligations under this Agreement, the Indenture and the New
Credit Facility. Each of the Company and each subsidiary is duly qualified as a
foreign corporation to transact business and is in good standing in the
Commonwealth of Massachusetts and each other jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except for such jurisdictions (other than
the Commonwealth of Massachusetts) where the failure to so qualify or to be in
good standing would not, individually or in the aggregate, result in a Material
Adverse Change (as defined below). All of the issued and outstanding capital
stock of each subsidiary has been duly authorized and validly issued, is fully
paid and nonassessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge, lien,
encumbrance or claim, except as described or contemplated in the Prospectus.
The Company does not own or control, directly or indirectly, any corporation,
association or other entity other than the subsidiaries listed in Exhibit 21 to
the Registration Statement.
(g) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption
<PAGE>
4
"Capitalization" (other than for subsequent issuances, if any, pursuant to
employee benefit plans described in the Prospectus or upon exercise of
outstanding options or warrants described in the Prospectus). The Common Stock
(including the Common Shares) conforms in all material respects to the
description thereof contained in the Prospectus. All of the issued and
outstanding shares of Common Stock have been duly authorized and validly issued,
are fully paid and nonassessable and have been issued in compliance with federal
and state securities laws. None of the outstanding shares of Common Stock were
issued in violation of any preemptive rights, rights of first refusal or other
similar rights to subscribe for or purchase securities of the Company. Except
for the ML Life and Bedrock Warrants, there are no authorized or outstanding
options, warrants, preemptive rights, rights of first refusal or other rights to
purchase, or equity or debt securities convertible into or exchangeable or
exercisable for, any capital stock of the Company or any of its subsidiaries
other than those accurately described in the Prospectus. The description of the
Company's stock option, stock bonus and other stock plans or arrangements, and
the options or other rights granted thereunder, set forth in the Prospectus
accurately and fairly presents in all material respects the information required
to be shown with respect to such plans, arrangements, options and rights.
(h) NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived or for which the period of notice to require such securities to be
registered has run.
(i) NO MATERIAL ADVERSE CHANGE. Except as otherwise disclosed in the
Prospectus, subsequent to the respective dates as of which information is given
in the Prospectus: (i) there has been no material adverse change, or any
development that could reasonably be expected to result in a material adverse
change, in the condition, financial or otherwise, or in the earnings,
stockholders' equity, business, management, operations or prospects, whether or
not arising from transactions in the ordinary course of business, of the Company
and its subsidiaries, considered as one entity (any such change is called a
"Material Adverse Change"); (ii) the Company and its subsidiaries, considered as
one entity, have not incurred any material liability or obligation, indirect,
direct or contingent, not in the ordinary course of business nor entered into
any material transaction or agreement not in the ordinary course of business;
and (iii) except as disclosed in the Prospectus, there has been no dividend or
distribution of any kind declared, paid or made by the Company or, except for
dividends paid to the Company or other subsidiaries, any of its subsidiaries on
any class of capital stock or repurchase or redemption by the Company or any of
its subsidiaries of any class of capital stock.
(j) INDEPENDENT ACCOUNTANTS. Arthur Andersen LLP, who have expressed
their opinion with respect to the financial statements (which term as used in
this Agreement includes the related notes thereto) and supporting schedules
filed with the Commission as a part of the Registration Statement and included
in the Prospectus, are independent public or certified public accountants as
required by the Securities Act.
(k) PREPARATION OF THE FINANCIAL STATEMENTS. The financial
statements filed with the Commission as a part of the Registration Statement and
included in the Prospectus
<PAGE>
5
present fairly the consolidated financial position of the Company and its
subsidiaries as of and at the dates indicated and the results of their
operations and cash flows for the periods specified. The supporting schedules
included in the Registration Statement present fairly the information required
to be stated therein. Such financial statements and supporting schedules have
been prepared in conformity with generally accepted accounting principles, as
applied in the United States, applied on a consistent basis throughout the
periods involved, except as may be expressly stated in the related notes
thereto. No other financial statements or supporting schedules are required to
be included in the Registration Statement. The financial information set forth
in the Prospectus under the captions "Prospectus Summary--Summary Consolidated
Financial Information", "Selected Consolidated Financial Information" and
"Capitalization" fairly present the information set forth therein on a basis
consistent with that of the audited financial statements contained in the
Registration Statement. The pro forma financial information of the Company and
its subsidiaries included under the caption "Prospectus Summary--Summary
Consolidated Financial Information", and elsewhere in the Prospectus and in the
Registration Statement present fairly the information contained therein, have
been prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements and have been properly presented on
the bases described therein, and the assumptions used in the preparation thereof
are reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein. The Company's ratios
of earnings to fixed charges set forth in the Prospectus under the captions
"Prospectus Summary--Summary Consolidated Financial Information" and in
"Selected Consolidated Financial Information" have been calculated in compliance
with Item 503(d) of Regulation S-K under the Securities Act.
(l) STOCK EXCHANGE LISTING. The Common Shares have been approved
for inclusion on the Nasdaq National Market, subject only to official notice of
issuance.
(m) NON-CONTRAVENTION OF EXISTING INSTRUMENTS; NO FURTHER
AUTHORIZATIONS OR APPROVALS REQUIRED. Neither the Company nor any of its
subsidiaries is in violation of its charter or by-laws or is in default (or,
with the giving of notice or lapse of time, would be in default) ("Default")
under any indenture, mortgage, loan or credit agreement, note, contract,
franchise, lease or other instrument to which the Company or any of its
subsidiaries is a party or by which it or any of them may be bound, or to which
any of the property or assets of the Company or any of its subsidiaries is
subject (each, an "Existing Instrument"), except for such Defaults as would not,
individually or in the aggregate, result in a Material Adverse Change. The
Company's execution, delivery and performance of this Agreement, the Indenture
and the New Credit Facility and consummation of the transactions contemplated
hereby and thereby and by the Prospectus (i) have been duly authorized by all
necessary corporate action and will not result in any violation of the
provisions of the charter or by-laws of the Company or any subsidiary, (ii) will
not conflict with or constitute a breach of, or Default or a Debt Repayment
Triggering Event (as defined below) under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Company or any of its subsidiaries pursuant to, or require the consent of any
other party to, any Existing Instrument, except for such conflicts, breaches,
Defaults, liens, charges or encumbrances as would not, individually or in the
aggregate, result in a Material Adverse Change and (iii) will not result in any
violation of any law, administrative regulation or administrative or court
decree applicable to the Company or any subsidiary, except for such violations
as would not, individually or in the aggregate, result in a Material Adverse
<PAGE>
6
Change. No consent, approval, authorization or other order of, or registration
or filing with, any court or other governmental or regulatory authority or
agency, is required for the Company's execution, delivery and performance of
this Agreement, the Indenture and the New Credit Facility and consummation of
the transactions contemplated hereby and thereby and by the Prospectus, except
such as have been obtained or made by the Company and are in full force and
effect under the Securities Act, applicable state securities or blue sky laws
and from the National Association of Securities Dealers, Inc. (the "NASD"). As
used herein, a "Debt Repayment Triggering Event" means any event or condition
which gives, or with the giving of notice or lapse of time would give, the
holder of any note, debenture or other evidence of indebtedness (or any person
acting on such holder's behalf) the right to require the repurchase, redemption
or repayment of all or a portion of such indebtedness by the Company or any of
its subsidiaries.
(n) ACCURACY OF EXHIBITS. There are no contracts or other documents
which are required to be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and Regulations and
which have not been so described or filed.
(o) NO MATERIAL ACTIONS OR PROCEEDINGS. There are no legal or
governmental actions, suits or proceedings pending or, to the Company's
knowledge, threatened (i) against or affecting the Company or any of its
subsidiaries, (ii) which has as the subject thereof any officer or director of,
or property owned or leased by, the Company or any of its subsidiaries or
(iii) relating to environmental or discrimination matters, where in any such
case (A) there is a reasonable possibility that such action, suit or proceeding
might be determined adversely to the Company or such subsidiary and (B) any such
action, suit or proceeding, if so determined adversely, would reasonably be
expected to result in a Material Adverse Change or adversely affect the
consummation of the transactions contemplated by this Agreement.
(p) POSSESSION OF INTELLECTUAL PROPERTY. Other than as set forth in
the Prospectus, the Company and each of its subsidiaries own or possess adequate
rights to use all material patents, patent applications, trademarks, service
marks, trade names, trademark registrations, service mark registrations,
copyrights, licenses and know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures) necessary for the conduct of their respective businesses and have no
reason to believe that the conduct of their respective businesses will conflict
with, and have not received any notice of any claim of conflict with, any such
rights of others.
(q) POSSESSION OF LICENSES AND PERMITS. The Company and each of its
subsidiaries possess all material licenses, certificates, authorizations and
permits issued by, and have made all declarations and filings with, the
appropriate state, federal or foreign regulatory agencies or bodies which are
necessary or desirable for the ownership of their respective properties or the
conduct of their respective businesses as described in the Prospectus, except
where any failures to possess or make the same, singularly or in the aggregate,
would not result in a Material Adverse Change, and the Company has not received
notification of any revocation or modification of any such license,
authorization or permit and has no reason to believe that any such license,
certificate, authorization or permit will not be renewed, except such
revocations, modifications or non-renewals as would not result in a Material
Adverse Change.
<PAGE>
7
(r) TITLE TO PROPERTIES. The Company and each of its subsidiaries
has good and marketable title to all the properties and assets reflected as
owned in the financial statements referred to in Section 1(A)(k) above (or
elsewhere in the Prospectus), in each case free and clear of any security
interests, mortgages, liens, encumbrances, equities, claims and other defects,
except as described in the Prospectus and such as do not materially and
adversely affect the value of such property and do not materially interfere with
the use made or proposed to be made of such property by the Company or such
subsidiary. The real property, improvements, equipment and personal property
held under lease by the Company or any subsidiary are held under valid and
enforceable leases, with such exceptions as are not material and do not
materially interfere with the use made or proposed to be made of such real
property, improvements, equipment or personal property by the Company or such
subsidiary.
(s) TAXES. The Company and its subsidiaries each (i) have filed all
necessary federal, state and foreign income and franchise tax returns, (ii) have
paid all federal, state, local and foreign taxes due and payable for which it is
liable, including, but not limited to, withholding taxes and amounts payable
under the Internal Revenue Code of 1986, as amended (the "Code"), and has
furnished all information returns it is required to furnish pursuant to the
Code, (iii) have established adequate reserves for all such taxes which are not
yet due and payable and (iv) do not have any tax deficiency or claims
outstanding or assessed or, to the Company's knowledge, proposed against it
which could reasonably be expected to result in a Material Adverse Change.
(t) NO LABOR DISPUTE. No labor disturbance by the employees of the
Company or any of its subsidiaries exists or, to the Company's knowledge, is
imminent which might be expected to result in a Material Adverse Change.
(u) COMPANY NOT AN "INVESTMENT COMPANY". The Company has been
advised of the rules and requirements under the Investment Company Act of 1940,
as amended (the "Investment Company Act"). The Company is not, and after
receipt of payment for the Common Shares will not be, an "investment company"
within the meaning of Investment Company Act and will conduct its business in a
manner so that it will not become subject to the Investment Company Act.
(v) NO LENDING RELATIONSHIPS. Attached hereto as EXHIBIT E is, to
the Company's knowledge, a complete and accurate list of the lenders under the
Old Credit Facility (as defined in the Prospectus) as of the date of this
Agreement, which constitute all of the Company's lenders who would have received
any of the proceeds from the sale of the Common Shares hereunder to repay
outstanding debt had such repayment occurred on the date of this Agreement.
(w) NO STABILIZATION. Neither the Company, nor to the Company's
knowledge, any of its affiliates, has taken or may take, directly or indirectly,
any action designed to cause or result in, or which has constituted or which
might reasonably be expected to constitute, the stabilization or manipulation of
the price of the Common Shares to facilitate the sale or resale of the Common
Shares.
<PAGE>
8
(x) INSURANCE. Each of the Company and its subsidiaries are insured
by recognized, financially sound and reputable institutions with policies in
such amounts and with such deductibles and covering such risks as are generally
deemed adequate and customary for their businesses including, but not limited
to, policies covering real and personal property owned or leased by the Company
and its subsidiaries against theft, damage, destruction, acts of vandalism and
earthquakes. The Company has no reason to believe that it or any subsidiary
will not be able (i) to renew its existing insurance coverage as and when such
policies expire or (ii) to obtain comparable coverage from similar institutions
as may be necessary or appropriate to conduct its business as now conducted and
at a cost that would not result in a Material Adverse Change. Neither of the
Company nor any subsidiary has been denied any insurance coverage which it has
sought or for which it has applied.
(y) TRANSACTIONS WITH MANAGEMENT AND OTHERS. No relationship, direct
or indirect, exists between or among the Company on the one hand, and the
directors, officers, stockholders, customers or suppliers of the Company on the
other hand, which is required to be described in the Prospectus and which is not
so described.
(z) NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS. Neither the Company
nor any of its subsidiaries nor, to the Company's knowledge, any employee or
agent of the Company or any subsidiary, has made any contribution or other
payment to any official of, or candidate for, any federal, state or foreign
office in violation of any law or of the character required to be disclosed in
the Prospectus.
(aa) ACCOUNTING CONTROLS. The Company and each of its subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset accountability;
(iii) access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets is
computed with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(ab) COMPLIANCE WITH ENVIRONMENTAL LAWS. Except as would not,
individually or in the aggregate, result in a Material Adverse Change (i)
neither the Company nor any of its subsidiaries is in violation of any federal,
state, local or foreign law or regulation relating to pollution or protection of
human health or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata) or wildlife,
including without limitation, laws and regulations relating to emissions,
discharges, releases or threatened releases of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum and
petroleum products (collectively, "Materials of Environmental Concern"), or
otherwise relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environment Concern
(collectively, "Environmental Laws"), which violation includes, but is not
limited to, noncompliance with any permits or other governmental authorizations
required for the operation of the business of the Company or its subsidiaries
under applicable Environmental Laws, or noncompliance with the terms and
conditions thereof, nor has the Company or any of its subsidiaries received any
written communication, whether from a
<PAGE>
9
governmental authority, citizens group, employee or otherwise, that alleges that
the Company or any of its subsidiaries is in violation of any Environmental Law;
(ii) there is no claim, action or cause of action filed with a court or
governmental authority with respect to which the Company has received notice, no
investigation with respect to which the Company has received written notice, and
no written notice by any person or entity alleging potential liability for
investigatory costs, cleanup costs, governmental responses costs, natural
resources damages, property damages, personal injuries, attorneys' fees or
penalties arising out of, based on or resulting from the presence, or release
into the environment, of any Material of Environmental Concern at any location
owned, leased or operated by the Company or any of its subsidiaries, now or in
the past (collectively, "Environmental Claims"), pending or, to the best of the
Company's knowledge, threatened against the Company or any of its subsidiaries
or any person or entity whose liability for any Environmental Claim the Company
or any of its subsidiaries has retained or assumed either contractually or by
operation of law; and (iii) to the Company's knowledge, there are no past or
present actions, activities, circumstances, conditions, events or incidents,
including, without limitation, the release, emission, discharge, presence or
disposal of any Material of Environmental Concern, that reasonably could result
in a violation of any Environmental Law or form the basis of a potential
Environmental Claim against the Company or any of its subsidiaries or against
any person or entity whose liability for any Environmental Claim the Company or
any of its subsidiaries has retained or assumed either contractually or by
operation of law.
(ac) EMPLOYEE BENEFIT PLANS. No "prohibited transaction" (as defined
in Section 406 of the Employee Retirement Income Security Act of 1974, as
amended, including the regulations and published interpretations thereunder
("ERISA"), or Section 4975 of the Code), or "accumulated funding deficiency" (as
defined in Section 302 of ERISA) or any of the events set forth in Section
4043(b) of ERISA (other than events with respect to which the 30-day notice
requirement under Section 4043 of ERISA has been waived) has occurred with
respect to any employee benefit plan which could result in a Material Adverse
Change; each employee benefit plan is in compliance in all material respects
with applicable law, including ERISA and the Code; the Company has not incurred
and does not expect to incur liability under Title IV of ERISA with respect to
the termination of, or withdrawal from, any "pension plan"; and each "pension
plan" (as defined in ERISA) for which the Company would have any liability that
is intended to be qualified under Section 401(a) of the Code is so qualified in
all material respects and nothing has occurred, whether by action or by failure
to act, which could cause the loss of such qualification with respect to such
plan which could result in a Material Adverse Change.
(ad) MINUTE BOOKS. The minute books of the Company and each of its
subsidiaries have been made available to the Underwriters and counsel for the
Underwriters, and such books (i) contain a complete summary of all meetings and
actions of the directors and stockholders of the Company and each of its
subsidiaries since January 1992 through the date of the latest meeting and
action, and (ii) accurately in all material respects reflect all transactions
referred to in such minutes.
Any certificate signed by an officer of the Company and delivered to
the Representative or to counsel for the Underwriters on the First Closing Date
or the Second
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10
Closing Date shall be deemed to be a representation and warranty by the Company
to each Underwriter as to the matters set forth therein.
B. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each
Selling Stockholder severally represents, warrants and covenants to each
Underwriter as follows:
(a) THE UNDERWRITING AGREEMENT. This Agreement has been duly
authorized, executed and delivered by or on behalf of such Selling Stockholder
and is a valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as rights to indemnification or contribution
hereunder may be limited by applicable law and except as the enforcement hereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights and remedies of creditors or by
general equitable principles.
(b) THE CUSTODY AGREEMENT AND POWER OF ATTORNEY. Each of the
(i) Custody Agreement signed by such Selling Stockholder and BankBoston, N.A.,
as custodian (the "Custodian"), relating to the deposit of the Common Shares to
be sold by such Selling Stockholder (the "Custody Agreement") and (ii) Power of
Attorney signed by such Selling Stockholder appointing certain individuals or
entities named therein as such Selling Stockholder's attorneys-in-fact (each, an
"Attorney-in-Fact") to the extent set forth therein relating to the transactions
contemplated hereby and by the Prospectus (the "Power of Attorney"), has been
duly authorized, executed and delivered by such Selling Stockholder and is a
valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as rights to indemnification or contribution
thereunder may be limited by applicable law and except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting the rights and remedies of creditors
or by general equitable principles.
(c) TITLE TO COMMON SHARES TO BE SOLD; ALL AUTHORIZATIONS OBTAINED.
Such Selling Stockholder is, and on the First Closing Date and the Second
Closing Date (as defined below) will be, the sole beneficial owner of all of the
Common Shares which may be sold by such Selling Stockholder pursuant to this
Agreement on such date and the legal right and power, and all authorizations and
approvals required by law and under its charter or by-laws, partnership
agreement, trust agreement or other organizational documents, to enter into this
Agreement and its Custody Agreement and Power of Attorney, to sell, transfer and
deliver all of the Common Shares which may be sold by such Selling Stockholder
pursuant to this Agreement and to comply with its other obligations hereunder
and thereunder.
(d) DELIVERY OF THE COMMON SHARES TO BE SOLD. Delivery of the Common
Shares which are sold by such Selling Stockholder pursuant to this Agreement
will pass good and valid title to such Common Shares, free and clear of any
security interest, mortgage, pledge, lien, encumbrance or other claim.
(e) NON-CONTRAVENTION; NO FURTHER AUTHORIZATIONS OR APPROVALS
REQUIRED. The execution and delivery by such Selling Stockholder of, and the
performance by such Selling Stockholder of its obligations under, this
Agreement, the Custody Agreement and the Power of
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11
Attorney will not contravene or conflict with, result in a breach of, or
constitute a default under, or require the consent of any other party to, the
charter or by-laws, partnership agreement, trust agreement or other
organizational documents of such Selling Stockholder or any other agreement or
instrument to which such Selling Stockholder is a party or by which it is bound
or under which it is entitled to any right or benefit, any provision of
applicable law or any judgment, order, decree or regulation applicable to such
Selling Stockholder of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over such Selling
Stockholder. Except for filings to be made by the Company and the Underwriters
under the Securities Act, applicable state securities or blue sky laws and with
the NASD, no consent, approval, authorization or other order of, or registration
or filing with, any court or other governmental authority or agency, is required
for the consummation by such Selling Stockholder of the transactions
contemplated in this Agreement.
(f) NO REGISTRATION OR OTHER SIMILAR RIGHTS. Such Selling
Stockholder does not have any registration or other similar rights to have any
equity or debt securities registered for sale by the Company under the
Registration Statement or included in the offering contemplated by this
Agreement, except for such rights as are described in the Prospectus under
"Shares Eligible for Future Sale".
(g) NO FURTHER CONSENTS, ETC. No consent, approval or waiver is
required under any instrument or agreement to which such Selling Stockholder is
a party or by which it is bound or under which it is entitled to any right or
benefit, in connection with the offering, sale or purchase by the Underwriters
of any of the Common Shares which may be sold by such Selling Stockholder under
this Agreement or the consummation by such Selling Stockholder of any of the
other transactions contemplated hereby.
(h) DISCLOSURE MADE BY SUCH SELLING STOCKHOLDER IN THE PROSPECTUS.
All information furnished by such Selling Stockholder in writing expressly for
use in the Registration Statement and Prospectus is, and on the First Closing
Date and the Second Closing Date will be, true, correct, and complete in all
material respects, and does not, and on the First Closing Date and the Second
Closing Date will not, contain any untrue statement of a material fact or omit
to state any material fact necessary to make such information not misleading.
Such Selling Stockholder confirms as accurate the number of shares of Common
Stock set forth in the preliminary prospectus and, as of the First Closing Date
or the Second Closing Date, as the case may be, in the Prospectus under the
caption "Ownership of Common Stock" (both prior to and after giving effect to
the sale of the Common Shares).
(i) NO PRICE STABILIZATION OR MANIPULATION. Such Selling Stockholder
has not taken and will not take, directly or indirectly, any action designed to
or that might be reasonably expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Common Shares.
Any certificate signed by or on behalf of any Selling Stockholder and
delivered to the Representative or to counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Stockholder to each
Underwriter as to the matters covered thereby.
<PAGE>
12
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
(a) THE FIRM COMMON SHARES. The Company agrees to issue and sell to
the several Underwriters the Firm Common Shares upon the terms herein set forth.
On the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase from the Company the
respective number of Firm Common Shares set forth opposite their names on
SCHEDULE A. The purchase price per Firm Common Share to be paid by the several
Underwriters to the Company shall be $[___] per share.
(b) THE FIRST CLOSING DATE. Delivery of certificates for the Firm
Common Shares to be purchased by the Underwriters and payment therefor shall be
made at the offices of Simpson Thacher & Bartlett, 425 Lexington Avenue, New
York, New York (or such other place as may be agreed to by the Company and the
Representative) at 10:00 a.m., New York City time, on ___________, 1997 or such
other time and date not later than 10:00 a.m. New York City time on the seventh
business day thereafter, as the Representative shall designate by notice to the
Company (the time and date of such closing are called the "First Closing Date").
The Company hereby acknowledges that circumstances under which the
Representative may provide notice to postpone the First Closing Date as
originally scheduled include, but are in no way limited to, any determination by
the Company or the Representative to recirculate to the public copies of an
amended or supplemented Prospectus or a delay as contemplated by the provisions
of Section 10.
(c) THE OPTIONAL COMMON SHARES; THE SECOND CLOSING DATE. In
addition, on the basis of the representations, warranties and agreements herein
contained, and upon the terms but subject to the conditions herein set forth,
the Company and the Selling Stockholders hereby grant an option to the several
Underwriters to purchase, severally and not jointly, up to an aggregate of [ ]
Optional Common Shares from the Company and the Selling Stockholders at the
purchase price per share to be paid by the Underwriters for the Firm Common
Shares. The option granted hereunder is for use by the Underwriters solely in
covering any over-allotments in connection with the sale and distribution of the
Firm Common Shares. The option granted hereunder may be exercised at any time
(but not more than once) upon notice by the Representative to the Company and
the Selling Stockholders (with a copy to the Company) which notice may be given
at any time within 30 days from the date of this Agreement. Such notice shall
set forth (i) the aggregate number of Optional Common Shares as to which the
Underwriters are exercising the option, (ii) the names and denominations in
which the certificates for the Optional Common Shares are to be registered and
(iii) the time, date and place at which such certificates will be delivered
(which time and date may be simultaneous with, but not earlier than, the First
Closing Date; and in such case the term "First Closing Date" shall refer to the
time and date of delivery of certificates for the Firm Common Shares and the
Optional Common Shares). Such time and date of delivery is called the "Second
Closing Date" and shall be determined by the Representative and shall not be
earlier than three nor later than five full business days after delivery of such
notice of exercise. The Second Closing Date may occur on the same day as the
First Closing Date. If any Optional Common Shares are to be purchased, (a) each
Underwriter agrees, severally and not jointly, to purchase the number of
Optional Common Shares (subject to such adjustments to eliminate fractional
shares as the Representative may determine) that bears
<PAGE>
13
the same proportion to the total number of Optional Common Shares to be
purchased as the number of Firm Common Shares set forth on SCHEDULE A opposite
the name of such Underwriter bears to the total number of Firm Common Shares and
(b) the Company and each Selling Stockholder agree, severally and not jointly,
to sell the number of Optional Common Shares determined as follows:
(A) In the event the Underwriters exercise the over-allotment option in
full, then (i) each of the Selling Stockholders agrees to sell the number
of Optional Shares set forth in Schedule B opposite the name of such
Selling Stockholder and (ii) the Company agrees to sell the number of
Optional Shares set forth in the paragraph "Introductory" of this
Agreement;
(B) In the event the Underwriters exercise the over-allotment option for a
number of Optional Common Shares (the "Actual Exercise Amount") which is
less than 750,000 but greater than the aggregate number of Optional Common
Shares granted by the Selling Stockholders, then each of the Selling
Stockholders and the Company agrees, severally and not jointly, to sell the
number of Optional Common Shares determined as follows:
(1) first, each Selling Stockholder agrees to sell the number of
Optional Common Shares set forth in Schedule B opposite the name of
such Selling Stockholder; and
(2) second, the Company agrees to sell the number of Optional Common
Shares which, when added to the number of Optional Common Shares sold
by the Selling Stockholders pursuant to clause (1) above, equals the
Actual Exercise Amount.
(C) In the event the Actual Exercise Amount is less than the aggregate
number of Optional Common Shares granted by the Selling Stockholders, then
each of the Selling Stockholders agrees, severally and not jointly, to sell
the number of Optional Common Shares equal to the number of Optional Common
Shares granted by such Selling Stockholder that bears the same proportion
to the Actual Exercise Amount as the number of Optional Common Shares set
forth in Schedule B opposite the name of such Selling Stockholder bears to
the total number of Optional Common Shares granted by the Selling
Stockholders collectively, and the Company shall not sell any Optional
Common Shares.
The Representative may cancel the option at any time prior to its
expiration by giving written notice of such cancellation to the Company and the
Selling Stockholders (with a copy to the Company).
(d) PUBLIC OFFERING OF THE COMMON SHARES. The Representative hereby
advises the Company and the Selling Stockholders that the Underwriters intend to
offer for sale to the public, as described in the Prospectus, their respective
portions of the Common Shares as soon after this Agreement has been executed and
the Registration Statement has been declared effective as the Representative, in
its sole judgment, has determined is advisable and practicable.
(e) PAYMENT FOR THE COMMON SHARES. Payment for the Common Shares to
be sold by the Company shall be made at the First Closing Date (and, if
applicable, at the Second
<PAGE>
14
Closing Date) by wire transfer of immediately available funds to the order of
the Company. Payment for the Common Shares to be sold by the Selling
Stockholders shall be made at the First Closing Date or at the Second Closing
Date, as applicable by wire transfer of immediately available funds to the order
of the Custodian. It is understood that the Representative has been authorized,
for its own account and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Common Shares and any Optional Common Shares the Underwriters have agreed
to purchase. Montgomery Securities, individually and not as the Representative
of the Underwriters, may (but shall not be obligated to) make payment for any
Common Shares to be purchased by any Underwriter whose funds shall not have been
received by the Representative by the First Closing Date or the Second Closing
Date, as the case may be, for the account of such Underwriter, but any such
payment shall not relieve such Underwriter from any of its obligations under
this Agreement.
Each Selling Stockholder hereby agrees that (i) it will pay all stock
transfer taxes, stamp duties and other similar taxes, if any, payable upon the
sale or delivery of the Common Shares to be sold by such Selling Stockholder to
the several Underwriters, or otherwise in connection with the performance of
such Selling Stockholder's obligations hereunder and (ii) the Custodian is
authorized to deduct for such payment any such amounts from the proceeds to such
Selling Stockholder hereunder and to hold such amounts for the account of such
Selling Stockholder with the Custodian under the Custody Agreement. In
connection with the preceding sentence, the Representative agrees to pay the New
York State stock transfer tax payable in connection with the sale and delivery
of the Optional Common Shares by the Selling Stockholders, and each Selling
Stockholder agrees to reimburse the Representative promptly for the transfer
taxes attributable to the Optional Common Shares sold by such Selling
Stockholder if such transfer tax payments are not rebated to the Representative.
The Representative agrees to use commercially reasonable efforts to cause the
rebate of such transfer taxes.
(f) DELIVERY OF THE COMMON SHARES. The Company shall deliver, or
cause to be delivered, to the Representative for the accounts of the several
Underwriters certificates for the Firm Common Shares at the First Closing Date,
against the irrevocable release of a wire transfer of immediately available
funds for the amount of the purchase price therefor. The Company and the
Selling Stockholders shall also deliver, or cause to be delivered, to the
Representative for the accounts of the several Underwriters, certificates for
the Optional Common Shares the Underwriters have agreed to purchase from them at
the First Closing Date or the Second Closing Date, as the case may be, against
the irrevocable release of a wire transfer of immediately available funds for
the amount of the purchase price therefor. The certificates for the Common
Shares shall be in definitive form and registered in such names and
denominations as the Representative shall have requested at least two full
business days prior to the First Closing Date (or the Second Closing Date, as
the case may be) and shall be made available for inspection on the business day
preceding the First Closing Date (or the Second Closing Date, as the case may
be) at a location in New York City as the Representative may designate. Time
shall be of the essence, and delivery at the time and place specified in this
Agreement is a further condition to the obligations of the Underwriters.
(g) DELIVERY OF PROSPECTUS TO THE UNDERWRITERS. Not later than 12:00
p.m. on the second business day following the date the Common Shares are
released by the Underwriters
<PAGE>
15
for sale to the public, the Company shall delivery or cause to be delivered
copies of the Prospectus in such quantities and at such places as the
Representative shall reasonably request.
SECTION 3. ADDITIONAL COVENANTS OF THE COMPANY.
A. COVENANTS OF THE COMPANY. The Company further covenants and agrees
with each Underwriter as follows:
(a) REPRESENTATIVE'S REVIEW OF PROPOSED AMENDMENTS AND SUPPLEMENTS.
During such period beginning on the date hereof and ending on the later of the
First Closing Date or such date that, in the opinion of counsel for the
Underwriters, the Prospectus is no longer required by law to be delivered in
connection with sales by an Underwriter or dealer (the "Prospectus Delivery
Period"), prior to amending or supplementing the Registration Statement
(including any registration statement filed under Rule 462(b) under the
Securities Act) or the Prospectus, the Company shall furnish to the
Representative for review a copy of each such proposed amendment or supplement,
and the Company shall not file any such proposed amendment or supplement to
which the Representative reasonably objects.
(b) SECURITIES ACT COMPLIANCE. After the date of this Agreement, the
Company shall promptly advise the Representative in writing (i) of the receipt
of any comments of, or requests for additional or supplemental information from,
the Commission, (ii) of the time and date of any filing of any post-effective
amendment to the Registration Statement or any amendment or supplement to any
preliminary prospectus or the Prospectus, (iii) of the time and date that any
post-effective amendment to the Registration Statement becomes effective and
(iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereto or of any order preventing or suspending the use of any preliminary
prospectus or the Prospectus, or of any proceedings to remove, suspend or
terminate from listing or quotation the Common Stock from any securities
exchange upon which it is listed for trading or included or designated for
quotation, or of the threatening or initiation of any proceedings for any of
such purposes. If the Commission shall enter any such stop order at any time,
the Company will use its reasonable best efforts to obtain the lifting of such
order at the earliest possible moment. Additionally, the Company agrees that it
shall comply with the provisions of Rules 424(b), 430A and 434, as applicable,
under the Securities Act and will use its reasonable efforts to confirm that any
filings made by the Company under such Rule 424(b) were received in a timely
manner by the Commission.
(c) AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER SECURITIES
ACT MATTERS. If, during the Prospectus Delivery Period, any event shall occur
or condition exist as a result of which it is necessary to amend or supplement
the Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not misleading,
or if in the reasonable opinion of the Representative or counsel for the
Underwriters it is otherwise necessary to amend or supplement the Prospectus to
comply with law, the Company agrees to promptly prepare (subject to
Section 3(A)(a) hereof), file with the Commission and furnish at its own expense
to the Underwriters and to dealers, amendments or supplements to the Prospectus
so that the statements in the Prospectus as so amended or supplemented will not,
in the light of the circumstances when the Prospectus is delivered to a
<PAGE>
16
purchaser, be misleading or so that the Prospectus, as amended or supplemented,
will comply with law.
(d) COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS. The
Company agrees to furnish the Representative, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any amendments
and supplements thereto as the Representative may reasonably request.
(e) BLUE SKY COMPLIANCE. The Company shall cooperate with the
Representative and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of) the
state securities or blue sky laws or Canadian provincial Securities laws (if
applicable) of those jurisdictions reasonably designated by the Representative,
shall comply with such laws and shall continue such qualifications,
registrations and exemptions in effect so long as required for the distribution
of the Common Shares. The Company shall not be required to qualify as a foreign
corporation or to take any action that would subject it to general service of
process in any such jurisdiction where it is not presently qualified or where it
would be subject to taxation as a foreign corporation. The Company will advise
the Representative promptly of the suspension of the qualification or
registration of (or any such exemption relating to) the Common Shares for
offering, sale or trading in any jurisdiction or any initiation or threat of any
proceeding for any such purpose, and in the event of the issuance of any order
suspending such qualification, registration or exemption, the Company shall use
its best efforts to obtain the withdrawal thereof at the earliest possible
moment.
(f) USE OF PROCEEDS. The Company shall apply the net proceeds from
the sale of the Common Shares sold by it in the manner described under the
caption "Use of Proceeds" in the Prospectus.
(g) TRANSFER AGENT. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Common Stock.
(h) EARNINGS STATEMENT. As soon as practicable, the Company will
make generally available to its security holders and to the Representative an
earnings statement (which need not be audited) covering the twelve-month period
ending [_______________] that satisfies the provisions of Section 11(a) of the
Securities Act.
(i) PERIODIC REPORTING OBLIGATIONS. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and the
Nasdaq National Market all reports and documents required to be filed under the
Exchange Act. Additionally, the Company shall file with the Commission all
reports on Form SR as may be required under Rule 463 under the Securities Act.
(j) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES During the
period of 90 days following the date of the Prospectus, the Company will not,
without the prior written consent of Montgomery Securities (which consent may be
withheld at the sole discretion of Montgomery Securities), directly or
indirectly, sell, offer, contract or grant any option to sell,
<PAGE>
17
pledge, transfer or establish an open "put equivalent position" within the
meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of or
transfer, or announce the offering of, or file any registration statement under
the Securities Act in respect of, any shares of Common Stock, options or
warrants to acquire shares of the Common Stock or securities exchangeable or
exercisable for or convertible into shares of Common Stock (other than as
contemplated by this Agreement with respect to the Common Shares); PROVIDED,
HOWEVER, that the Company may issue shares of its Common Stock or options to
purchase its Common Stock, or Common Stock upon exercise of options, pursuant to
any stock option, stock bonus or other stock plan or arrangement described in
the Prospectus.
(k) FUTURE REPORTS TO THE REPRESENTATIVE. During the period of five
years hereafter the Company will furnish to the Representative at 600 Montgomery
Street, San Francisco, CA 94111 Attention:[ ]: (i) as soon as practicable
after the end of each fiscal year, when made available to holders of its capital
stock, copies of the Annual Report of the Company containing the balance sheet
of the Company as of the close of such fiscal year and statements of income,
stockholders' equity and cash flows for the year then ended and the opinion
thereon of the Company's independent public or certified public accountants;
(ii) as soon as practicable after the filing thereof, copies of each proxy
statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current
Report on Form 8-K or other report filed publicly by the Company with the
Commission, the NASD or any securities exchange; and (iii) as soon as available,
copies of any report or communication of the Company mailed generally to holders
of its capital stock.
B. COVENANTS OF THE SELLING STOCKHOLDERS. Each Selling Stockholder
further covenants and agrees with each Underwriter:
DELIVERY OF FORMS W-8 AND W-9 . To deliver to the Representative
prior to the First Closing Date a properly completed and executed United States
Treasury Department Form W-8 (if the Selling Stockholder is a non-United States
person) or Form W-9 (if the Selling Stockholder is a United States Person).
Montgomery Securities, on behalf of the several Underwriters, may, in
its sole discretion, waive in writing the performance by the Company of any one
or more of the foregoing covenants or extend the time for their performance.
SECTION 4. PAYMENT OF EXPENSES.
Subject to the provisions of the last paragraph of this Section 4, the
Company agrees to pay all costs, fees and expenses incurred in connection with
the performance of its and the Selling Stockholders' obligations hereunder and
in connection with the transactions contemplated hereby, including without
limitation (i) all expenses incident to the issuance and delivery of the Common
Shares (including all printing and engraving costs), (ii) all fees and expenses
of the registrar and transfer agent of the Common Stock, (iii) all necessary
issue, transfer and other stamp taxes in connection with the issuance and sale
by the Company of the Common Shares to the Underwriters, (iv) all fees and
expenses of the Company's counsel, independent public or certified pubic
accountants and other advisors, (v) all costs and expenses
<PAGE>
18
incurred in connection with the preparation, printing, filing, shipping and
distribution of the Registration Statement (including financial statements,
exhibits, schedules, consents and certificates of experts), each preliminary
prospectus and the Prospectus, and all amendments and supplements thereto, and
this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by
the Company or the Underwriters in connection with qualifying or registering (or
obtaining exemptions from the qualification or registration of) all or any part
of the Common Shares for offer and sale under the state securities or blue sky
laws or the provincial securities laws of Canada, and, if requested by the
Representative, preparing and printing a "Blue Sky Survey" or memorandum, and
any supplements thereto, advising the Underwriters of such qualifications,
registrations and exemptions, (vii) the filing fees incident to the NASD's
review and approval of the Underwriters' participation in the offering and
distribution of the Common Shares, (viii) the fees and expenses associated with
including the Common Shares on the Nasdaq National Market, and (ix) all other
fees, costs and expenses referred to in Item 13 of Part II of the Registration
Statement. Except as provided in this Section 4, Section 6, Section 8 and
Section 9 hereof, the Underwriters shall pay their own expenses, including the
fees and disbursements of their counsel and the expenses of advertising any
offering of Common Stock made by the Underwriters.
The Selling Stockholders further agree with each Underwriter to pay
(directly or by reimbursement) all fees and expenses incident to the performance
of their obligations under this Agreement which are not otherwise specifically
provided for herein, including but not limited to (i) fees and expenses of
counsel and other advisors for such Selling Stockholders, (ii) fees and expenses
of the Custodian and (iii) subject to the provisions of the second paragraph of
Section 2(e), expenses, stock transfer taxes, stamp duties and all other taxes
incident to the sale and delivery of the Common Shares to be sold by such
Selling Stockholders to the Underwriters hereunder (which taxes, if any, may be
deducted by the Custodian under the provisions of Section 2 of this Agreement).
This paragraph is not intended to supersede or otherwise affect any rights the
Selling Stockholders may have outside this Agreement to cause the Company to pay
any such expenses.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS.
The obligations of the several Underwriters to purchase and pay for
the Firm Common Shares or the Optional Common Shares as provided herein shall be
subject to (i) with respect to the Common Shares at the First Closing Date, the
accuracy of the representations and warranties on the part of the Company set
forth in Section 1 hereof as of the date hereof and as of the First Closing Date
as though then made and to the timely performance by the Company of its
covenants and other obligations and to each of the conditions set forth below
other than clauses (g) and (h); and (ii) with respect to the Optional Common
Shares at the Second Closing Date, the accuracy of the respective
representations and warranties on the part of the Company and the Selling
Stockholders set forth in Section 1 hereof as of the date hereof and as of the
Second Closing Date as though then made and to the timely performance by the
Company and the Selling Stockholders of their respective covenants and other
obligations and to each of the following conditions:
(a) ACCOUNTANTS' COMFORT LETTER. On the date hereof, the
Representative shall have received from Arthur Andersen LLP, independent
public or certified public
<PAGE>
19
accountants for the Company, a letter dated the date hereof addressed to
the Underwriters, in form and substance satisfactory to the Representative,
containing statements and information of the type ordinarily included in
accountant's "comfort letters" to underwriters, delivered according to
Statement of Auditing Standards No. 72 (or any successor bulletin), with
respect to the audited and unaudited financial statements and certain
financial information contained in the Registration Statement and the
Prospectus (and the Representative shall have received an additional [___]
conformed copies of such accountants' letter for each of the several
Underwriters).
(b) COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER; NO
OBJECTION FROM NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under the
Securities Act) in the manner and within the time period required by
Rule 424(b) under the Securities Act; or the Company shall have filed
a post-effective amendment to the Registration Statement containing
the information required by such Rule 430A, and such post-effective
amendment shall have become effective; or, if the Company elected to
rely upon Rule 434 under the Securities Act and obtained the
Representative's consent thereto, the Company shall have filed a Term
Sheet with the Commission in the manner and within the time period
required by such Rule 424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment to the Registration Statement, shall be in
effect and no proceedings for such purpose shall have been instituted
or threatened by the Commission; and
(iii) the NASD shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
(c) NO MATERIAL ADVERSE CHANGE. (i) Neither the Company nor any of
its subsidiaries shall have sustained since the date of the latest audited
financial statements included in the Prospectus any loss or interference
with its business from fire, explosion, flood or other calamity, whether or
not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus or (ii) since such date there shall not have
been any Material Adverse Change or any change in the capital stock or
long-term debt of the Company or any of its subsidiaries, otherwise than as
set forth in the Prospectus, the effect of which, in any such case
described in clause (i) or (ii), is, in the judgment of the Representative,
so material and adverse as to make it impracticable or inadvisable to
proceed with the public offering or the delivery of the Common Shares on
the terms and in the manner contemplated in the Prospectus exclusive of any
supplement.
<PAGE>
20
(d) NO DOWNGRADING. Subsequent to the execution and delivery of this
Agreement (i) no downgrading shall have occurred in the rating accorded the
Senior Notes or any of the Company's or any of its subsidiaries' other debt
securities by any "nationally recognized statistical rating organization,"
as that term is defined by the Commission for purposes of Rule 436(g)(2) of
the Rules and Regulations and (ii) no such organization shall have publicly
announced that it has under surveillance or review (other than an
announcement with positive implications of a possible upgrading), its
rating of the Senior Notes or any of the Company's other debt securities.
(e) OPINIONS OF COUNSEL FOR THE COMPANY. On each of the First
Closing Date and the Second Closing Date, the Representative shall have
received the favorable opinion of (a) Mayer, Brown & Platt, special counsel
for the Company, dated as of such Closing Date, the form of which is
attached as EXHIBIT A-1 and (b) , counsel to the Company,
dated as of such Closing Date, the form of which is attached as EXHIBIT A-2
(and the Representative shall have received an additional [___] conformed
copies of such counsels' legal opinions for each of the several
Underwriters).
(f) OPINION OF COUNSEL FOR UNDERWRITERS. On each of the First
Closing Date and Second Closing Date, the Representative shall have
received from Simpson Thacher & Bartlett, counsel for the Underwriters,
such opinion or opinions, dated as of such Closing Date, with respect to
such matters as the Representative may reasonably require, and the Company
shall have furnished to such counsel such documents as they reasonably
request for enabling them to pass upon such matters.
(g) OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS. On each of the
First Closing Date and the Second Closing Date the Representative shall
have received the favorable opinion of Bingham, Dana & Gould LLP, dated as
of such Closing Date, the form of which is attached as EXHIBIT B (and the
Representative shall have received an additional [___] conformed copies of
such counsel's legal opinion for each of the several Underwriters).
(h) SELLING STOCKHOLDERS' CERTIFICATE. On each of the First Closing
Date and the Second Closing Date the Representative shall have received a
written certificate executed by the Attorney-in-Fact of each Selling
Stockholder, dated as of such Closing Date, to the effect that:
(i) the representations, warranties and covenants of such Selling
Stockholder set forth in Section 1(B) of this Agreement are true and
correct with the same force and effect as though expressly made by such
Selling Stockholder on and as of such Closing Date; and
(ii) such Selling Stockholder has complied with all the agreements
and satisfied all the conditions on its part to be performed or satisfied
at or prior to such Closing Date.
(i) SELLING STOCKHOLDERS' DOCUMENTS. Prior to the date hereof, the
Selling Stockholders shall have furnished for review by the Representative
copies of the Powers
<PAGE>
21
of Attorney and Custody Agreements executed by each of the Selling
Stockholders and such further information, certificates and documents as
the Representative may reasonably request.
(j) OFFICERS' CERTIFICATE. On each of the First Closing Date and
Second Closing Date, the Company shall have furnished to the Representative
a certificate, dated as of such Closing Date, of its Chairman of the Board,
its President or a Vice President and its chief financial officer stating
that (i) such officers have carefully examined the Registration Statement
and the Prospectus, (ii) in their opinion, as of the Effective Time, the
Registration Statement and the Prospectus did not include any untrue
statement of a material fact and did not omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, and since the Effective Time, no event has occurred which
should have been set forth in a supplement or amendment to the Registration
Statement or the Prospectus and (iii) to their knowledge after reasonable
investigation, as of the First Closing Date and the Second Closing Date,
the representations and warranties of the Company in this Agreement are
true and correct, the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied hereunder
at or prior to such Closing Date, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or, to their knowledge,
are contemplated by the Commission, and subsequent to the date of the most
recent financial statements in the Prospectus, there has been no Material
Adverse Change, except as set forth in the Prospectus.
(k) BRING-DOWN COMFORT LETTER. On each of the First Closing Date and
the Second Closing Date the Representative shall have received from Arthur
Andersen, LLP, independent public or certified public accountants for the
Company, a letter dated such date, in form and substance reasonably
satisfactory to the Representative, to the effect that they reaffirm the
statements made in the letter furnished by them pursuant to subsection (a)
of this Section 5, except that the specified date referred to therein for
the carrying out of procedures shall be no more than three business days
prior to the First Closing Date or Second Closing Date, as the case may be
(and the Representative shall have received an additional [___] conformed
copies of such accountants' letter for each of the several Underwriters).
(l) LOCK-UP AGREEMENT FROM CERTAIN SHAREHOLDERS OF THE COMPANY. On
the date hereof, the Company shall have furnished to the Representative an
agreement in the form of EXHIBIT C-1 hereto from each of the lender-equity
holders listed in EXHIBIT D hereto and in the form of Exhibit C-2 hereto
from each of the non-lender-equity holders listed in Exhibit D hereto, and
such agreements shall be in full force and effect on each of the First
Closing Date and the Second Closing Date.
(m) RECAPITALIZATION. The Recapitalization, as defined and described
in the Prospectus, shall have been, or be concurrently, completed as of the
First Closing Date, including, without limitation, the Senior Note Offering
shall have been, or be concurrently, consummated and the Company shall have
entered, or be concurrently
<PAGE>
22
entering, into the New Credit Facility and the proceeds therefrom shall
have been applied, or are being applied concurrently with the offering of
the Common Shares, as described in the Prospectus.
(n) ADDITIONAL DOCUMENTS. On or before each of the First Closing
Date and the Second Closing Date, the Representative and counsel for the
Underwriters shall have received such information, documents and opinions
as they may reasonably require for the purposes of enabling them to pass
upon the issuance and sale of the Common Shares as contemplated herein, or
in order to evidence the accuracy of any of the representations and
warranties, or the satisfaction of any of the conditions or agreements,
herein contained.
(o) LEGAL MATTERS. All corporate proceedings and other legal matters
incident to the authorization, form and validity of this Agreement, the
Common Shares, the Indenture, the New Credit Facility, the Registration
Statement and the Prospectus, and all other legal matters relating to this
Agreement and the transactions contemplated hereby shall be reasonably
satisfactory in all material respects to counsel for the Underwriters, and
the Company shall have furnished to such counsel all documents and
information that they may reasonably request to enable them to pass upon
such matters.
If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representative by notice to the Company and the Selling Stockholders at any time
prior to the First Closing Date and, with respect to the Optional Common Shares,
at any time prior to the Second Closing Date, which termination shall be without
liability on the part of any party to any other party, except that Section 4,
Section 6, Section 8 and Section 9 shall at all times be effective and shall
survive such termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES.
If this Agreement is terminated by the Representative pursuant to
Section 5, Section 7 or Section 11(i) (in respect of the Company's securities
only), (iv) or (v) or if the sale to the Underwriters of the Common Shares or
the Optional Common Shares, as the case may be, is not consummated because of
any refusal, inability or failure on the part of the Company to perform any
agreement herein or to comply with any provision hereof, the Company agrees to
reimburse the Representative and the other Underwriters severally, upon demand
for all out-of-pocket expenses that shall have been reasonably incurred by the
Representative and the Underwriters in connection with the proposed purchase and
the offering and sale of the Common Shares or the Optional Common Shares, as the
case may be, including but not limited to fees and disbursements of counsel,
printing expenses, travel expenses, postage, facsimile and telephone charges.
In the event the sale of Optional Common Shares is not consummated because of
any refusal, inability or failure on the part of any Selling Stockholder to
perform any agreement herein or to comply with any provision hereof, such
Selling Stockholder (or such Selling Stockholders severally, in the event such
non-consummation is caused by more than one Selling Stockholder as described
above) agree to reimburse the Representative and the other Underwriters
<PAGE>
23
severally, upon demand for those expenses described above which are attributable
to the Optional Common Shares to be sold by such Selling Stockholder(s).
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.
This Agreement shall not become effective until the later of (i) the
execution of this Agreement by the parties hereto and (ii) notification by the
Commission to the Company and the Representative of the effectiveness of the
Registration Statement under the Securities Act. Prior to such effectiveness,
this Agreement may be terminated by any party by notice to each of the other
parties hereto, and any such termination shall be without liability on the part
of (a) the Company or the Selling Stockholders to any Underwriter, except that
the Company and the Selling Stockholders shall be obligated to reimburse the
expenses of the Representative and the Underwriters pursuant to Sections 4 and 6
hereof, (b) of any Underwriter to the Company or the Selling Stockholders or
(c) of any party hereto to any other party except that the provisions of
Section 8 and Section 9 shall at all times be effective and shall survive such
termination.
SECTION 8. INDEMNIFICATION.
(a) INDEMNIFICATION OF THE UNDERWRITERS. The Company and its
subsidiaries agree to indemnify and hold harmless each Underwriter and each
Selling Stockholder, their respective officers and employees, and each person,
if any, who controls any Underwriter and any Selling Stockholder within the
meaning of the Securities Act and the Exchange Act against any loss, claim,
damage, liability or expense, as incurred, to which such Underwriter, such
Selling Stockholder or such controlling person (as applicable) may become
subject, under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of the Company), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of or
is based (i) upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, or any amendment thereto,
including any information deemed to be a part thereof pursuant to Rule 430A or
Rule 434 under the Securities Act, or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) upon any untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the omission or
alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; or (iii) any act or failure to act or any alleged act or
failure to act by any Underwriter in connection with, or relating in any manner
to, the Common Stock or the offering contemplated hereby, and which is included
as part of or referred to in any loss, claim, damage, liability or action
arising out of or based upon any matter covered by clause (i) or (ii) above,
PROVIDED that the Company shall not be liable under this clause (iii) to the
extent that a court of competent jurisdiction shall have determined by a final
judgment that such loss, claim, damage, liability or action resulted directly
from any such acts or failures to act undertaken or omitted to be taken by such
Underwriter through its bad faith or willful misconduct; and to reimburse each
Underwriter, each Selling Stockholder and each such controlling person (as
applicable) for any and all expenses (including the reasonable fees and
disbursements of counsel chosen by
<PAGE>
24
Montgomery Securities) as such expenses are reasonably incurred by such
Underwriter, such Selling Stockholder or such controlling person (as applicable)
in connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action; PROVIDED, HOWEVER,
that the foregoing indemnity agreement shall not apply to any loss, claim,
damage, liability or expense to the extent, but only to the extent, arising out
of or based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Representative or by such Selling
Stockholder (as applicable) expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); and PROVIDED, FURTHER, that with respect to any preliminary
prospectus, the foregoing indemnity agreement shall not inure to the benefit of
any Underwriter from whom the person asserting any loss, claim, damage,
liability or expense purchased Common Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Common Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense.
Each of the Selling Stockholders agrees to indemnify and hold harmless
the Company and each Underwriter, their respective officers and employees, and
each person, if any, who controls the Company and any Underwriter within the
meaning of the Securities Act and the Exchange Act against any loss, claim,
damage, liability or expense, as incurred, to which the Company, such
Underwriter or such controlling person (as applicable) may become subject, under
the Securities Act, the Exchange Act or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Selling Stockholder), insofar as such loss, claim, damage, liability or expense
(or actions in respect thereof as contemplated below) arises out of or is based
(i) upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, or any amendment thereto, including any
information deemed to be a part thereof pursuant to Rule 430A or Rule 434 under
the Securities Act, or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case only to the extent that the untrue statement or
alleged untrue statement or the omission or alleged omission was made in
reliance upon and in conformity with written information furnished to the
Company or the Underwriters by such Selling Stockholder expressly for use
therein; or (ii) upon any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission therefrom
of a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, in each
case only to the extent that the untrue statement or alleged untrue statement or
the omission or alleged omission was made in reliance upon and in conformity
with written information furnished to the Company or the Underwriters by such
Selling Stockholder expressly for use therein; or (iii) any act or failure to
act or any alleged act or failure to act by any Underwriter in connection with,
or relating in any manner to, the Common Stock or the offering contemplated
hereby, and which is based upon any matter covered
<PAGE>
25
by clause (i) or (ii) above, PROVIDED that such Selling Stockholder shall not be
liable under this clause (iii) to the extent that a court of competent
jurisdiction shall have determined by a final judgment that such loss, claim,
damage, liability or action resulted directly from any such acts or failures to
act undertaken or omitted to be taken by such Underwriter through its bad faith
or willful misconduct; and to reimburse the Company, each Underwriter, each such
controlling person (as applicable) for any and all expenses (including the
reasonable fees and disbursements of counsel chosen by Montgomery Securities) as
such expenses are reasonably incurred by the Company, such Underwriter or such
controlling person (as applicable) in connection with investigating, defending,
settling, compromising or paying any such loss, claim, damage, liability,
expense or action; PROVIDED, HOWEVER, that with respect to any preliminary
prospectus, the foregoing indemnity agreement shall not inure to the benefit of
any Underwriter from whom the person asserting any loss, claim, damage,
liability or expense purchased Common Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended
or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such Underwriter
to such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Common Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense; PROVIDED that the
liability of each Selling Stockholder under the foregoing indemnity agreement
shall be limited to an amount equal to the initial public offering price of the
Common Shares sold by such Selling Stockholder, less the underwriting discount,
as set forth on the front cover page of the Prospectus.
The indemnity agreement set forth in this Section 8(a) shall be in
addition to any liabilities that the Company and the Selling Stockholders may
otherwise have.
(b) INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND OFFICERS. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement, the Selling Stockholders and each person, if any, who
controls the Company or any Selling Stockholder within the meaning of the
Securities Act or the Exchange Act, against any loss, claim, damage, liability
or expense, as incurred, to which the Company, or any such director, officer,
Selling Stockholder or controlling person may become subject, under the
Securities Act, the Exchange Act, or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such loss, claim, damage, liability or expense (or
actions in respect thereof as contemplated below) arises out of or is based upon
any untrue or alleged untrue statement of a material fact contained in the
Registration Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or arises out of or is based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any preliminary prospectus, the Prospectus (or any amendment or
supplement thereto), in reliance upon and in conformity with written information
furnished to the Company by the Representative expressly for use therein; and to
reimburse the Company, or any such director, officer, Selling Stockholder or
controlling person for any legal
<PAGE>
26
and other expense reasonably incurred by the Company, or any such director,
officer, Selling Stockholder or controlling person in connection with
investigating, defending, settling, compromising or paying any such loss, claim,
damage, liability, expense or action. Each of the Company and each of the
Selling Stockholders hereby acknowledges that the only information that the
Underwriters have furnished to the Company expressly for use in the Registration
Statement, any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto) are the statements set forth (A) in the paragraph on the
inside front cover page of the Prospectus concerning stabilization by the
Underwriters (B) in the last paragraph on the front cover page of the Prospectus
and (C) in the table in the first paragraph and in the second, fifth, eighth and
ninth paragraphs under the caption "Underwriting" in the Prospectus; and the
Underwriters confirm that such statements are correct. The indemnity agreement
set forth in this Section 8(b) shall be in addition to any liabilities that each
Underwriter may otherwise have.
(c) NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES. Promptly
after receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 8, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 8 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; PROVIDED, HOWEVER, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with local counsel), approved by the
indemnifying party (Montgomery Securities in the case of Section 8(b) and
Section 9), representing the indemnified parties who are parties to such action)
or (ii) the indemnifying party shall not have employed counsel satisfactory to
the indemnified party to represent the indemnified party within a reasonable
time after notice of commencement of the action, in each of which
<PAGE>
27
cases the reasonable fees and expenses of counsel shall be at the expense of the
indemnifying party.
(d) SETTLEMENTS. The indemnifying party under this Section 8 shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
against any loss, claim, damage, liability or expense by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by
Section 8(c) hereof, the indemnifying party agrees that it shall be liable for
any settlement of any proceeding effected without its written consent if
(i) such settlement is entered into more than 30 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 15 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed the indemnified party in accordance with such request prior to
the date of such settlement. Notwithstanding the immediately preceding
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, an indemnifying party shall not be liable for any settlement effected
without its consent if such indemnifying party (i) reimburses such indemnified
party in accordance with such request to the extent it in its reasonable
judgment considers such request to be reasonable and (ii) provides written
notice to the indemnified party substantiating the unpaid balance as
unreasonable, in each case prior to the date of such settlement. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement, compromise or consent to the entry of judgment in
any pending or threatened action, suit or proceeding in respect of which any
indemnified party is or could have been a party and indemnity was or could have
been sought hereunder by such indemnified party, unless such settlement,
compromise or consent includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such action,
suit or proceeding.
(e) INDEMNIFICATION OF A QUALIFIED INDEPENDENT UNDERWRITER. Without
limitation and in addition to its obligations under the other subsections of
this Section 8, the Company agrees to indemnify and hold harmless Montgomery
Securities, Inc. and each person, if any, who controls Montgomery Securities,
Inc. within the meaning of the Securities Act or the Exchange Act from and
against any loss, claim, damage, liabilities or expense, as incurred, arising
out of or based upon Montgomery Securities, Inc.'s acting as a "qualified
independent underwriter" (within the meaning of Rule 2720 to the NASD's Conduct
Rules) in connection with the offering contemplated by this Agreement, and
agrees to reimburse each such indemnified person for any legal or other expense
reasonably incurred by them in connection with investigating, defending,
settling, compromising or paying any such loss, claim, damage, liability,
expense or action; PROVIDED, HOWEVER, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage, liability or
expense results from the gross negligence or willful misconduct of Montgomery
Securities, Inc.
<PAGE>
28
SECTION 9. CONTRIBUTION.
If the indemnification provided for in Section 8 is for any reason
held to be unavailable to or otherwise insufficient to hold harmless an
indemnified party in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount paid or payable by such indemnified party, as incurred, as
a result of any losses, claims, damages, liabilities or expenses referred to in
Section 8 (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Stockholders, on the one hand,
and the Underwriters, on the other hand, from the offering of the Common Shares
pursuant to this Agreement or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company and the Selling Stockholders, on the one
hand, and the Underwriters, on the other hand, in connection with the statements
or omissions or inaccuracies in the representations and warranties herein which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative benefits received by
the Company and the Selling Stockholders, on the one hand, and the Underwriters,
on the other hand, in connection with the offering of the Common Shares pursuant
to this Agreement shall be deemed to be in the same respective proportions as
the total net proceeds from the offering of the Common Shares pursuant to this
Agreement (before deducting expenses) received by the Company and the Selling
Stockholders and the total underwriting discount received by the Underwriters,
in each case as set forth on the front cover page of the Prospectus (or, if
Rule 434 under the Securities Act is used, the corresponding location on the
Term Sheet) bear to the aggregate initial public offering price of the Common
Shares as set forth on such cover. The relative fault of the Company and the
Selling Stockholders, on the one hand, and the Underwriters, on the other hand,
shall be determined by reference to, among other things, whether any such untrue
or alleged untrue statement of a material fact or omission or alleged omission
to state a material fact or any such inaccurate or alleged inaccurate
representation or warranty relates to information supplied by the Company or the
Selling Stockholders, on the one hand, or the Underwriters, on the other hand,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 8(c), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
Section 8(c) with respect to notice of commencement of any action shall apply if
a claim for contribution is to be made under this Section 9; PROVIDED, HOWEVER,
that no additional notice shall be required with respect to any action for which
notice has been given under Section 8(c) for purposes of indemnification. The
Company, the Selling Stockholders and the Underwriters agree that it would not
be just and equitable if contribution pursuant to this Section 9 were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to in this Section 9. Notwithstanding
the provisions of this Section 9, no Underwriter shall be required to contribute
any amount in excess of the underwriting commissions received by such
Underwriter in connection with the Common Shares underwritten by it and
distributed
<PAGE>
29
to the public. The liability of each Selling Stockholder for contribution
hereunder shall be limited to an amount equal to the initial public offering
price of the Common Shares sold by such Selling Stockholder, less the
underwriting discount, as set forth on the front cover page of the Prospectus.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 9 are several,
and not joint, in proportion to their respective underwriting commitments as set
forth opposite their names in SCHEDULE A. For purposes of this Section 9, each
officer and employee of an Underwriter and each person, if any, who controls an
Underwriter within the meaning of the Securities Act and the Exchange Act shall
have the same rights to contribution as such Underwriter, and each director of
the Company, each officer of the Company who signed the Registration Statement,
and each person, if any, who controls the Company with the meaning of the
Securities Act and the Exchange Act shall have the same rights to contribution
as the Company.
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS.
If, on the First Closing Date or the Second Closing Date, as the case
may be, any one or more of the several Underwriters shall fail or refuse to
purchase Common Shares that it or they have agreed to purchase hereunder on such
date, and the aggregate number of Common Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase does not
exceed 10% of the aggregate number of the Common Shares to be purchased on such
date, the other Underwriters shall be obligated, severally, in the proportions
that the number of Firm Common Shares set forth opposite their respective names
on SCHEDULE A bears to the aggregate number of Firm Common Shares set forth
opposite the names of all such non-defaulting Underwriters, or in such other
proportions as may be specified by the Representative with the consent of the
non-defaulting Underwriters, to purchase the Common Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date. If, on the First Closing Date or the Second Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Common
Shares and the aggregate number of Common Shares with respect to which such
default occurs exceeds 10% of the aggregate number of Common Shares to be
purchased on such date, and arrangements satisfactory to the Representative and
the Company for the purchase of such Common Shares are not made within 48 hours
after such default, this Agreement shall terminate without liability of any
party to any other party except that the provisions of Section 4, Section 8,
Section 9 and this Section 10 shall at all times be effective and shall survive
such termination. In any such case either the Representative or the Company
shall have the right to postpone the First Closing Date or the Second Closing
Date, as the case may be, but in no event for longer than seven days in order
that the required changes, if any, to the Registration Statement and the
Prospectus or any other documents or arrangements may be effected. As used in
this Agreement, the term "Underwriter" shall be deemed to include any person
substituted for a defaulting Underwriter under this Section 10. Any action
taken under this Section 10 shall not relieve any defaulting Underwriter from
liability to the Company or the other Underwriters in respect of any default of
such Underwriter under this Agreement.
<PAGE>
30
SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First
Closing Date this Agreement may be terminated by the Representative by notice
given to the Company and the Selling Stockholders if at any time (i) trading or
quotation in any of the Company's securities shall have been suspended or
limited, or trading in securities generally on any of the Nasdaq Stock Market,
the New York Stock Exchange, the American Stock Exchange or in the
over-the-counter market shall have been suspended or limited, or minimum or
maximum prices shall have been generally established on any such stock exchange
or market by the Commission, by any such exchange, by the NASD or by any other
regulatory body or governmental authority having jurisdiction; (ii) a general
banking moratorium shall have been declared by any of federal or state
authorities; (iii) there shall have occurred any outbreak or escalation of
national or international hostilities or any crisis or calamity, or a
declaration of a national emergency or war by the United States, or any change
in the United States or international financial markets, or any substantial
change or development involving a prospective substantial change in United
States' or international political, financial or economic conditions (or the
effect of international conditions on the financial markets in the United States
shall be such), in each case as in the judgment of the Representative is
material and adverse and makes it impracticable to market the Common Shares in
the manner and on the terms described in the Prospectus or to enforce contracts
for the sale of securities; (iv) in the judgment of the Representative there
shall have occurred any Material Adverse Change; or (v) the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as in the judgment of the Representative may interfere
materially with the conduct of the business and operations of the Company
regardless of whether or not such loss shall have been insured. Any termination
pursuant to this Section 11 shall be without liability on the part of (a) the
Company or the Selling Stockholders to any Underwriter, except that the Company
and the Selling Stockholders shall be obligated to reimburse the expenses of the
Representative and the Underwriters pursuant to Sections 4 and 6 hereof, (b)
any Underwriter to the Company or the Selling Stockholders, or (c) of any party
hereto to any other party except that the provisions of Section 8 and Section 9
shall at all times be effective and shall survive such termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY.
The respective indemnities, agreements, representations, warranties
and other statements of the Company, of its officers, of the Selling
Stockholders and of the several Underwriters set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
its or their partners, officers or directors or any controlling person or the
Selling Stockholders, as the case may be, and will survive delivery of and
payment for the Common Shares sold hereunder and any termination of this
Agreement.
SECTION 13. NOTICES.
All communications hereunder shall be in writing and shall be mailed,
hand delivered or telecopied and confirmed to the parties hereto as follows:
<PAGE>
31
If to the Representative:
NationsBanc Montgomery Securities, Inc.
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-249-5558
Attention: Richard A. Smith
with a copy to:
NationsBanc Montgomery Securities, Inc.
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
If to the Company:
Friendly Ice Cream Corporation
1855 Boston Road
Wilbraham, MA 01095
Facsimile: (413) 543-3186
Attention: George G. Roller
If to the Selling Stockholders prior to the Second Closing Date:
BankBoston, N.A.
150 Federal Street
Boston, MA 02110
Facsimile:
Attention: Rod Guinn
If to the Selling Stockholders after the Second Closing Date, to BankBoston,
N.A. at the address set forth above, unless such Selling Stockholder has
furnished requisite contact information to the Company or the Underwriters, in
which case communications shall be sent in accordance with such contact
information.
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 14. SUCCESSORS.
This Agreement will inure to the benefit of and be binding upon the
parties hereto, including any substitute Underwriters pursuant to Section 10
hereof, and to the benefit of the employees, officers and directors and
controlling persons referred to in Section 8 and Section 9, and in each case
their respective successors, and personal representatives, and no other person
<PAGE>
32
will have any right or obligation hereunder. The term "successors" shall not
include any purchaser of the Common Shares as such from any of the Underwriters
merely by reason of such purchase.
SECTION 15. PARTIAL UNENFORCEABILITY.
The invalidity or unenforceability of any Section, paragraph or
provision of this Agreement shall not affect the validity or enforceability of
any other Section, paragraph or provision hereof. If any Section, paragraph or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, there shall be deemed to be made such minor changes (and only
such minor changes) as are necessary to make it valid and enforceable.
SECTION 16. GOVERNING LAW PROVISIONS.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO
BE PERFORMED IN SUCH STATE.
SECTION 17. FAILURE OF ONE OR MORE OF THE SELLING STOCKHOLDERS TO
SELL AND DELIVER COMMON SHARES.
If one or more of the Selling Stockholders shall fail to sell and
deliver to the Underwriters the Optional Common Shares to be sold and delivered
by such Selling Stockholders at the Second Closing Date pursuant to this
Agreement, then the Underwriters may at their option, by written notice from the
Representative to the Company and the Selling Stockholders, either (i) terminate
this Agreement with respect to the Optional Common Shares at the Second Closing
Date without any liability on the part of any Underwriter or, except as provided
in Sections 4, 6, 8 and 9 hereof, the Company or the Selling Stockholders, or
(ii) purchase the shares which the Company and other Selling Stockholders have
agreed to sell and deliver in accordance with the terms hereof. If one or more
of the Selling Stockholders shall fail to sell and deliver to the Underwriters
the Optional Common Shares to be sold and delivered by such Selling Stockholders
pursuant to this Agreement at the Second Closing Date, then the Underwriters
shall have the right, by written notice from the Representative to the Company
and the Selling Stockholders, to postpone the Second Closing Date, as the case
may be, but in no event for longer than seven days in order that the required
changes, if any, to the Registration Statement and the Prospectus or any other
documents or arrangements may be effected.
SECTION 18. GENERAL PROVISIONS.
This Agreement constitutes the entire agreement of the parties to this
Agreement and supersedes all prior written or oral and all contemporaneous oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may be executed in two or more counterparts, each one of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. This Agreement may not be amended or
modified unless in writing by all of the parties hereto, and no condition herein
(express or implied) may be waived unless waived in writing by each party whom
the condition
<PAGE>
33
is meant to benefit. The Table of Contents and the Section headings herein are
for the convenience of the parties only and shall not affect the construction or
interpretation of this Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
<PAGE>
34
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
FRIENDLY ICE CREAM CORPORATION
By:
------------------------------
Name:
Title:
[Names of Selling Stockholders]
By:
------------------------------
(Attorney-in-fact)
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Representative in San Francisco, California as of the date first above
written.
NATIONSBANC MONTGOMERY SECURITIES, INC.
Acting as Representative of the
several Underwriters named in
the attached Schedule A.
By:
----------------------------------
<PAGE>
SCHEDULE A
NUMBER OF FIRM COMMON
UNDERWRITERS SHARES TO BE PURCHASED
NationsBanc Montgomery
Securities, Inc.
[___] [___]
[___] [___]
[___] [___]
[___] [___]
Total 5,000,000
<PAGE>
SCHEDULE B
MAXIMUM NUMBER
OF OPTIONAL
COMMON SHARES TO
SELLING STOCKHOLDER BE SOLD
- ------------------- ----------------
Selling Stockholder........................ [______]
Selling Stockholder........................ [______]
Total............................. [______]
<PAGE>
EXHIBIT A-1
Opinion of Mayer, Brown & Platt, special counsel to the Company, to be
delivered pursuant to Section 5(e) of the Underwriting Agreement.
References to the Prospectus in this EXHIBIT A-1 include any
supplements thereto at the Closing Date.
(i) The authorized, issued and outstanding capital stock of the
Company (including the Common Stock) conform in all material respects to
the descriptions thereof set forth in the Prospectus. The description of
the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents in
all material respects the information required to be shown with respect to
such plans, arrangements, options and rights.
(ii) Assuming that the Underwriting Agreement has been duly
authorized, executed and delivered by the Company and the Selling
Stockholders, it is a valid and binding agreement of the Company
enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law or public
policy and except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles.
(iii) Assuming that the Common Shares to be purchased by the
Underwriters from the Company have been duly authorized for issuance and
sale pursuant to the Underwriting Agreement, when such Common Shares have
been issued and delivered by the Company pursuant to the Underwriting
Agreement against payment of the consideration set forth therein, such
Common Shares will be validly issued, fully paid and nonassessable;
assuming that the Common Shares to be sold by the Selling Stockholders to
the Underwriters have been duly authorized, such Common Shares have been
validly issued and are fully paid and nonassessable.
(iv) Each of the Registration Statement and the Rule 462(b)
Registration Statement, if any, has been declared effective by the
Commission under the Securities Act. To the knowledge of such counsel, no
stop order suspending the effectiveness of either of the Registration
Statement or the Rule 462(b) Registration Statement, if any, has been
issued under the Securities Act and no proceedings for such purpose have
been instituted or are pending or are contemplated or threatened by the
Commission. Any required filing of the Prospectus and any supplement
thereto pursuant to Rule 424(b) under the Securities Act has been made in
the manner and within the time period required by such Rule 424(b).
(v) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus and each amendment or supplement to
the Registration Statement and the Prospectus as of their respective
effective or issue dates (other than the
A-1
<PAGE>
financial statements and supporting schedules included or incorporated by
reference therein or in exhibits to or excluded from the Registration
Statement, as to which no opinion need be rendered) comply as to form in
all material respects with the applicable requirements of the Securities
Act.
(vi) The Common Shares have been approved for inclusion on the Nasdaq
National Market.
(vii) The statements (i) in the Prospectus under the captions "Risk
Factors--Restrictions Imposed Under New Credit Facility", "--Fraudulent
Conveyance" and "--Shares Eligible for Future Sale", "Management's
Discussion and Analysis and Results of Operations--Liquidity", "Description
of New Credit Facility", "Description of Senior Notes", "Description of
Capital Stock", "Shares Eligible for Future Sale", and "Underwriting" and
(ii) in Item 14 and Item 15 of the Registration Statement, insofar as such
statements constitute matters of law, summaries of legal matters, the
Company's charter or by-law provisions, documents or legal proceedings, or
legal conclusions, has been reviewed by such counsel and fairly present and
summarize, in all material respects, the matters referred to therein.
(viii) No consent, approval, authorization or other order of, or
registration or filing with, any federal or New York court, governmental
authority or agency, is required for the Company's execution, delivery and
performance of the Underwriting Agreement and consummation of the
transactions contemplated thereby and by the Prospectus, except as required
under the Securities Act, applicable state securities or blue sky laws and
from the NASD.
(ix) The execution and delivery of the Underwriting Agreement by the
Company and the performance by the Company of its obligations thereunder
(other than performance by the Company of its obligations under the
indemnification section of the Underwriting Agreement, as to which no
opinion need be rendered) (i) will not result in any violation of the
provisions of the charter or by-laws of the Company or any subsidiary;
(ii) will not constitute a breach of, or Default or a Debt Repayment
Triggering Event under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or
any of its subsidiaries pursuant to, any Existing Instrument identified on
an annex to such opinion which the Company has represented lists all
material Existing Instruments to which the Company or any of such
subsidiaries is bound or to which any of the property or assets of the
Company or any of such subsidiaries is subject, except for such breaches,
Defaults, liens, charges or encumbrances as would not, individually or in
the aggregate, result in a Material Adverse Change; or (iii) will not
result in any violation of any federal or New York statute or any rule or
regulation that has been issued pursuant to any federal or New York statute
or any order known to such counsel issued pursuant to any federal or New
York statute by any court or governmental agency or body or court having
jurisdiction over the Company or any subsidiary.
(x) The Company is not, and after receipt of payment for the Common
Shares will not be, an "investment company" within the meaning of
Investment Company Act.
A-2
<PAGE>
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants
for the Company and with representatives of the Underwriters at which the
contents of the Registration Statement and the Prospectus, and any
supplements or amendments thereto, and related matters were discussed and,
although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus (other than as
specified above in paragraphs (i) and (vii)), and any supplements or
amendments thereto, on the basis of the foregoing, nothing has come to
their attention which has led them to believe that either the Registration
Statement or any amendments thereto, at the time the Registration Statement
or such amendments became effective, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that
the Prospectus, as of its date and at the First Closing Date or the Second
Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading (it being understood that such counsel need
express no belief as to the financial statements or schedules or other
financial or statistical data derived therefrom, included in the
Registration Statement or the Prospectus or any amendments or supplements
thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the
General Corporation Law of the State of Delaware, the law of the State of
New York or the federal law of the United States, to the extent they deem
proper and specified in such opinion, upon the opinion (which shall be
dated the First Closing Date or the Second Closing Date, as the case may
be, shall be satisfactory in form and substance to the Underwriters, shall
expressly state that the Underwriters may rely on such opinion as if it
were addressed to them and shall be furnished to the Representative) of
other counsel of good standing whom they believe to be reliable and who are
satisfactory to counsel for the Underwriters; PROVIDED, HOWEVER, that such
counsel shall further state that they believe that they and the
Underwriters are justified in relying upon such opinion of other counsel,
and (B) as to matters of fact, to the extent they deem proper, on
certificates of responsible officers of the Company and public officials.
A-3
<PAGE>
EXHIBIT A-2
Opinion to be delivered pursuant to Section 5(e) of the Underwriting
Agreement by Aaron B. Parker, General Counsel of the Company and/or by [Choate
Hall], Massachusetts counsel to the Company, which opinions may be divided among
such counsel in any manner satisfactory to counsel to the Underwriters.
References to the Prospectus in this Exhibit A-2 include any supplements thereto
at the Closing Date.
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the Commonwealth of
Massachusetts.
(ii) The Company has full corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the
Underwriting Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in the States of
and in each other jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct of
business, except for such jurisdictions (other than the States of
) where the failure to so qualify or to be in good standing
would not, individually or in the aggregate, result in a Material Adverse
Change.
(iv) Each subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has full corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Prospectus and, to the knowledge of such counsel, is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct of
business, except for such jurisdictions where the failure to so qualify or
to be in good standing would not, individually or in the aggregate, result
in a Material Adverse Change.
(v) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued and outstanding capital stock of each
subsidiary has been duly authorized and validly issued, is fully paid and
non-assessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance or, to the knowledge of such counsel, any pending or
threatened claim.
(vi) All of the outstanding shares of Common Stock (including those
to be sold by the Selling Stockholders to the Underwriters) have been duly
authorized and validly issued, are fully paid and nonassessable and, to
such counsel's knowledge, have been issued in compliance with the
registration and qualification requirements of federal and state securities
laws. The form of certificate used to evidence the Common Stock is in due
and proper form and complies in all material respects with all applicable
requirements of the charter and by-laws of the Company and the General
Corporation Law of the Commonwealth of Massachusetts.
A-4
<PAGE>
(vii) No stockholder of the Company or any other person has any
preemptive right, right of first refusal or other similar right to
subscribe for or purchase securities of the Company arising (i) by
operation of the charter or by-laws of the Company or the General
Corporation Law of the Commonwealth of Massachusetts or (ii) to the
knowledge of such counsel, otherwise.
(viii) The Underwriting Agreement has been duly authorized, executed
and delivered by, and is a valid and binding agreement of, the Company.
(ix) The Common Shares to be purchased by the Underwriters from the
Company have been duly authorized for issuance and sale pursuant to the
Underwriting Agreement and, when issued and delivered by the Company
pursuant to the Underwriting Agreement against payment of the consideration
set forth therein, will be validly issued, fully paid and nonassessable;
the Common Shares to be sold by the Selling Stockholders to the
Underwriters have been duly authorized, validly issued and are fully paid
and nonassessable.
(x) To the knowledge of such counsel, no stop order suspending the
effectiveness of either of the Registration Statement or the Rule 462(b)
Registration Statement, if any, has been issued under the Securities Act
and no proceedings for such purpose have been instituted or are pending or
are contemplated or threatened by the Commission.
(xi) The statements (i) in the Prospectus under the captions
"Prospectus Summary--Recent Developments", "Risk Factors--Relationships
with Perkins; Potential Conflicts of Interest; Dependence on Senior
Management", "--Regulation" and "--Effect of Certain Anti-Takeover
Provisions", "Management's Discussion and Analysis and Results of
Operations--Liquidity", "Business--Licenses and Trademarks" and
"--Government Regulation and Legal Proceedings", "Management", "Certain
Transactions", "Description of Capital Stock" and "Underwriting" and
(ii) in Item 14 and Item 15 of the Registration Statement, insofar as such
statements constitute matters of law, summaries of legal matters, the
Company's charter or by-law provisions, documents or legal proceedings, or
legal conclusions, has been reviewed by such counsel and fairly present and
summarize, in all material respects, the matters referred to therein.
(xii) To the knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or threatened which are
required to be disclosed in the Registration Statement, other than those
disclosed therein.
(xiii) To the knowledge of such counsel, there are no Existing
Instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed as exhibits thereto; and the descriptions
thereof and references thereto are correct in all material respects.
(xiv) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the
A-5
<PAGE>
Company's execution, delivery and performance of the Underwriting Agreement
and consummation of the transactions contemplated thereby and by the
Prospectus, except as required under the Securities Act, applicable state
securities or blue sky laws and from the NASD.
(xv) The execution and delivery of the Underwriting Agreement by the
Company and the performance by the Company of its obligations thereunder
(other than performance by the Company of its obligations under the
indemnification section of the Underwriting Agreement, as to which no
opinion need be rendered) (i) have been duly authorized by all necessary
corporate action on the part of the Company; (ii) will not result in any
violation of the provisions of the charter or by-laws of the Company or any
subsidiary; (iii) will not constitute a breach of, or Default or a Debt
Repayment Triggering Event under, or result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the
Company or any of its subsidiaries pursuant to, any material Existing
Instrument, except for such breaches, Defaults, liens, charges or
encumbrances as would not, individually or in the aggregate, result in a
Material Adverse Change; or (iv) to the knowledge of such counsel, will not
result in any violation of any law, administrative regulation or
administrative or court decree applicable to the Company or any subsidiary,
except for such violations as would not, individually or in the aggregate,
result in a Material Adverse Change.
(xvi) Except as disclosed in the Prospectus, to the knowledge of such
counsel, there are no persons with registration or other similar rights to
have any equity or debt securities registered for sale under the
Registration Statement or included in the offering contemplated by the
Underwriting Agreement, except for such rights as have been duly waived.
(xvii) To the knowledge of such counsel, neither the Company nor any
subsidiary is in violation of its charter or by-laws or any law,
administrative regulation or administrative or court decree applicable to
the Company or any subsidiary or is in Default in the performance or
observance of any obligation, agreement, covenant or condition contained in
any material Existing Instrument, except in each such case for such
violations or Defaults as would not, individually or in the aggregate,
result in a Material Adverse Change.
(xviii) The Company and each of its subsidiaries have good and
marketable title in fee simple to all real property owned by them, in each
case free and clear of all liens, encumbrances and defects except such as
are described in the Prospectus or such as do not materially affect the
value of such property and do not materially interfere with the use made
and proposed to be made of such property by the Company and its
subsidiaries; and all real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases, with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries.
A-6
<PAGE>
(xix) To such counsel's knowledge and other than as set forth in the
Prospectus, (A) the Company possesses such certificates, authorizations or
permits issued by the appropriate state, federal or foreign regulatory
agencies or bodies necessary to conduct the business now operated by it,
except where the failure to possess such certificates, authorizations or
permits would not be reasonably expected to result in a Material Adverse
Change, and (B) the Company has not received any notice of proceedings
relating to the revocation or modification of any such certificate,
authorization or permit which, singularly or in the aggregate, if the
subject of an unfavorable decision, ruling, or finding, would be reasonably
expected to result in a Material Adverse Change.
(xx) To such counsel's knowledge and other than as set forth in the
Prospectus, the Company and each of its subsidiaries own or possess
adequate rights to use all material patents, patent applications,
trademarks, service marks, trade names, trademark registrations, service
mark registrations, copyrights and licenses necessary for the conduct of
their respective businesses and have no reason to believe that the conduct
of their respective businesses will conflict with, and have not received
any notice of any claim of conflict with, any such rights of others.
In rendering the opinion referred to in subsection (xviii) above, such
counsel may state that no examination of record titles for the purpose of
such opinion has been made, and that they are relying upon a general review
of the titles of the Company and its subsidiaries, upon opinions of local
counsel and abstracts, reports and policies of title companies rendered or
issued at or subsequent to the time of acquisition of such property by the
Company or its subsidiaries, upon opinions of counsel to the lessors of
such property and, in respect of matters of fact, upon certificates of
officers of the Company or its subsidiaries, PROVIDED that such counsel
shall state that they believe that both the Underwriters and they are
justified in relying upon such opinions, abstracts, reports, policies and
certificates.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants
for the Company and with representatives of the Underwriters at which the
contents of the Registration Statement and the Prospectus, and any
supplements or amendments thereto, and related matters were discussed and,
although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus (other than as
specified above in paragraph (xi)), and any supplements or amendments
thereto, on the basis of the foregoing, nothing has come to their attention
which has led them to believe that either the Registration Statement or any
amendments thereto, at the time the Registration Statement or such
amendments became effective, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus, as of its date and at the First Closing Date or the Second
Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading (it being understood that such counsel need
express no belief as to the financial statements or schedules or other
A-7
<PAGE>
financial or statistical data derived therefrom, included in the
Registration Statement or the Prospectus or any amendments or supplements
thereto).
A-8
<PAGE>
EXHIBIT B
Opinion of counsel for the Selling Stockholders to be delivered
pursuant to Section 5(g) of the Underwriting Agreement.
The opinion of such counsel pursuant to Section 5(g) shall be rendered
to the Representative at the request of the Company and shall so state therein.
References to the Prospectus in this EXHIBIT B include any supplements thereto
at the Closing Date.
BankBoston, N.A. is the sole registered owner of the Shares to
be sold by the Selling Stockholders; and assuming that the Underwriters
purchase the Common Shares which are sold by such Selling Stockholders
pursuant to the Underwriting Agreement for value, in good faith and without
notice of any adverse claim, the delivery of such Common Shares pursuant to
the Underwriting Agreement will pass good and valid title to such Common
Shares, free and clear of any security interest, mortgage, pledge, lien,
encumbrance or other claim.
B-1
<PAGE>
EXHIBIT C-1
September __, 1997
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
As Representative of the Several Underwriters
Re: Friendly Ice Cream Corporation (the "Company")
----------------------------------------------
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of Class
B Voting Stock or Class C Nonvoting Common Stock of the Company or securities
convertible into or exchangeable or exercisable for Class A Voting Common Stock
of the Company. The Company proposes to carry out a public offering (the
"Offering") of Common Stock (the "Common Stock") of the Company (into which the
Class A Voting Common Stock, Class B Voting Stock and Class C Nonvoting Common
Stock are being converted in connection with the Offering and a related
amendment of the Company's Articles of Organization) for which you will act as
the representative of the underwriters. The undersigned recognizes that the
Offering will be of benefit to the undersigned and will benefit the Company by,
among other things, raising additional capital for its operations. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of Montgomery Securities
(which consent may be withheld in its sole discretion), 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) under 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
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) by the undersigned (collectively "Transfer"),
other than shares purchased in or after consummation of the Offering that are
not "restricted securities" within the meaning of Rule 144 of the Securities Act
of 1933, as amended, or publicly announce the undersigned's intention to do any
of the foregoing, for a period commencing on the date of the Prospectus relating
to the Offering and continuing through the close of trading on the date 360 days
after the date of such Prospectus. The undersigned also agrees that the terms
and conditions of this Lockup Agreement will be binding on it as well as any
shares of capital stock of the Company held by it (or its successors and
assigns), either beneficially or of record. The undersigned further agrees that
should the undersigned sell any of its shares of Class B Voting Stock or Class C
Nonvoting Common Stock of the Company prior to the date of the Prospectus,
C-1
<PAGE>
it will obtain a valid and binding Lockup Agreement from the buyer of such
shares in substantially the same form as this Lockup Agreement. The undersigned
further agrees and consents to the entry of stop transfer instructions with the
Company's transfer agent and registrar against the transfer of shares of Common
Stock or securities convertible into or exchangeable or exercisable for Common
Stock held by the undersigned except in compliance with the foregoing
restrictions. Notwithstanding the foregoing, the undersigned may Transfer
shares of Common Stock to any person or entity that was a direct or beneficial
holder of Common Stock immediately prior to the sale of Common Stock by the
Company in consummation of the Offering.
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially by the undersigned, including any rights
to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
- -----------------------------
Printed Name of Holder
By:
---------------------------------
Signature
- ------------------------------
Printed Name of Person Signing
(AND INDICATE CAPACITY OF PERSON SIGNING IF
SIGNING AS CUSTODIAN, TRUSTEE, OR ON BEHALF
OF AN ENTITY)
C-2
<PAGE>
EXHIBIT C-2
, 1997
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
As Representative of the Several Underwriters
Re: Friendly Ice Cream Corporation (the "Company")
----------------------------------------------
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of Class
A Voting Common Stock of the Company or securities convertible into or
exchangeable or exercisable for such Class A Voting Common Stock of the Company.
The Company proposes to carry out a public offering (the "Offering") of Common
Stock (the "Common Stock") of the Company (into which the Class A Voting Common
Stock is being converted in connection with the Offering and a related amendment
of the Company's Articles of Organization) for which you will act as the
representative of the underwriters. The undersigned recognizes that the
Offering will be of benefit to the undersigned and will benefit the Company by,
among other things, raising additional capital for its operations. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of Montgomery Securities
(which consent may be withheld in its sole discretion), 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) under 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
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) by the undersigned (collectively,
"Transfer"), other than shares purchased in or after consummation of the
Offering that are not "restricted securities" within the meaning of Rule 144 of
the Securities Act of 1933, as amended, or publicly announce the undersigned's
intention to do any of the foregoing, for a period commencing on the date of the
Prospectus relating to the Offering and continuing through the close of trading
on the date 360 days after the date of such Prospectus. The undersigned also
agrees that the terms and conditions of this Lockup Agreement will be binding on
it as well as any shares of capital stock of the Company held by it (or its
successors and assigns), either beneficially or of record. The undersigned
further agrees that should the undersigned sell any of its shares of Class A
Nonvoting Common Stock of the Company prior to the date of such Prospectus, it
will obtain a valid and binding Lockup Agreement from the buyer of such shares
in substantially the same
C-3
<PAGE>
form as this Lockup Agreement. The undersigned further agrees and consents to
the entry of stop transfer instructions with the Company's transfer agent and
registrar against the transfer of shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock held by the
undersigned except in compliance with the foregoing restrictions.
Notwithstanding the foregoing, if the undersigned is not a director or an
executive officer of the Company, the undersigned may Transfer shares of Common
Stock to any person or entity that was a direct or beneficial holder of Common
Stock immediately prior to the sale of Common Stock by the Company in
consummation of the Offering.
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially by the undersigned, including any rights
to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
- -----------------------------
Printed Name of Holder
By:
---------------------------------
Signature
- ------------------------------
Printed Name of Person Signing
(AND INDICATE CAPACITY OF PERSON SIGNING IF
SIGNING AS CUSTODIAN, TRUSTEE, OR ON BEHALF
OF AN ENTITY)
C-4
<PAGE>
EXHIBIT D
Persons required to deliver lock-up letters
[Insert names of lender-equity holders]
The Equitable Life Assurance Society of the U.S.
Donald Smith
Larry Browne
Peter Joost
Charles L. Atwood
Steven L. Ezzes
Joseph A. O'Shaughnessy
Paul J. McDonald
Gerald E. Sinsigalli
Dennis J. Roberts
George G. Roller
Henry V. Pettis III
Scott D. Colwell
Garret J. Ulrich
D-1
<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 closing of the
Corporation's initial public offering of shares of Common Stock pursuant to
the Securities Act of 1933, as amended (the "Public Offering 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 Public Offering 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 Public Offering 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 Public Offering 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>
CH&S DRAFT 8/13/97
AMENDED AND RESTATED
BY-LAWS
of
FRIENDLY ICE CREAM CORPORATION
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1 OFFICES....................................................1
Section 1.1 Registered Office................................1
Section 1.2 Other Offices....................................1
SECTION 2 STOCKHOLDERS..........................................1
Section 2.1 Time and Place of Meetings.......................1
Section 2.2 Annual Meetings..................................1
Section 2.3 Special Meetings.................................1
Section 2.4 Notice of Meetings...............................1
Section 2.5 Waiver of Notice.................................2
Section 2.6 Fixing of Record Date............................2
Section 2.7 Stockholders' List of Meeting....................2
Section 2.8 Quorum; Adjournment..............................3
Section 2.9 Voting Requirements..............................3
Section 2.10 Proxies..........................................3
Section 2.11 Notice of Stockholder Business...................3
Section 2.12 Conduct of Meetings..............................4
Section 2.13 Inspectors of Election...........................5
Section 2.14 Informal Action by Stockholders..................5
SECTION 3 DIRECTORS.............................................5
Section 3.1 General Powers...................................5
Section 3.2 Number, Qualification,
Tenure and Removal............................6
Section 3.3 Vacancies; Resignations..........................6
Section 3.4 Place of Meetings................................6
Section 3.5 Regular Meetings.................................6
Section 3.6 Special Meetings.................................6
Section 3.7 Notice...........................................6
Section 3.8 Waiver of Notice.................................7
Section 3.9 Quorum...........................................7
Section 3.10 Manner of Acting.................................7
Section 3.11 Committees.......................................7
Section 3.12 Organization.....................................7
Section 3.13 Action without Meeting...........................7
Section 3.14 Attendance by Telephone..........................8
Section 3.15 Compensation.....................................8
Section 3.16 Presumption of Assent............................8
Section 3.17 Notification of Nominations......................8
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<PAGE>
SECTION 4 OFFICERS..............................................9
Section 4.1 Enumeration......................................9
Section 4.2 Salaries.........................................9
Section 4.3 Term of Office...................................9
Section 4.4 Chairman........................................10
Section 4.5 President.......................................10
Section 4.6 Vice President..................................10
Section 4.7 Clerk...........................................10
Section 4.8 Assistant Clerk.................................10
Section 4.9 Treasurer.......................................10
Section 4.10 Assistant Treasurer.............................11
Section 4.11 Other Duties....................................11
SECTION 5 CERTIFICATES OF STOCK AND OTHER
STOCKHOLDER MATTERS..............................11
Section 5.1 Form............................................11
Section 5.2 Replacement.....................................11
Section 5.3 Transfer........................................12
Section 5.4 Stock Ledger Determinative of Dividend
Distributions and Voting Entitlement............12
SECTION 6 INDEMNIFICATION......................................12
Section 6.1 Right to Indemnification........................12
Section 6.2 Settlements.....................................13
Section 6.3 Notification and Defense of Proceedings.........13
Section 6.4 Advance of Expenses.............................13
Section 6.5 Certain Presumptions and Determinations.........14
Section 6.6 Remedies........................................14
Section 6.7 Contract Right; Subsequent Amendment............15
Section 6.8 Other Rights....................................15
Section 6.9 Partial Indemnification.........................15
Section 6.10 Insurance.......................................15
Section 6.11 Merger or Consolidation.........................16
Section 6.12 Savings Clause..................................16
Section 6.13 Subsequent Legislation..........................16
Section 6.14 Indemnification of Others.......................16
SECTION 7 DIVIDENDS............................................16
Section 7.1 Declaration of Dividends........................16
Section 7.2 Reserves for Dividends..........................16
SECTION 8 GENERAL PROVISIONS...................................17
Section 8.1 Fiscal Year.....................................17
Section 8.2 Corporate Seal..................................17
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<PAGE>
Section 8.3 Corporation Checks..............................17
Section 8.4 Protection of Corporate Books...................17
Section 8.5 Control Share Acquisitions......................17
SECTION 9 AMENDMENTS...........................................17
Section 9.1 Amendments of By-Laws...........................17
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<PAGE>
AMENDED AND RESTATED
BY-LAWS
of
FRIENDLY ICE CREAM CORPORATION
SECTION 1
OFFICES
Section 1.1 Registered Office. The registered office of Friendly Ice
Cream Corporation (the "Corporation") shall be in the town of Wilbraham,
County of Hampden, Commonwealth of Massachusetts at 1855 Boston Road.
Section 1.2 Other Offices. The Corporation may also have offices at
such other places both within and without the Commonwealth of Massachusetts
as the Board of Directors of the Corporation (the "Board") may from time to
time determine or the business of the Corporation may require.
SECTION 2
STOCKHOLDERS
Section 2.1 Time and Place of Meetings. All meetings of the
stockholders for the election of directors or for any other purpose shall be
held within the Commonwealth of Massachusetts or, to the extent permitted by
the Corporation's Restated Articles of Organization as in effect from time to
time (the "Articles of Organization"), elsewhere in the United States.
Section 2.2 Annual Meetings. An annual meeting of stockholders shall be
held, within six months after the end of the fiscal year of the Corporation,
for the purpose of electing directors to serve on the Board and transacting
such other business as may properly be brought before the meeting. The date
of the annual meeting shall be determined by the Board.
Section 2.3 Special Meetings. Special meetings of the stockholders, for
any purpose or purposes, unless otherwise prescribed by law, may be called
only by (i) the Board pursuant to a resolution approved by the affirmative
vote of a majority of the Directors then in office, (ii) the Chairman of the
Board, if one is elected or (iii) the President. Only those matters set
forth in the notice of the special meeting may be considered or acted upon at
such special meeting, except as otherwise provided by law.
Section 2.4 Notice of Meetings. Written or printed notice stating the
date, time and place of the meeting and, in the case of a special meeting or
a meeting for which special notice is required by law, the purposes for which
the meeting is called shall be mailed by the Corporation to each stockholder
entitled to vote at the meeting and, if required by law, to any other
<PAGE>
stockholders entitled to receive notice, at the stockholder's address shown
in the Corporation's record of stockholders, with postage pre-paid, not less
than ten (10) nor more than sixty (60) days before the meeting date, either
personally or by mail, by or at the direction of the President, Clerk, or
Assistant Clerk, or the officer or persons calling the meeting, to each
stockholder of record entitled to vote at such meeting. Notice shall be
effective when mailed if it is mailed postage pre-paid and is correctly
addressed to the stockholder's address as it appears on the stock transfer
books of the Corporation.
Section 2.5 Waiver of Notice. A stockholder may at any time waive any
notice required by law, these By-Laws or the Corporation's Articles of
Organization. The waiver shall be in writing, be signed by the stockholder
entitled to the notice and be delivered to the Corporation for inclusion in
the minutes for filing with the corporate records. A stockholder's
attendance at a meeting waives objection to (i) lack of notice or defective
notice of the meeting, unless the stockholder at the beginning of the meeting
objects to holding the meeting or transacting business at the meeting, and
(ii) consideration of a particular matter at the meeting that is not within
the purposes described in the meeting notice, unless the stockholder objects
to considering the matter when it is presented.
Section 2.6 Fixing of Record Date. The Board may fix a future date as
the record date to determine the stockholders entitled to notice of a
stockholders' meeting, vote, take any other action or receive payment of any
share or cash dividend or other distribution. This date shall not be more
than sixty (60) days nor, in the case of a meeting, less than ten (10) days
before the meeting or action requiring a determination of stockholders. The
record date for any meeting, vote or other action of the stockholders shall
be the same for all classes of capital stock of the Corporation. If not
otherwise fixed by the Board, the record date to determine stockholders
entitled to notice of and to vote at an annual or special stockholders'
meeting is the close of business on the day before the first notice is first
mailed or delivered to a stockholder. If not otherwise fixed by the Board,
the record date to determine stockholders entitled to receive payment of any
share or cash dividend or other distribution is the close of business on the
day the Board authorizes the share or cash dividend or other distribution.
Section 2.7 Stockholders' List of Meeting. After a record date for a
meeting is fixed, the Corporation shall prepare an alphabetical list of all
stockholders entitled to notice of the stockholders' meeting. The list shall
be arranged by classes of capital stock of the Corporation and show the
address of and number of shares held by each stockholder. The stockholders'
list shall be available for inspection by any stockholder, upon proper demand
as may be required by law, beginning two business days after notice of the
meeting is given and continuing through the meeting, at the Corporation's
principal office or at a place identified in the meeting notice in the city
where the meeting will be held. The Corporation shall make the stockholders'
list available at the meeting, and any stockholder or the stockholder's agent
or attorney shall be entitled to inspect the list at any time during the
meeting or any adjournment. Refusal or failure to prepare or make available
the stockholder's list does not affect the validity of action taken at the
meeting.
2
<PAGE>
Section 2.8 Quorum; Adjournment.
(a) Shares entitled to vote may take action on a matter at a
meeting only if a quorum of these shares exists with respect to that matter.
Shares entitled to vote as a separate class may take action on a matter at a
meeting only if a quorum of those shares exists with respect to that matter.
A majority of the votes entitled to be cast on any matter constitutes a
quorum for action on that matter.
(b) A majority of votes represented at the meeting, although less
than a quorum, may adjourn the meeting from time to time to a different time
and place without further notice to any stockholder of any adjournment. At
an adjourned meeting at which a quorum is present, any business may be
transacted that might have been transacted at the meeting originally held.
(c) Once a share is represented for any purpose at a meeting, it
shall be present for quorum purposes for the remainder of the meeting and for
any adjournment of that meeting unless a new record date is or must be set
for the adjourned meeting. A new record date must be set if the meeting is
adjourned to a date more than 120 days after the date fixed for the original
meeting.
Section 2.9 Voting Requirements. At all meetings of stockholders, each
stockholder shall be entitled to vote, in person or by proxy, the shares of
voting stock owned by such stockholder of record on the record date for the
meeting. When a quorum is present or represented at any meeting, the vote of
a majority of the votes entitled to be cast on any matter, question or
proposal brought before such meeting shall decide such question, unless the
question is one upon which, by express provision of law, by the Articles of
Organization or by these By-Laws, a different vote is required, in which case
such express provision shall govern and control the decision of such
question.
Section 2.10 Proxies. A stockholder may vote shares in person or by
proxy. A stockholder may appoint a proxy by signing an appointment form
either personally or by the stockholder's attorney-in-fact. An appointment
of a proxy is effective when received by the Clerk or other officer of the
Corporation authorized to tabulate votes. An appointment is valid for six
(6) months unless a different period is provided in the appointment form. An
appointment is revocable by the stockholder unless the appointment form
conspicuously states that it is irrevocable and the appointment is coupled
with an interest that has not been extinguished.
Section 2.11 Notice of Stockholder Business. At a meeting of the
stockholders, only such business shall be conducted as shall have been
properly brought before the meeting in accordance with the By-Laws. To be
properly brought before a meeting, business must be (a) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board, (b) otherwise properly brought before the meeting by or at the
direction of the Board, or (c) otherwise (i) properly be requested to be
brought before the meeting by a stockholder of
3
<PAGE>
record entitled to vote in the election of directors generally, and (ii)
constitute a proper subject to be brought before such meeting. For business
to be properly brought before a meeting of stockholders, any stockholder who
intends to bring any matter (other than the election of directors) before a
meeting of stockholders and is entitled to vote on such matter must deliver
written notice of such stockholder's intent to bring such matter before the
meeting of stockholders, either by personal delivery or by United States
mail, postage pre-paid, to the Clerk of the Corporation. Such notice must be
received by the Clerk not later than the following dates: (i) with respect to
an annual meeting of stockholders, sixty (60) days in advance of such meeting
if such meeting is to be held on a day which is within thirty (30) days
preceding the anniversary of the previous year's meeting, or ninety (90) days
in advance of such meeting if such meeting is to be held on or after the
anniversary of the previous year's meeting; and (ii) with respect to any
other meeting of stockholders or a special meeting of stockholders, the close
of business on the tenth day following the date on which notice of such
meeting is first given to stockholders. For purposes of this Section 2.11,
notice shall be deemed to first be given to stockholders when disclosure of
such date is first made in a press release reported by the Dow Jones News
Services, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange
Act of 1934, as amended.
A stockholder's notice to the Clerk shall set forth as to each matter the
stockholder proposes to bring before the meeting of stockholders (a) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (b) the name and
address, as they appear on the Corporation's books, of the stockholder
intending to propose such business, (c) the class and number of shares of
capital stock of the Corporation which are beneficially owned by the
stockholder, and (d) any material interest of the stockholder in such
business. No business shall be conducted at a meeting of stockholders except
in accordance with the procedures set forth in Section 2.12 of this Article.
The chairman of a meeting may, if the facts warrant, determine and declare to
the meeting that the business was not properly brought before the meeting and
in accordance with the provisions hereof and, if the chairman should so
determine, the chairman may so declare to the meeting that any such business
not properly brought before the meeting shall not be transacted.
Section 2.12 Conduct of Meetings. The date and time of the opening and
the closing of the polls for each matter upon which the stockholders will
vote at a meeting shall be announced at the meeting by the person presiding
over the meeting. The Board may adopt by resolution such rules and
regulations for the conduct of the meeting of stockholders as it shall deem
appropriate. Except to the extent inconsistent with such rules and
regulations as adopted by the Board, the chairman of any meeting of
stockholders shall have the right and authority to prescribe such rules,
regulations and procedures and to do all such acts as, in the judgment of
such chairman, are appropriate for the proper conduct of the meeting. Such
rules, regulations or procedures, whether adopted by the Board or prescribed
by the chairman of the meeting, may include, without limitation, the
following: (i) the establishment of an agenda or order of business for the
meeting; (ii) rules and procedures for maintaining order at the meeting and
the safety of those present; (iii) limitations on attendance at or
participation in the meeting to
4
<PAGE>
stockholders of record of the Corporation, their duly authorized and
constituted proxies or such other persons as the chairman of the meeting
shall determine; (iv) restrictions on entry to the meeting after the time
fixed for the commencement thereof; and (v) limitations on the time allotted
to questions or comments by participants. Unless and to the extent
determined by the Board or the chairman of the meeting, meetings of
stockholders shall not be required to be held in accordance with the rules of
parliamentary procedure.
Section 2.13 Inspectors of Election. The Corporation may, and shall if
required by law, in advance of any meeting of stockholders, appoint one or
more inspectors of election, who may be employees of the Corporation, to act
at the meeting or any adjournment thereof and to make a written report
thereof. The Corporation may designate one or more persons as alternate
inspectors to replace any inspector who fails to act. In the event that no
inspector so appointed or designated is able to act at a meeting of
stockholders, the person presiding at the meeting shall appoint one or more
inspectors to act at the meeting. Each inspector, before entering upon the
discharge of his or her duties, shall take and sign an oath to execute
faithfully the duties of inspector with strict impartiality and according to
the best of his or her ability.
The inspector or inspectors so appointed or designated shall (i)
ascertain the number of shares of capital stock of the Corporation
outstanding and the voting power of each such share, (ii) determine the
shares of capital stock of the Corporation represented at the meeting and the
validity of proxies and ballots, (iii) count all votes and ballots, (iv)
determine and retain for a reasonable period a record of the disposition of
any challenges made to any determination by the inspectors, and (v) certify
their determination of the number of shares of capital stock of the
Corporation represented at the meeting and such inspectors' count of all
votes and ballots. Such certification and report shall specify such other
information as may be required by law. In determining the validity and
counting of proxies and ballots cast at any meeting of stockholders of the
Corporation, the inspectors may consider such information as is permitted by
applicable law. No person who is a candidate for an office at an election
may serve as an inspector at such election.
Section 2.14 Informal Action by Stockholders. Any action required to be
taken at a meeting of the stockholders or any other action which may be taken
at a meeting of the stockholders, may be taken without a meeting if a consent
in writing, setting forth the action so taken, shall be signed by all of the
stockholders entitled to vote with respect to the subject matter thereof and
the written consents are filed with the records of the meetings of the
stockholders.
SECTION 3
DIRECTORS
Section 3.1 General Powers. The business and affairs of the Corporation
shall be managed and controlled by or under the direction of the Board, which
may exercise all such powers of the Corporation and do all such lawful acts
and things as are not by law or by Articles
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of Organization or by these By-Laws directed or required to be exercised or
done by the stockholders.
Section 3.2 Number, Qualification, Tenure and Removal. The number of
Directors shall be fixed, from time to time, by the Board, in accordance with
Article VI of the Articles of Organization. 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. Directors need not be residents of Massachusetts or
stockholders of the Corporation. At any meeting of the stockholders called
for the purpose, any Director may be removed from office only for cause by
the affirmative vote of a majority of the shares issued, outstanding and
entitled to vote in the election of Directors. At any meeting of the Board,
any Director may be removed from office only for cause by vote of a majority
of the Directors then in office. A Director may be removed for cause only
after a reasonable notice and opportunity to be heard before the body
proposing to remove him or her.
Section 3.3 Vacancies; Resignations. Any vacancy on the Board that
results from an increase in the number of Directors shall be filled only by a
majority of the Directors then in office, provided that a quorum is present,
and any other vacancy occurring in the Board 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 vacancy not filled by the Directors shall be filled
by election at an annual meeting or at a special meeting of stockholders
called for that purpose. A vacancy that will occur at a specified later
date, by reason of a resignation or otherwise, may be filled before the
vacancy occurs, but the new Director may not take office until the vacancy
occurs.
Section 3.4 Place of Meetings. The Board may hold meetings, both
regular and special, either within or without the Commonwealth of
Massachusetts.
Section 3.5 Regular Meetings. The Board shall hold a regular meeting,
to be known as the annual meeting, immediately following each annual meeting
of the stockholders. Other regular meetings of the Board shall be held at
such time and at such place as shall from time to time be determined by the
Board. No notice of regular meetings need be given.
Section 3.6 Special Meetings. Special meetings of the Board may be
called by the Chairman or the President. Special meetings shall also be
called by the Clerk on written request of any two Directors. The person or
persons authorized to call special meetings of the Board may fix any place in
or out of Massachusetts as the place for holding any special meeting of the
Board called by them.
Section 3.7 Notice. Notice of the date, time and place of any special
meeting of the Board shall be given at least three days prior to the meeting
by notice communicated in person, by telephone, telegraph, teletype, other
form of wire or wireless communication, mail or private carrier. If written,
notice shall be effective at the earliest of (a) when received, (b) its
deposit in the United States mail, as evidenced by the postmark, if mailed
postage pre-paid and correctly
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addressed, or (c) on the date shown on the return receipt, if sent by
registered or certified mail, return receipt requested and the receipt is
signed by or on behalf of the addressee. Notice by all other means shall be
deemed effective when received by or on behalf of the Director. Notice of
any regular or special meeting need not describe the purposes of the meeting
unless required by law or the Articles of Organization.
Section 3.8 Waiver of Notice. A Director may at any time waive any
notice required by law, these By-Laws or the Articles of Organization.
Except as set forth below, the waiver must be in writing, be signed by the
Director entitled to the notice, specify the meeting for which notice is
waived and be filed with the minutes or corporate records. A Director's
attendance at or participation in a meeting waives any required notice to the
Director of the meeting unless the Director at the beginning of the meeting,
or promptly upon such Director's arrival, objects to holding the meeting or
transacting business at the meeting and does not thereafter vote for or
assent to action taken at the meeting.
Section 3.9 Quorum. A majority of the number of Directors fixed in
accordance with Section 3.2 of this Article shall constitute a quorum for the
transaction of business at any meeting of the Board. If less than a quorum
is present at a meeting, a majority of the Directors present may adjourn the
meeting from time to time without further notice.
Section 3.10 Manner of Acting. The act of the majority of the Directors
present at a meeting at which a quorum is present shall be the act of the
Board, unless a different number is provided by law, the Articles of
Organization or these By-Laws.
Section 3.11 Committees. The Board may, by vote of a majority of the
Directors then in office appoint from their number one or more committees and
delegate to such committees some or all of their powers to the extent
permitted by law, the Articles of Organization or these By-Laws. Except as
the Board may otherwise determine, any such committee shall be governed in
the conduct of its business by the rules governing the conduct of the
business of the Board contained in these By-laws and may, by majority vote of
the entire committee make other rules for the conduct of its business. The
Board shall have power at any time to fill vacancies in any such committees,
to change its membership or to discharge the committee.
Section 3.12 Organization. The Chairman, if elected, shall act as
chairman at all meetings of the Board. If the Chairman is not elected or, if
elected, is not present, the President or, in the absence of the President, a
Vice Chairman (who is also a member of the Board and, if more than one, in
order designated by the Board or, in the absence of such designation, in
order of their election), if any, or if no such Vice Chairman is present, a
Director chosen by a majority of the Directors present, shall act as chairman
at meetings of the Board.
Section 3.13 Action without Meeting. Unless otherwise restricted by the
Articles of Organization or these By-Laws, any action required or permitted
to be taken at any meeting of the Board may be taken without a meeting, if
all members of the Board consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board.
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Section 3.14 Attendance by Telephone. Members of the Board, may
participate in a meeting of the Board by means of a conference telephone or
similar communications equipment by means of which all persons participating
in the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
Section 3.15 Compensation. The Board shall have the authority to fix
the compensation of Directors, which may include their expenses, if any, of
attendance at each meeting of the Board.
Section 3.16 Presumption of Assent. A Director who is present at a
meeting of the Board or a committee of the Board shall be deemed to have
assented to the action taken at the meeting unless (a) the Director's dissent
or abstention from the action is entered in the minutes of the meeting, (b)
the Director delivers a written notice of dissent or abstention to the action
to the presiding officer of the meeting before any adjournment of the meeting
or to the Corporation immediately after the adjournment of the meeting or (c)
the Director objects at the beginning of the meeting or promptly upon such
Director's arrival to the holding of the meeting or transacting business at
the meeting. The right to dissent or abstain is not available to a Director
who voted in favor of the action.
Section 3.17 Notification of Nominations. Except for Directors elected
pursuant to the provisions of Section 3.3 of this Article, only individuals
nominated for election to the Board pursuant to and in accordance with the
provision of this Section 3.17 may be elected to and may serve upon the Board
of the Corporation. Nominations for the election of Directors may be made by
the Board, a Committee thereof or by any stockholder entitled to vote in the
election of Directors generally. Subject to the foregoing, only a
stockholder of record entitled to vote in the election of Directors generally
may nominate one or more persons for election as Directors at a meeting of
stockholders and only if written notice of such stockholder's intent to make
such nomination or nominations has been given, either by personal delivery or
by United States mail, postage pre-paid, to the Clerk of the Corporation and
has been received by the Clerk not later than the following dates: (i) with
respect to an election to be held at an annual meeting of stockholders, sixty
(60) days in advance of such meeting if such meeting is to be held on a day
which is within thirty (30) days preceding the anniversary of the previous
year's annual meeting, or ninety (90) days in advance of such meeting if such
meeting is to be held on or after the anniversary of the previous year's
annual meeting; and (ii) with respect to an election to be held at a special
meeting of stockholders for the election of Directors, the close of business
on the tenth day following the date on which notice of such meeting is first
given to stockholders. For purposes of this Section 3.17, notice shall be
deemed to first be given to stockholders when disclosure of such date is
first made in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document
publicly filed by the Corporation with the Securities and Exchange Commission
pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934,
as amended.
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Each such notice shall set forth:
(a) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated;
(b) a representation that the stockholder is a holder of record of stock
of the Corporation entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting to nominate the person or persons specified
in the notice;
(c) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the stockholder; and
(d) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission, had
the nominee been nominated, or intended to be nominated, by the Board.
To be effective, each notice of intent to make a nomination given
hereunder shall be accompanied by the written consent of each nominee to
serve as a Director of the Corporation if elected.
The chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not properly brought before the
meeting in accordance with the provisions hereof and, if the chairman should
so determine, declare to the meeting that such nomination was not properly
brought before the meeting and shall not be considered.
SECTION 4
OFFICERS
Section 4.1 Enumeration. The officers of the Corporation shall be
chosen by the Board and shall be a Chairman, President, a Clerk, and a
Treasurer. The Board may also elect one or more Vice Chairmen, one or more
Vice Presidents, one or more Assistant Clerks and Assistant Treasurers and
such other officers and agents as it shall deem appropriate. Any number of
offices may be held by the same person.
Section 4.2 Salaries. The salaries of all officers of the Corporation
shall be fixed by the Board.
Section 4.3 Term of Office. The officers of the Corporation shall be
elected at the annual meeting of the Board and shall hold office until their
successors are elected and qualified or until their earlier resignation,
removal or death. Any officer elected or appointed by the Board may be
removed at any time by the Board with or without cause. Any vacancy
occurring in any
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office of the Corporation required by this section shall be filled by the
Board, and any vacancy in any other office may be filled by the Board.
Section 4.4 Chairman. The Chairman shall preside, when present, at
each meeting of the Board and shall perform such other duties and have such
powers as the Board may from time to time prescribe. The Chairman shall have
general supervision, direction and control of the business and affairs of the
Corporation, subject to the control of the Board, shall preside at meetings
of stockholders and shall have such other functions, authority and duties as
customarily appertain to the office of the chief executive of a business
Corporation or as may be prescribed by the Board.
Section 4.5 President. During any period when there shall be an office
of Chairman, the President shall have such functions, authority and duties as
may be prescribed by the Board or the Chairman. The President need not be a
Director. During any period when there shall not be an office of Chairman,
the President shall have the functions, authority and duties provided for the
Chairman.
Section 4.6 Vice President. The Vice President or if there be more
than one, the Vice Presidents, shall perform, such duties and have such
other powers as may from time to time be prescribed by the Board, the
Chairman or the President.
Section 4.7 Clerk. The Clerk shall keep a record of all proceedings of
the stockholders of the Corporation and of the Board, and shall perform like
duties for the standing committees when required. The Clerk shall give, or
cause to be given, notice, if any, of all meetings of the stockholders and
shall perform such other duties as may be prescribed by the Board, the
Chairman or the President. The Clerk shall have custody of the corporate
seal of the Corporation and the Clerk or in the absence of the Clerk any
Assistant Clerk, shall have the authority to affix the same to any instrument
requiring it, and when so affixed it may be attested by the signature of the
Clerk or an Assistant Clerk. The Board may give general authority to any
other officer to affix the seal of the Corporation and to attest such
affixing of the seal. The Clerk shall be a resident of the Commonwealth of
Massachusetts unless the Corporation has a resident agent in accordance with
Massachusetts law.
Section 4.8 Assistant Clerk. The Assistant Clerk or if there be more
than one, the Assistant Clerks in the order determined by the Board (or if
there be no such determination, then in order of their election), shall, in
the absence of the Clerk or in the event of the Clerk's inability or refusal
to act, perform the duties and exercise the powers of the Clerk and shall
perform such other duties as may from time to time be prescribed by the
Board, the Chairman, or the President.
Section 4.9 Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all monies and other valuable assets in the name and to the credit of
the Corporation in such depositories as may be designated by the Board. The
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Treasurer shall disburse the funds of the Corporation as may be ordered by
the Board, taking proper vouchers for such disbursements, and shall render to
the Chairman, the President and the Board, at its regular meetings or when
the Board so requires, an account of all transactions as Treasurer and of the
financial condition of the Corporation. The Treasurer shall perform such
other duties as may from time to time be prescribed by the Board, the
Chairman or the President.
Section 4.10 Assistant Treasurer. The Assistant Treasurer, or if
there shall be more than one, the Assistant Treasurers in the order
determined by the Board (or if there be no such determination, then in order
of their election), shall, in absence of the Treasurer or in the event of the
Treasurer's inability or refusal to act, perform the duties and exercise the
powers of the Treasurer and shall perform such other duties and have such
other powers as may from time to time be prescribed by the Board, the
Chairman, the President or the Treasurer.
Section 4.11 Other Duties. Any officer who is elected or appointed
from time to time by the Board and whose duties are not specified in these
By-Laws shall perform such duties and have such powers as may be prescribed
from time to time by the Board, the Chairman or the President.
SECTION 5
CERTIFICATES OF STOCK AND OTHER STOCKHOLDER MATTERS
Section 5.1 Form. The shares of the Corporation shall be represented
by certificates; provided, however, that the Board may provide by resolution
or resolutions that some or all of any or all classes or series of the
Corporation's stock shall be uncertificated shares. Certificates of stock in
the Corporation, if any, shall be signed by or in the name of the Corporation
by the Chairman or the President or a Vice President and by the Treasurer or
an Assistant Treasurer of the Corporation. Where a certificate is
countersigned by a transfer agent, other than the Corporation or a director,
officer or employee of the Corporation, or by a registrar, the signatures of
the Chairman, the President or a Vice President and the Treasurer or an
Assistant Treasurer may be facsimiles. In case any officer, transfer agent
or registrar who has signed or whose facsimile signature has been placed upon
a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, the certificate may be issued by
the Corporation with the same effect as if such officer, transfer agent or
registrar were such officer, transfer agent or registrar at the date of its
issue.
Section 5.2 Replacement. In case of the loss, destruction, mutilation
or theft of a certificate for any stock of the Corporation, a new certificate
of stock or uncertificated shares in place of any certificate therefor issued
by the Corporation may be issued upon (x) in the case of a mutilated
certificate, surrender of such mutilated certificate to the Corporation, and
(y) in the case of a certificate alleged to have been lost, destroyed or
stolen, satisfactory proof of such loss, destruction or theft and upon such
terms as the Board may prescribe. The Board may in its discretion require
the owner of the lost, mutilated, destroyed or stolen certificate, or his
legal representative, to give the Corporation a bond, in such sum and in such
form and with such
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surety or sureties as it may direct, to indemnify the Corporation against any
claim that may be made against it with respect to a certificate alleged to
have been lost, mutilated, destroyed or stolen.
Section 5.3 Transfer. Subject to the restrictions, if any, stated or
noted on the certificate, upon surrender to the Corporation or the transfer
agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate
of stock or uncertificated shares in place of any certificate therefor issued
by the Corporation to the person entitled thereto, cancel the old certificate
and record the transaction on its books.
Section 5.4 Stock Ledger Determinative of Dividend Distributions and
Voting Entitlement. The Corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends and other distributions, and to vote as such owner, and
shall not be bound to recognize any equitable or other claim to, or interest
in, such share or shares on the part of any other person, whether or not it
shall have express or other notice thereof, except as otherwise provided by
the laws of the Commonwealth of Massachusetts.
SECTION 6
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 By-Laws, 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.
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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 By-Laws 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 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 By-Laws 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 By-Laws. 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 By-Laws, as part of the right to indemnification granted by these
By-Laws, any expenses (including attorneys' fees) incurred by an Indemnitee
in defending any Proceeding within the scope of Section 6.1 of these By-laws
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
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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 By-Laws. Such undertaking need not be secured and shall be accepted
without 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 the 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 By-Laws, 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, 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 By-Laws 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
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Indemnitee is not entitled to indemnification or advancement of expenses
under these By-Laws 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 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 By-Laws shall
be a contract right. No amendment, termination or repeal of these By-Laws 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 By-Laws 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 By-Laws 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 By-Laws.
Section 6.9 Partial Indemnification. If an Indemnitee is entitled
under any provision of these By-Laws 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
15
<PAGE>
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, the surviving corporation shall assume the obligations
of the Corporation under these By-Laws 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 By-Laws 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 By-Laws 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 By-Laws 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, 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 By-Laws.
SECTION 7
DIVIDENDS
Section 7.1 Declaration of Dividends. Dividends may be declared by the
Board at any regular or special meeting, pursuant to law and in accordance
with the voting requirements stated in these By-Laws. Dividends may be paid
in cash, in property or in shares of the Corporation's capital stock.
Section 7.2 Reserves for Dividends. Before payment of any dividend,
there may be set aside out of any funds of the Corporation available for
dividends such sum or sums as the Board from time to time, in its absolute
discretion, deems proper as a reserve or reserves to meet contingencies, or
for repairing or maintaining any property of the Corporation, or for such
other purpose as the Board determines promotes the interest of the
Corporation and the Board may modify or abolish any such reserve in the
manner in which it was created.
16
<PAGE>
SECTION 8
GENERAL PROVISIONS
Section 8.1 Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board.
Section 8.2 Corporate Seal. The corporate seal shall be in such form
as may be approved from time to time by the Board. The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or in any other
manner reproduced.
Section 8.3 Corporation Checks. All checks or other orders for the
payment of money and notes of the Corporation shall be signed by such officer
or officers or such other person or persons as the Board may from time to
time designate.
Section 8.4 Protection of Corporate Books. As provided under
applicable laws of the Commonwealth of Massachusetts, or any successor laws,
the Corporation shall make available to the stockholders the books and
records of the Corporation, including, without limitation, periodic financial
statements of the Corporation.
Section 8.5 Control Share Acquisitions. The provisions of Chapter 110D
of the Massachusetts General Laws with respect to the regulation of control
share acquisitions shall not apply to this Corporation.
SECTION 9
AMENDMENTS
Section 9.1 Amendments of By-Laws. Subject to any requirement set
forth in the Articles of Organization, these By-Laws may be altered, amended
or repealed or new By-Laws may be adopted by the Board or the stockholders;
provided, that Sections 2.3, 2.11, 3.2, 3.3, 3.17, 6.1-6.14, 8.5 and 9.1 of
these By-Laws may be amended or repealed only (i) by the affirmative vote of
at least two-thirds of the shares of the capital stock then issued and
outstanding and entitled to vote or (ii) by the affirmative vote of a
majority of the directors then in office. The fact that the power to amend,
alter, repeal or adopt the By-Laws has been conferred upon the Board shall
not divest the stockholders of the same powers.
17
<PAGE>
EXHIBIT 10.5
- --------------------------------------------------------------------------------
SPECIAL STOCK ALLOCATION AWARD AGREEMENT
THIS AGREEMENT, dated as of the ______ day of ______________, 1997 (the
"Award Date") and entered into by and between Friendly Ice Cream Corporation
(the "Company") and ______________________ (the "Employee"),
WITNESSETH THAT:
WHEREAS, in recognition of services the Employee has performed for the
Company and is expected to perform in the future, the Company wishes to award
shares of common stock of the Company ("Stock") to the Employee, subject to
certain restrictions;
NOW, THEREFORE, IT IS AGREED between the Company and the Employee as
follows:
1. Restricted Shares. Subject to the terms of this Agreement, the
Company hereby awards the Employee _____________________ shares of
Stock (the "Restricted Shares").
2. Restrictions on Shares. During the Restricted Period (as defined in
paragraph 4):
(a) the Restricted Shares may not be sold, assigned, transferred,
pledged or otherwise encumbered except by laws of descent and
distribution;
(b) the certificate representing such shares shall be registered in the
name of the Employee and shall be deposited with the Company,
together with stock power (in such form as the Company may
determine); and
(c) the Employee shall be treated as a shareholder with respect to the
Restricted Shares, including the right to vote such shares.
3. Transfers at Termination of Restricted Period. At the end of the
Restricted Period with respect to any one or more of the Restricted Shares, the
certificate or certificates representing such shares shall be transferred to the
Employee (or the Employee's legal representative or heir) free of all
restrictions. If the Employee's employment with the Company and its affiliates
terminates for any reason prior to the end of the Restricted Period with respect
to any of the shares awarded hereunder, it shall not effect such Employees'
rights in or to the Restricted Shares. For notice purposes, the Company shall be
entitled to rely on the most recent address provided in writing to the Company
by the Employee (or the Employee's legal representative or heir) and the Company
shall have no responsibility or obligation to locate a missing Employee (or
legal representative or heir).
4. Restricted Period. The "Restricted Period" shall be the period
commencing on the Award Date and ending with respect to 25 percent of the shares
awarded on each of the first through fourth anniversaries of the Award Date.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
5. Withholding. This Award is subject to withholding of all applicable
taxes.
6. Agreement Not Contract of Employment. This Agreement does not
constitute a contract of employment, and does not give the Employee the right to
be retained in the employ of the Company or an affiliate or the right to
continue as a director of the Company.
7. Successors and Assigns. This Agreement shall be binding upon, and inure
to the benefit of, the Company and its successors and assigns, and upon any
person acquiring, whether by merger, consolidation, purchase of assets or
otherwise, all or substantially all of the Company's assets and business.
8. Applicable Law. The provisions of this Agreement shall be construed in
accordance with the laws of the State of Massachusetts, without giving effect to
choice of law principles. Notwithstanding any other provision of this Agreement
to the contrary, the Company may subject shares of stock transferred pursuant to
this Agreement to such conditions, limitations or restrictions as the Company
determines to be necessary or desirable to comply with any applicable law or
regulation.
9. Amendment. This Agreement may be amended by written agreement of the
Employee and the Company, without the consent of any other person.
IN WITNESS WHEREOF, the Employee has hereunto set his hand and the Company
has caused these presents to be executed in its name and on its behalf, all as
of the date first above written.
--------------------------------------
Employee
FRIENDLY ICE CREAM CORPORATION
By
-----------------------------------
Its___________________________________
-2-
- --------------------------------------------------------------------------------
'<PAGE>
EXHIBIT 10.11
SUBLEASE
SSP COMPANY, INC.
successor-in-interest to S. S. PIERCE COMPANY
(Sublessor)
and
FRIENDLY ICE CREAM CORPORATION
(Sublessee)
Dated as of June 9, 1995
================================================================================
<PAGE>
TABLE OF CONTENTS TO SUBLEASE
Page
----
ARTICLE I Definitions 1
ARTICLE II Representations
Section 2.1. Representations by the Sublessor 5
Section 2.2. Representations by the Sublessee 9
ARTICLE III Demising Clause
Section 3.1 Demise 10
Section 3.2 Consent 10
Section 3.3 Title Insurance 11
ARTICLE IV Sublease Term and Rents
Section 4.1. Sublease Term 11
Section 4.2. Rents 11
Section 4.3. Place of Payments 12
Section 4.4. Net Sublease; Nonterminability 13
Section 4.5. Sublessor's Work 13
Section 4.6. Definition of Substantial Completion 13
Section 4.7. Notice of Substantial Completion 14
Section 4.8. Completion Date 14
Section 4.9. Warranties 14
Section 4.10. Sublessee's Termination and Other Rights 14
Section 4.11. Sublessee's Work 15
ARTICLE V Maintenance, Taxes and Insurance
Section 5.1. Maintenance and Modification of
Project 16
Section 5.2. Removal of Leased Machinery or Excluded
Property 20
Section 5.3. Taxes, Governmental Charges and
Utility Charges 20
Section 5.4. Insurance 21
Section 5.5. Applications of Insurance Proceeds 22
Section 5.6. Additional Insurance Provisions 22
Section 5.7. Advances by Sublessor 22
(i)
<PAGE>
TABLE OF CONTENTS TO SUBLEASE (cont'd)
Page
----
ARTICLE VI Damage, Destruction and Condemnation
Section 6.1. Damage and Destruction 23
Section 6.2. Condemnation 24
Section 6.3. Condemnation of Excluded Property 25
Section 6.4. Sublessee's Options 25
ARTICLE VII Special Covenants and Other Matters
Section 7.1. Sublessee to Hold Municipality Harmless 26
Section 7.2. Right of Access 27
Section 7.3. Sublessor to Maintain its Corporate
Existence 27
Section 7.4. Release of Certain Land 27
Section 7.5. Granting of Easements 30
Section 7.6. Arbitrage Covenants 30
Section 7.7. Compliance with Laws 31
Section 7.8. Limitation of Obligations of
Municipality 31
Section 7.9. Consent and Other Actions of Sublessor
Under Lease 31
Section 7.10. Hazardous Waste 32
ARTICLE VIII Assignment, Subleasing, Mortgaging, Selling,
Redemption, Prepayment and Abatement
Section 8.1. Assignment and Subleasing 36
Section 8.2. Mortgaging 36
Section 8.3. Redemption of Bonds 36
Section 8.4. Prepayment of Rents 37
Section 8.5. Certain Rent Abatements 37
Section 8.6. Installation of Sublessee's Property 37
Section 8.7. References to Bonds After Bonds Paid 38
ARTICLE IX Default
Section 9.1. Sublessee's Events of Default 38
Section 9.2. Remedies on Sublessee's Default 39
Section 9.3. No Remedy Exclusive 41
Section 9.4. Attorneys' Fees and Expenses 41
Section 9.5. No Waiver Implied 42
Section 9.6. Sublessor's Default 42
(ii)
<PAGE>
TABLE OF CONTENTS TO SUBLEASE (cont'd)
Page
----
ARTICLE X Options in Favor of Sublessee
Section 10.1. Options to Purchase 43
Section 10.2. Option to Purchase or Right of First
Refusal 44
Section 10.3. Sublease Prior to Indenture 47
ARTICLE XI Miscellaneous
Section 11.1. Surrender of Project 47
Section 11.2. Notices 48
Section 11.3. Binding Effect 48
Section 11.4. Severability 49
Section 11.5. Amounts Remaining in Bond Fund 49
Section 11.6. Consents 49
Section 11.7. Amendments 49
Section 11.8. Recording 49
Section 11.9. Captions 49
Section 11.10. Counterparts 49
Section 11.11. Law Governing 50
EXHIBITS
EXHIBIT A 52
EXHIBIT B 54
EXHIBIT C 55
EXHIBIT C-2 57
EXHIBIT D 58
(iii)
<PAGE>
THIS SUBLEASE dated as of June 9, 1995 between SSP COMPANY, INC., a
Massachusetts corporation with its principal place of business located at 1162
Pittsford-Victor Road, Pittsford, New York 14534 (hereinafter called
"Sublessor") and FRIENDLY ICE CREAM CORPORATION, a Massachusetts corporation
with its principal place of business located at 1855 Boston Road, Wilbraham,
Massachusetts 01095 (hereinafter called "Sublessee").
W I T N E S S E T H:
In consideration of the mutual covenants of the parties and other good and
valuable consideration, Sublessor and Sublessee agree as follows:
ARTICLE I
DEFINITIONS
The following terms used in this Sublease shall have the followings
meanings:
"Authority" means the Chicopee Industrial Development Financing Authority
duly established by the Municipality pursuant to the Enabling Act.
"Authorized Sublessor Representative" means the person at the time
designated to act on behalf of the Sublessor by written certificate furnished to
the Municipality and the Trustee containing the specimen signature of such
person and signed on behalf of the Sublessor by the president or any vice
president of the Sublessor. Such certificate may designate an alternate or
alternates.
"Authorized Municipal Representative" means the person at the time
designated to act on behalf of the Municipality by written certificate furnished
to the Sublessor and the Trustee containing the specimen signature of such
person and signed by the chairman of its Authority. Such certificate may
designate an alternate or alternates.
"Authorized Sublessee Representative" means the person at the time
designated to act on behalf of the Sublessee by written certificate furnished to
the Sublessor, the Municipality and the Trustee containing the specimen
signature of such person and signed on behalf of the Sublessee by the president
or any vice president of the Sublessee. Such certificate may designate a
alternate or alternates.
<PAGE>
"Bonds" means the City of Chicopee, Massachusetts Industrial
Development Revenue Bonds (S. S. Pierce Company Project) of all series from
time to time authenticated and delivered pursuant to the Indenture identified
as such in Sections 202 and 208 of the Indenture.
"Bond Fund" means the fund created by Section 502 of the Indenture.
"Building" means all of the structures constructed or to be constructed
on the Leased Land.
"Commencement Date" means the date which is seven (7) days following the
Completion Date, as hereinafter provided in Section 4.8.
"Construction Fund" means the fund created by Section 602 of the
Indenture.
"Construction Period" means the period between July 10, 1979 and the
Completion Date.
"Enabling Act" means Chapter 40D of the General Laws of The Commonwealth
of Massachusetts, as amended from time to time.
"Excluded Property" means any real or personal property, including,
without limitation, structures, machinery, equipment, furniture and fixtures,
and whether in the nature of additions, modifications or improvements,
previously, now or hereafter constructed upon or installed in the Project by the
Sublessor or Sublessee with its own funds, without expense to the Municipality,
and not out of Bond proceeds. Excluded Property shall not include: property
constructed or acquired by application of any payment by the Sublessor pursuant
to Section 4.6 of the Lease, insurance proceeds pursuant to Section 7.1 of the
Lease or condemnation awards pursuant to Section 7.2 of the Lease; substitutions
for Leased Machinery made pursuant to Section 6.2 of the Lease; repairs,
renewals and replacements required by clause (ii) of Section 6.1 of the Lease;
any addition, modification or improvement which would render the Project less
suitable to its continued operation than if such addition, modification or
improvement had not been made; and any addition, modification or improvement,
the removal of which would impair the effective use of the Project as a
manufacturing facility either (a) comparable to the Project immediately prior to
the making of such addition, modification or improvement, or (b) at least as
valuable as it would have been had such addition, modification or improvement
not been made. All Excluded Property located on the Leased Land shall be and
remain identified as such by a writing affixed thereto. All property located on
the Leased
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<PAGE>
Land and not so identified shall be presumed to be the property of the
Municipality and to be part of the Project.
"Friendly Work" means the work described in Exhibit C attached hereto and
made a part hereof, together with such changes and additions as the Sublessor
and Sublessee may mutually agree.
"Indenture" means the Mortgage and Indenture of Trust executed in
connection with the Bonds between the Municipality and the Trustee, recorded
with the Hampden County Registry of Deeds at Book ____, Page ____, and all
amendments and supplements thereto.
"Independent Counsel" means any counsel approved by the Municipality, the
Sublessor and the bondholders but who is not a full-time employee of any of
them.
"Independent Engineer" or "Independent Architect" means an engineer,
architect or engineering or architectural firm registered and qualified to
practice engineering or architecture under the laws of Massachusetts and
approved by the Municipality and Sublessor but who is not a full-time employee
of either of them.
"Industrial Development Facility" shall have the meaning given to it by
the Enabling Act.
"Lease" means that certain Lease dated as of September 1, 1979, by and
between the City of Chicopee, Massachusetts, acting by and through its
Industrial Development Financing Authority as Lessor, and S.S. Pierce Company,
predecessor-in-interest to Sublessor as Lessee, and any amendments and
supplements thereto which have been approved by Sublessee in its sole and
absolute discretion.
"Lease Term" means the duration of the leasehold estate created by the
Lease.
"Leased Land" means the real estate described in Exhibit A hereof,
together with all additions thereto, improvements thereto (other than
structures) and substitutes therefore.
"Leased Machinery" means those items of machinery, equipment and related
property required by the Lease to be acquired with proceeds from the sale of
Bonds or the proceeds of any payment by the Sublessor pursuant to Section 4.6 of
the Lease, which items are described in Exhibit B of the Lease, together with
any item of machinery, equipment and related property acquired or
3
<PAGE>
installed in substitution therefore pursuant to Sections 4.1, 6.1, 6.2, 7.1 and
7.2 of the Lease.
"Municipality" means The City of Chicopee, Massachusetts. When exercising
authority granted by Massachusetts General Laws, Chapter 40D, the Municipality
shall act or be deemed to have acted by and through its Authority (unless the
context otherwise requires), and its successors and assigns.
"Net Proceeds" when used with respect to any insurance or condemnation
award, means the proceeds from the award for damage to the Project (excluding
the Excluded Property) remaining after payment of all reasonable expenses of the
Trustee and Sublessee (including attorneys' fees and the reasonable fees and
expenses of the Trustee) incurred in the collection of such proceeds.
"Outstanding" when used in connection with the Bonds has the meaning
defined in the Indenture.
"Parent Corporation" means the common parent corporation in any
"parent-subsidiary controlled group" in which the Sublessor or Sublessee is a
"component member" as such terms are used and defined in Section 1563 of the
Internal Revenue Code of 1954 and applicable regulations issued thereunder, as
the same may be amended from time to time.
"Permitted Encumbrances" means:
(a) Easements, rights-of-way, servitudes, zoning laws, use regulations,
other similar reservations, rights and restrictions and other minor defects and
irregularities in title, none of which materially lessens the value of the
Project or materially impairs the use thereof for the purposes held by the
Sublessee or the interest of the Sublessor;
(b) The right reserved to or vested in any municipality or public
authority by the terms of any right, power, franchise, grant, license, permit or
provisions of law to terminate such right, power, franchise, grant, license or
permit or to condemn, appropriate, recapture and designate a purchaser of the
Project;
(c) Any liens for taxes, assessments and other governmental charges and
any liens of mechanics, materialmen and laborers for work or services performed
or materials furnished in connection with the Project which are not due, or are
being contested at the time by appropriate legal proceedings which shall operate
to prevent the collection thereof or other realization thereon and the sale or
forfeiture of the Project or any interest therein to satisfy the same, provided
that the Sublessor or Sublessee, as the case may be, shall have complied
herewith dealing with the
4
<PAGE>
contest of any tax, assessment, other governmental charge or lien;
(d) The easements, rights-of-way, encroachments, encumbrances, or other
irregularities in the title, if any, set forth in Exhibit B hereto; and
(e) The Lease, the Sublease and the Indenture and any rights granted
thereby.
"Project" means the Leased Land, the Buildings, the Leased Machinery and
the Excluded Property, as they may be from time to time.
"Project Supervisor" means the project supervisor or supervisors who at
the time shall have been designated as such pursuant to Section 4.7 of the
Lease.
"Seneca Work" means that work described in Exhibit C attached hereto and
made a part hereof, together with such changes, additions or deletions as the
Sublessor and Sublessee may mutually agree.
"Specifications" means, collectively, those specifications incorporated
into a construction agreement between the Sublessor and Edward O'Leary
Construction Company dated July 23, 1979, the "Construction Agreement", and all
contract documents, plans and specifications related to the implementation
thereof, together with such changes and additions as the Sublessor may have
requested and the Municipality approved.
"Sublease" means this Sublease and amendments and supplements thereto.
"Sublessee" means Friendly Ice Cream Corporation, a Massachusetts
corporation, its successors and assigns and any surviving, resulting or
transferee corporation meeting the requirements of Section 8.1 of this Sublease.
"Sublessor" means SSP Company, Inc., a Massachusetts corporation,
successor-in-interest to S. S. Pierce Company, a Massachusetts Corporation,
its successors and assigns and any surviving, resulting or transferee
corporation meeting the requirements of Section 8.3 of the Lease.
"Sublessor Construction Period" means the period between the date of
execution hereof and the Completion Date.
5
<PAGE>
"Substantial Completion Date" means the date of Substantial Completion of
the Seneca Work as that date shall be certified as provided in Section 4.8
hereof.
"Trustee" means the trustee or the cotrustee or both at the time serving
as such under the Indenture.
ARTICLE II
REPRESENTATIONS
SECTION 2.1. Representations by the Sublessor. The Sublessor
represents that:
(a) To the best of its knowledge and belief, Sublessor has received
no written notice of any pending, threatened or contemplated action by any
government or private authority, agency or entity having the power of
eminent domain, which might result in any part of the Project being taken
by condemnation or conveyed in lieu thereof. Sublessor shall, promptly
upon receiving any such notice of any such contemplated or threatened
action, give Sublessee written notice thereof;
(b) To the best of its knowledge and belief, Sublessor has received
no written notice from any governmental authority, agency, entity or
employee (any or all of the foregoing "Governmental Authority") of any
pending proceedings to (i) change, rezone or down-zone the existing zoning
classification as to any portion of the Project, or (ii) to revoke,
rescind or terminate any existing certificate of occupancy, business
license or other permits required in connection with the use or occupancy
of the Project proposed by Sublessee;
(c) To the best of its knowledge and belief, Sublessor has not
received notice from any Governmental Authority that the Project or any
portion thereof is in violation of any law, ordinance, order, regulation
or governmental requirement (collectively, "Governmental Requirements")
including, without limitation, matters relating to zoning, construction,
fire protection, environmental requirements, building code, health code,
housing code, public accommodations and accessibility codes (including,
without limitation, the Americans With Disabilities Act (the "ADA") and
M.G.L. c. 22, ss. 13A, and regulations promulgated pursuant to each of the
foregoing), subdivision, traffic, flood control, fire safety, or notice
from any insurance company or public authority of the
6
<PAGE>
existence of any condition or situation or Governmental Requirements or
violation thereof which requires work to be done to cure an unsatisfactory
condition with respect to the Project or which could result in a
termination of insurance coverage or an increase in its costs. All
licenses, permits, approvals and consents required in connection with the
construction of the Project and the Seneca Work (including without
limitation all Permits described in Section 4.5 hereof) have been duly
issued, or will be issued in due course, by the appropriate Governmental
Authority or private authority and are in full force and effect;
(d) Other than the Lease, there are no leases, occupancy agreements,
service agreements, management agreements, or other agreements, contracts
or understandings relating to the Project to which Sublessor is a party
that will be binding on Sublessee or the Property on or after the date of
this Sublease (The parties acknowledge that the Sublessor is a party to
the so-called "Kraft Termination Agreement" which relates to the
Property);
(e) There are no actions, suits or proceedings pending or, to the
best of its knowledge and belief, threatened in writing before or by any
judicial, administrative or union body or any arbiter or any Governmental
Authority, against the Sublessor or the Project which affect title to the
Project or the Sublessor's leasehold estate, or the right or power of the
Sublessor to enter into or carry out its obligations under this Sublease,
and there are no insurance or condemnation awards or settlements pending
and no proceeds are due from any insurance company or condemnation
authority with respect to the Project;
(f) Sublessor is not a "foreign person" as that term is defined in
the Internal Revenue Code of 1986, as amended, and the Regulations
promulgated pursuant thereto;
(g) Sublessor has not created any liens on the Project during the
Lease Term, except for the Indenture and the Lease and shall not create
any lien on the Project or any right it might have under this Sublease
after the date of this Sublease;
(h) All utility services, including water, sewer, gas, electricity
and telephone, are being supplied to the Project by a public utility and
that there are no unpaid fees or assessments for these services or charges
for making connections. All utility bills and charges are current and have
been and will be paid up to the Commencement Date;
7
<PAGE>
(i) Sublessor is solvent, has not filed any petitions in bankruptcy,
has not had any petitions in bankruptcy filed against it which have not
been dismissed and has not made an assignment for the benefit of its
creditors;
(j) Sublessor has never made an assignment for the benefit of
creditors, filed a petition in bankruptcy, been adjudicated insolvent or
bankrupt, petitioned a court for the appointment of a receiver of or
trustee for it or any substantial part of its property, commenced any
proceeding under any reorganization, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, and there
is not presently pending against the Sublessor, any proceeding of the
nature described in this sentence. No order for relief has been entered
with respect to Sublessor under the Federal Bankruptcy Code;
(k) Provided that the assent of the Municipality, the holders of the
Bonds and the Trustee is obtained as provided in the Indenture, the
execution, delivery and performance of this Sublease in accordance with
the terms hereof and all other documents executed and delivered by
Sublessor hereunder, compliance with the terms hereof, the occupancy and
operation of the Project by Sublessee for the purposes contemplated by
Sublessee, and the rights and remedies provided herein, do not and will
not conflict with, or cause a violation of the Indenture, the Bonds, or
documents executed in connection therewith, the organizational documents
of Sublessor, or any other agreement binding on Sublessor or the Project;
(l) Sublessor is a corporation duly organized, existing and in good
standing under the laws of The Commonwealth of Massachusetts and has
authority to enter into this Sublease and to carry out its obligations
contemplated herein, and the Sublessor and the person signing this
Sublease on behalf of the Sublessor have, by proper corporate action, been
duly authorized to execute and deliver the same and carry out the
Sublessor's obligations hereunder;
(m) No default, or event which with the giving of notice, passage of
time or otherwise, exists under the Lease, the Bonds, the Indenture, or
the documents executed in connection therewith, and throughout the
Sublease Term Sublessor shall take all action necessary to prevent the
occurrence of any such default or event thereunder;
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(n) No improvements to the Project have been made or do any
circumstances exist which adversely affect the exemption from federal
income taxes of interest on the Bonds and the Bonds are not "arbitrage"
bonds;
(o) No amounts are due to the Municipality or the Trustee on account
of any matter whatsoever except for basic rent payments due pursuant to
Section 5.2 of the Lease. Without limiting the generality of the
foregoing, all amounts due to the Trustee and any paying agents on the
Bonds pursuant to said Section 5.2 have been paid in due course, and no
tax fund is being collected pursuant to Section 5.2 of the Lease;
(p) Sublessor will provide to the Municipality and Trustee all such
information and notices which it is required to furnish pursuant to the
Lease, and shall provide copies of all of the same to Sublessee
concurrently with furnishing the same to the Municipality or Trustee.
Additionally, Sublessor shall provide within fifteen (15) days of receipt
to Sublessee, copies of documents and notices which it receives from the
Municipality or the Trustee pursuant to the Lease; and
(q) Sublessor has good and marketable title to the leasehold estate
in the Project (excluding the Excluded Property as to which it has good
and marketable title in fee simple) and has good and sufficient rights to
all means of access thereto and egress therefrom, including without
limitation the right to use for all purposes the public ways as are used
in the City of Chicopee;
(r) At all times during the Sublease Term, Sublessor shall comply
promptly and in good faith with all of its obligations under the Lease,
the Bonds, the Indenture and the documents executed in connection with any
of the foregoing, and shall take all action or refrain from taking action
as necessary or appropriate under the foregoing in order to enable
Sublessee to exercise its rights hereunder and to secure to Sublessee the
rights provided to it herein. Without limiting the generality of the
foregoing, Sublessor agrees that it shall not make any modification to the
Lease, the Bonds, the Indenture or the documents executed in connection
therewith at any time during the Sublease Term;
(s) None of the Bonds, the Indenture or the documents executed in
connection therewith contain any limitation or condition to the exercise
by Sublessor of its options provided in Article XI of the Lease, except
for
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payment of the amount due under the Bonds and other amounts to the Trustee
as described in Article X of the Sublease;
(t) Sublessor shall provide to Sublessee notice of all actions it
takes with respect to the Lease, the Bonds, the Indenture or any other
documents executed in connection therewith, including, without limitation,
notice of any prepayments thereunder.
Sublessor hereby acknowledges and agrees that the representations
and warranties contained in this Article II and elsewhere in this Sublease
are true, accurate and complete in all material respects as of the date
hereof and shall be true, accurate and complete in all material respects
as of the Commencement Date, and, to the extent that the same are provided
herein as continuing representations and warranties, shall be true,
accurate and complete in all material respects throughout the Sublease
Term.
SECTION 2.2. Representations by the Sublessee. Sublessee represents that:
(a) The Sublessee is a corporation duly organized, existing and in
good standing under the laws of The Commonwealth of Massachusetts and has
power to enter into this Sublease and by proper corporate action has been
duly authorized to executed and deliver this Sublease.
(b) Neither the execution and delivery of this Sublease, the
consummation of the transactions contemplated hereby, nor the fulfillment
of or compliance with the terms and conditions of this Sublease conflicts
with or results in a breach of the terms, conditions or provisions of any
corporate restriction or any agreement or instrument to which the
Sublessee is now a party or by which it is bound, or constitutes a default
under any of the foregoing.
(c) Sublessee is solvent, has not filed any petitions in bankruptcy,
has not had any petitions in bankruptcy filed against it which have not
been dismissed and has not made an assignment for the benefit of its
creditors.
(d) Sublessee has never made an assignment for the benefit of
creditors, filed a petition in bankruptcy, been adjudicated insolvent or
bankrupt, petitioned a court for the appointment of a receiver of or
trustee for it or any substantial part of its property, commenced any
proceeding under any reorganization, arrangement,
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readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, and there is not presently pending against the Sublessee,
any proceeding of the nature described in this sentence. No order for
relief has been entered with respect to Sublessee under the Federal
Bankruptcy Code.
(e) It will use the Project as permitted under the Lease.
Sublessee hereby acknowledges and agrees that the representations and
warranties contained in this Article II and elsewhere in this Sublease are true,
accurate and complete in all material respects as of the date hereof and shall
be true, accurate and complete in all material respects as of the Commencement
Date, and, to the extent that the same are provided herein as continuing
representations and warranties, shall be true, accurate and complete in all
material respects throughout the Sublease Term.
ARTICLE III
DEMISING CLAUSE
SECTION 3.1 Demise. In consideration of the rents and covenants herein
stipulated to be paid and performed and upon the terms contained herein, the
Sublessor leases the Leased Land, commonly known as 1045 Sheridan Street,
Westover Industrial Park, Chicopee, Massachusetts, and described in Exhibit A
attached hereto and made a part hereof, the Building, the Leased Machinery and
the Excluded Property (if any), all of which is hereafter referred to as the
"Project" to the Sublessee, and the Sublessee leases the Project from the
Sublessor.
SECTION 3.2. Consent. Notwithstanding anything contained in this Sublease
to the contrary, in the event that the Municipality, the Bondholders or the
Trustee refuses to consent to the Sublease or any of their consents is not
reasonably acceptable to the Sublessor or the Sublessee, then each party shall
have the right to terminate this Sublease by written notice given to the other
no later than thirty (30) days after the Municipality, the Bondholders or the
Trustee refuse to consent or give such consent which is not reasonably
acceptable and in the event Sublessee has incurred any out-of-pocket expenses in
the performance of Friendly's Work, such expenses shall be reimbursed by the
Sublessor within ten (10) days of demand by the Sublessee.
SECTION 3.3. Title Insurance. Sublessee shall have the right to obtain,
review and approve, in its sole and absolute
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discretion, at its sole cost and expense, an original policy of title
insurance for the Project, together with copies of the encumbrances
reflected thereon (the "Title Policy"). In the event the Title Policy is
not received by Sublessee within thirty (30) days of the date of this
Sublease, then Sublessee shall have the right to terminate this Sublease
upon fifteen (15) days' written notice to Sublessor. If there are title
defects which have occurred since the issuance of Lawyers Title Insurance
Company Policy No. 82-79-027005 to Sublessor that would prevent the
Sublessor from subleasing the Project to Sublessee and which would
materially adversely affect Sublessee's use and occupancy of the Project
and the exercise of Sublessee's rights and obligations under the Sublease,
then Sublessor agrees that it shall cure such defaults, at its sole cost
and expense, by June 30, 1995.
ARTICLE IV
SUBLEASE TERM AND RENTS
SECTION 4.1. Sublease Term. The initial term of this Sublease shall be
approximately nine (9) years and three (3) months commencing on the Commencement
Date and ending on August 31, 2004 (the "Sublease Term").
SECTION 4.2. Rents. The Sublessee agrees to pay as basic rent ("Basic
Rent") for use of the Project the aggregate of the amounts for which provision
is made in this Section:
(a) Sublessee shall pay as Basic Rent the monthly sum of Twenty-Two
Thousand Five Hundred Sixty-Six and 50/100 ($22,566.50) Dollars payable on
the first day of each and every month in advance commencing on the day
which is ninety-one (91) days following the Completion Date and continuing
during the first five years of the Sublease Term. The Sublessee shall pay
Twenty-Six Thousand Nine Hundred Twenty-Five and 94/100 ($26,925.94)
payable on the first day of each and every month in advance during the
remainder of the Sublease Term. Rent for a fractional month at the
beginning or end of the Sublease Term shall be prorated on a per diem
basis. If any part of such Basic Rent is not paid within fifteen (15) days
from the date the same shall be due, Sublessee shall pay a late charge of
three (3%) per cent of such unpaid rent, which late charge shall be deemed
to be additional rent.
(b) The Sublessee agrees to pay to the appropriate party, or
otherwise to Sublessor, when due, or otherwise assume and pay, all other
costs of maintaining and
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operating the Project, including taxes, assessments on the Sublessee's
interest in the Project, real estate taxes, or excises as provided in
Section 8 and 20 of the Enabling Act, but specifically excluding (i) any
costs related to the principal, interest or premium on the Bonds, all
amounts due to the Trustee for its annual fee or for extraordinary
services rendered or extraordinary expenses incurred by it, and all
expenses of the paying agent as required pursuant to the Lease, and (ii)
other expenses or obligations of Sublessor hereunder (including, without
limitation, those set forth in Article V hereof), all of which costs,
expenses and obligations listed in this subsection 4.2(b)(i) and (ii)
Sublessor covenants and agrees to pay.
If the Sublessee should fail to make any of the payments required in this
Section, and such failure shall continue past the period for cure thereof
provided in Article IX hereof, the item or installment so in default shall
continue as an obligation of the Sublessee until the amount in default shall
have been fully paid, and the Sublessee agrees to pay the same with interest
thereon at the rate of ten per cent (10%) per annum commencing with the
expiration of such cure period and continuing until paid. If the Sublessee fails
to pay real estate taxes when due, the Sublessor or the Municipality, at the
direction of the Bondholders, may pay the same and add the cost to rent and may
require the Sublessee thereafter to pay each month an amount equal to
one-twelfth of the annual real estate taxes as reasonably estimated by the
Sublessor.
SECTION 4.3. Place of Payments. The Basic Rent provided for in Section 4.2
shall be paid directly to the Sublessor. In the event Sublessee sends three
notices of default pursuant to this Sublease to Sublessor in any twelve (12)
month time period, or in the event that Sublessor defaults in the payment of any
monetary payment due under the Lease, Sublessee shall have the right, at its
option, to pay Ten Thousand Three Hundred Sixty-Three and 68/100 ($10,363.68)
Dollars of Basic Rent and monthly payments of real estate taxes if required
pursuant to the provisions of the last paragraph of Section 4.2 above on a
monthly basis directly to the Trustee for the account of the Sublessor and
deposited in the Bond Fund (the "Sublease Bond Payment"). The remainder of the
Basic Rent payments (the "Remainder Lease Payment"), e.g. Twelve Thousand Two
Hundred Two and 82/100 ($12,202.82) Dollars per month for the first five years
of the Sublease Term, and Sixteen Thousand Two Hundred Eighty-Nine and 26/100
($16,289.26) Dollars for the remainder of the Sublease Term shall be paid
directly to the Sublessor, as provided in this Sublease. The payments provided
for in
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Subsection 4.2(b) shall be paid directly to the person entitled to receive the
same.
SECTION 4.4. Net Sublease; Nonterminability. This Sublease is a net
sublease and, except as otherwise expressly provided herein, any present or
future law to the contrary notwithstanding, shall not terminate, nor shall the
Sublessee be entitled to any abatement, reduction, setoff, counterclaim, defense
or deduction with respect to any Basic Rent, additional rent or other sum
payable hereunder. The Sublessee may, at its own cost and expense and in its own
name or in the name of the Municipality or Sublessor, prosecute or defend any
action or proceeding or take any other action involving third persons which the
Sublessee deems reasonably necessary in order to secure or protect its right of
possession, occupancy and use hereunder, and in such event the Sublessor hereby
agrees to cooperate fully with the Sublessee and to use reasonable efforts to
cause the Municipality to cooperate and to take all action necessary to effect
the substitution of the Sublessee for the Municipality or Sublessor in any such
action or proceeding if the Sublessee shall so request.
SECTION 4.5. Sublessor's Work. In addition to the obligation of Sublessor
contained in Article V, as part consideration for entry into this Sublease,
Sublessor shall perform certain work at its expense on behalf of Sublessee which
work and expenses are as more particularly set forth in the Work Letter attached
as Exhibit C (the "Seneca Work"). This Sublease is contingent upon the Sublessee
obtaining the Certificate of Occupancy (the "C.O."). Sublessor agrees to use its
best efforts to cooperate with Sublessee in obtaining its C.O. The Sublessor
agrees that it will cause the Seneca Work to be completed, and the equipment,
fixtures and machinery described therein to be acquired and installed in the
Building, all in accordance with the provisions of Exhibit C attached hereto and
made a part hereof. All costs and expenses of performing the Seneca Work shall
be paid in full by Sublessor.
SECTION 4.6. Definition of Substantial Completion. "Substantial
Completion" of the Seneca Work shall be deemed to occur on the date on which (a)
the Seneca Work has been completed in full, excluding only such items (herein
called "punch list items") which can be performed without causing any material
inconvenience to Sublessee in its relocation to the Project and its proposed use
and occupancy thereof and the conduct of its business therein (Sublessee
recognizes that the failure to remove the storage tanks by the Substantial
Completion Date will not
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cause a material inconvenience to Sublessee); and (b) all permits have been
issued in connection with such Work.
SECTION 4.7. Notice of Substantial Completion. Sublessor shall give
Sublessee at least seven (7) days' prior written notice of the anticipated date
of Substantial Completion of the Seneca Work.
SECTION 4.8. Completion Date. The Completion Date shall be evidenced to
the Sublessee by a certificate signed by the Sublessee's Authorized
Representative who, for these purposes, will be an engineer stating that, except
for work to be done to complete the Seneca Work and amounts to be paid for the
punch list items which are not then due and payable in accordance with the
contracts therefor; (i) Substantial Completion of the Seneca Work has been
achieved in accordance with Exhibit C; (ii) all other facilities necessary in
connection with the Seneca Work have been constructed, acquired and installed in
accordance with Exhibit C; (iii) the Leased Machinery and the Excluded Property
have been installed and/or repaired as contemplated by Exhibit C, are in good,
sound operating condition and are suitable and sufficient for the efficient
operation of the Project as contemplated by Sublessee; and (iv) all labor,
services, materials and supplies used in connection with the foregoing have been
paid for in full, and all other costs and expenses incurred in connection with
the foregoing have been paid for in full, and containing a list of the punch
list items and certifying that the punch list items comply with the requirements
of Section 4.6 above. Notwithstanding the foregoing, such certificate shall
state that it is given without prejudice to any rights against third parties
which may exist at the date of such certificate or which may subsequently come
into being.
SECTION 4.9. Warranties. Sublessor agrees that it will use its best
efforts to obtain warranties for parts, labor and services to be provided in
connection with the Seneca Work which are assignable to Sublessee, and shall
assign them to Sublessee at the Commencement Date. At the request of the
Sublessee, Sublessor will join as a nominal party in any action or proceeding
relating to default of any contractor, subcontract, supplier or surety under any
contract made in connection with the Seneca Work or the breach of any such
warranty thereunder.
SECTION 4.10. Sublessee's Termination and Other Rights. In the event that
(a) Substantial Completion of the Seneca Work has not been achieved on or before
June 30, 1995 (provided that in the
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event that Substantial Completion is not achieved on or before such date as a
result of the default of Sublessee, then the same may be extended by the number
of days by which such default of Sublessee actually delays Substantial
Completion; or (b) final completion of the punch list items has not been
achieved on or before thirty (30) days following the date of Substantial
Completion, then in any such event, Sublessee shall have the right at
Sublessee's option, by giving ten (10) days' prior written notice to Sublessor
at any time thereafter, to (i) complete all the Seneca Work, in which case 120%
of the reasonable cost thereof may be deducted by Sublessee from all Basic Rent
and other charges due hereunder; (ii) to terminate this Sublease, in which case
all obligations of the parties hereunder shall cease and this Sublease will be
void and of no further force and effect, and any amounts paid by Sublessee to
Sublessor pursuant to Exhibit C, or in connection with the occupancy of the
Project, shall promptly be refunded to Sublessee; or (iii) in the event of
failure to achieve Substantial Completion as provided herein only, to require
Sublessor to pay to Sublessee the amount set forth below in this Section 4.10.
The parties hereby acknowledge and agree that in the event that the Substantial
Completion Date does not occur on or before June 30, 1995 (as the same may be
extended as provided above), Sublessee will suffer substantial loss, damage and
expense as a result of its inability to consolidate its operations at the
Project, and that such damages, although substantial, are incapable of exact
calculation. In recognition thereof, Sublessor agrees that in the event that
Substantial Completion does not occur on or before such date, Sublessor shall
promptly pay to Sublessee for each day during which such delay in achieving
Substantial Completion continues the sum of One Thousand Two Hundred Fifty
Dollars ($1,250.00) per day. Such amount shall be paid by Sublessor to Sublessee
weekly, and in the event that Sublessor does not make any such payment,
Sublessee shall have all rights and remedies provided hereunder or under
applicable law or in equity, including, without limitation, the right to deduct
all such sums from Basic Rent and other charges due hereunder. Sublessor agrees
that Sublessee may exercise the remedies provided in this Section 4.10
successively and from time to time and that election of one remedy shall not
preclude election of a different remedy or remedies by Sublessee at a later
time.
SECTION 4.11. Sublessee's Work. In addition to the obligations of
Sublessee contained in Article V, Sublessee shall perform work at the expense of
Sublessor on behalf of Sublessor, as more particularly set forth in Exhibit C-1
(the "Friendly Work"). Sublessor and Sublessee have agreed that Sublessor shall
pay to Sublessee the amount of One Hundred Seventeen Thousand Dollars
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($117,000.00) ("Seneca's Payment") which shall be paid by Sublessor to Sublessee
upon execution of this Sublease by both parties. In the event, during the
performance of the Friendly Work or the Seneca Work, hidden and/or latent
defects are discovered or additional work is required to bring the Project into
compliance with all applicable Governmental Requirements ("Additional Work"),
then Sublessor or Sublessee as the case may be, as provided in Article V of this
Sublease, shall immediately perform such Additional Work at the its own cost and
expense. Sublessor shall evidence its Acceptance of Sublessee's Work by a
certificate signed by the Sublessor's Authorized Representative, who, for these
purposes, will be an engineer stating that Sublessee's Work has been achieved in
accordance with Exhibit C-1. Sublessee's Work shall be completed within one
hundred and eighty (180) days of the execution of this Sublease (provided that
in the event such date is not achieved as a result of the default of Sublessor,
then the same may be extended by the number of days by which such default delays
such Work.
ARTICLE V
MAINTENANCE, TAXES AND INSURANCE
SECTION 5.1. Maintenance and Modification of Project.
(a) The Sublessee agrees that it will at its own expense (i) keep
the Project in a safe condition and (ii) subject to the provisions of
Article V hereof, and reasonable wear and tear, casualty, damage caused by
default of Sublessor hereunder or by act or neglect of Sublessor, the
Municipality, or those claiming by, through or under the Sublessor or the
Municipality, and circumstances beyond Sublessee's reasonable control,
keep the Building and the Leased Machinery in good repair and in good
operating condition, making from time to time all necessary repairs
thereto. Sublessee shall be responsible for performing, at its sole cost
and expense, all ongoing and preventative maintenance of the Project,
including electrical testing and maintenance of all main electrical and
motor controls, testing of all back flow prevention devices, all testing
required by all applicable Governmental Requirements and all maintenance
of all blacktop and concrete surfaces at the Project. Sublessee shall keep
and maintain repair and maintenance records as is customary for such
components of the Project. In the event that any test or the engineer as
provided below indicates that any repair or replacement is necessary,
Sublessor shall immediately perform such work at its sole cost and expense
unless it is reasonably determined that such repair or replacement is
necessary solely due to
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an act or omission of Sublessee, in which case the repair or replacement
shall be immediately performed by Sublessee at its sole cost and expense.
The Sublessee may, also at its own expense, make from time to time any
additions, modifications, improvements or enlargement to the Project (in
this Section 5.1 termed improvements) which it may deem desirable for its
business purposes, without the consent of the Sublessor, provided that the
costs of any single such addition, modification, improvement or
enlargement does not exceed Fifty Thousand Dollars ($50,000) and they do
not reduce the value, adversely affect the structural integrity or change
the nature of the Project to the extent that it would not constitute an
Industrial Development Facility. Any other addition, modification,
improvement or enlargement may only be made with the consent of the
Sublessor, which consent shall not be unreasonably withheld or delayed.
All improvements shall comply with all applicable Governmental
Requirements. All improvements to the Building or Leased Machinery (other
than Excluded Property or improvements or equipment which is installed by
or at the request of Sublessee collectively, "Sublessee's Property") which
are located within the Leased Land or are attached to the Leased Machinery
shall become a part of the Project. Improvements constituting Sublessee's
Property may be removed by the Sublessee at any time and from time to
time, and any damage to the Project occasioned thereby shall be repaired
by the Sublessee at its expense, provided Sublessor provides written
notice to Sublessee within thirty (30) days of the earlier of (i) any
inspection of the Project which reveals that there is damage that needs to
be repaired and that is Sublessee's responsibility hereunder; or (ii) the
termination of this Sublease. The Sublessee shall not permit any liens
except Permitted Encumbrances to remain against the Project for labor or
materials furnished in connection with any improvements, repairs, renewals
or replacements made by it; but the existence of any lien in respect
thereof shall not constitute a violation of this sentence if payment
therefor is not yet due and payable or if Sublessee posts a bond in
connection with such lien.
The Sublessee shall not be required to pay, discharge or remove any
mechanics', or other lien or encumbrance or any other imposition or charge
against the Project or any part thereof, so long as the Sublessee shall,
after prior written notice to the Sublessor, at the Sublessee's expense,
contest the same in good faith by appropriate proceedings which shall
operate to prevent the enforcement of the contested lien, encumbrance or
other imposition or charge. Such contest may be made in the name of the
Municipality, Sublessor or of the Sublessee or all as
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the Sublessee shall determine, and the Sublessor agrees that it will, at
the Sublessee's expense, cooperate with the Sublessee to such extent as
the Sublessee may reasonably request. Pending any such proceeding the
Sublessor shall not have the right to pay, remove or cause to be
discharged the tax, lien, assessment, encumbrance, imposition or charge
thereby being contested.
(b) The Sublessor agrees that it will at its own expense promptly
repair any damage to the Project and make any replacements or renewals
thereof which are (i) necessary as a result of any act or neglect of the
Sublessor or the Municipality or any persons claiming by, through or under
them; (ii) required to maintain the Project in a safe and sound condition
and which are not otherwise the responsibility of Sublessee pursuant to
the provisions of Section 5.1(a) above; and/or (iii) necessary to conform
the condition of the Project to the provisions of Article II and Exhibit C
hereof, or to cure any breach of any representations or warranties
contained herein existing as of the Commencement Date, or, as to any
continuing representations or warranties, existing at any time during the
Sublease Term.
(c) Provided that such work is not required as a result of the
negligence or wilful misconduct of Sublessee, Sublessor shall be
responsible for performing, at its sole cost expense, all work required in
connection with any component of the Project which becomes worn out and
needs replacement, including the roof, all exterior and interior walls,
the structural integrity of the facilities at the Project, all equipment
not installed by Sublessee (including the FLEXAIRE heater, the HVAC
equipment and the boiler), the sprinkler system (but not replacement of
heads, which shall be the responsibility of the Sublessee), all
underground and drainage pipes, all blacktop and concrete surfaces (due to
age, weather conditions or circumstances beyond the control of either
party) and all future repairs and replacements dictated by Governmental
Requirements. In the event the Sublessor and Sublessee are unable to reach
agreement within a fifteen (15) day time period from notice of one party
to the other that a certain repair or replacement is necessary (whether
discovered by either party or through testing or any other source), then
each party shall designate an engineer within ten (10) days of the
termination of the fifteen (15) day period. The two engineers shall,
within thirty (30) days after the designation of the second engineer, make
the determination in writing of the necessity of such repair or
replacement and give notice thereof to each other and to the Sublessor and
Sublessee. Such two
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engineers shall have fifteen (15) days after the receipt of notice of each
other's determination to confer with each other and to attempt to reach
agreement. If such engineers shall concur in such a determination, they
shall give notice thereof to Sublessor and Sublessee that such concurrence
shall be final and binding upon Sublessor and Sublessee. In the event the
two engineers are not able to reach an agreement, they shall designate a
third engineer, who shall make such a determination of the necessity of
such repair and replacement within fifteen (15) days of designation, and
such determination shall be final and binding upon Sublessor and
Sublessee. In the event such work is necessary, Sublessor shall
immediately commence performing such work and shall use due diligence to
complete such work in a timely manner. All fees and expenses charged by
the engineers shall be borne equally by Sublessor and Sublessee.
(d) The Sublessor warrants that (i) the refrigeration equipment will
maintain a temperature of -20(degrees)F at 95 degrees Fahrenheit in the
freezer area at all times, including, but not limited to, if there is a
failure of some of the refrigeration equipment which requires such
equipment to be repaired or replaced and that it will run using a Freon
refrigerant (coolant); (ii) the freezer and cooler areas will accept a
layout in the freezer of two deep storage and single deep storage; product
can be stored four high and two pallets wide, each pallet upright will
carry 20,000 lbs. of weight; the weight of the truck with pallets to be
used in the rack system will be approximately 12,000 lbs., all as shown on
Exhibit D attached hereto and made a part of this Sublease; the cooler and
freezer floors will not be damaged or impacted in any way as a result of
the temperature in the freezer area provided the Sublessee does not exceed
the designed specifications of 5,000 lbs. per square inch; and (iii) as of
the Commencement Date, there is a new roof over the freezer area and all
of the roof leaks have been fixed and there are no leaks; (iv) as of the
Commencement Date, all of the walls are structurally sound; (v) as of the
Commencement Date, the two (2) fuel pumps or the one split fuel pump with
two nozzles (either of which will have a total forty (40) gallon per
minute flow-rate capacity) it is relocating will be capable of pumping
diesel fuel from the new underground diesel fuel tank it is installing and
that such pumps are operational and meet all Governmental Requirements;
(vi) as of the Commencement Date, all the battery charging equipment,
except for the existing disconnects, have been removed; (vii) as of the
Commencement Date, the sprinkler system flow has been checked and put in
certified operation and condition; (viii) as of the Commencement Date, all
of the oil and other materials which
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have been spilled down the floor drains in the garage has been removed,
and all gas and oil leaks have been repaired; (ix) as of the Commencement
Date, all lighting in the cooler and dry warehouse will be at
specifications of 50 foot candles at 3 feet, which was Sublessor's
original facility design specification; (x) the telephone system hardware
(control box and instruments) has been removed; and (xi) that at the
garage floor and battery charging drain-out areas have been traced and
identified by Sublessor and given to Sublessee or that certified
blueprints showing the completion of such work has been drafted and given
to Sublessee. Sublessee shall have thirty (30) days after the execution of
the Completion Date, to notify Sublessor of any failure of it to fully
perform as to Items (vi), (vii), (ix), (x) and (xi) and if such notice is
not given, Sublessee waives any rights hereunder.
SECTION 5.2. Removal of Leased Machinery or Excluded Property. The
Sublessee shall not be under obligation to renew, repair or replace any
inadequate, obsolete, worn out, unsuitable, undesirable or unnecessary Leased
Machinery or Excluded Property. If the Sublessee in its reasonable discretion
determines that any items of Leased Machinery or Excluded Property have become
inadequate, obsolete, worn out, unsuitable, undesirable or unnecessary, the
Sublessor shall, at it's sole cost and expense, remove such items from the
Leased Land and replace such items by other machinery or related property free
of all liens and encumbrances (other than Permitted Encumbrances) having equal
or greater utility and the same function in the operation of the Project). All
such substituted machinery or related property shall become a part of the Leased
Machinery or Excluded Property, as the case may be.
SECTION 5.3. Taxes, Governmental Charges and Utility Charges. The
Sublessee shall pay, as the same become due, all taxes and governmental charges
of any kind whatsoever that may at any time be lawfully assessed or levied
against or with respect to the Project or any machinery or other property
installed or brought by the Sublessee therein or thereon, all utility and other
charges incurred in the operation, maintenance, use, occupancy and upkeep of the
Project and all assessments and charges lawfully made by governmental body for
public improvements that may be secured by lien on the Project. In no event
shall Sublessee be required to pay any taxes levied upon or with respect to
Sublessor's or the Municipality's receipts, income or profits. Sublessor agrees
that it shall provide promptly to Sublessee any notices of any taxes to be paid
by Sublessee pursuant to this paragraph and, notwithstanding the
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foregoing provisions of this Section 5.3, Sublessee shall not be deemed to be in
default hereunder if it pays the same within ten (10) business days following
receipt thereof. In the event that Sublessor does not provide the same to
Sublessee at least ten (10) business days before the date on which the same are
due, and provided Sublessee pays the amount thereof as provided herein or
contests the same in the manner provided in the next succeeding paragraph,
Sublessor shall pay all penalties and expenses resulting from such delay in
forwarding the same to Sublessee. Sublessee agrees that it shall provide
promptly to Sublessor any notices it receives of any taxes which are due and
payable.
The Sublessee may, at its expense and in its own name and behalf, in good
faith contest any such taxes, assessments and other charges and, in the event of
any such contest, may permit the taxes, assessments or other charges so
contested to remain unpaid during the period of such contest and any appeal
therefrom, if, during such period, enforcement of such contested item is
effectively stayed. The Sublessor shall cooperate and shall use reasonable
efforts to cause the Municipality to cooperate as a nominal party with the
Sublessee in any such contest if necessary under law. Nevertheless, if the
Sublessee shall fail to pay any of the foregoing items required by this section
to be paid by the Sublessee, the Sublessor shall pay the same. Any amounts so
advanced therefor by the Sublessor shall become an additional obligation of the
Sublessee hereunder, together with interest thereon at the rate of ten per cent
(10%) per annum from the date thereof. Anything to the contrary notwithstanding,
it is agreed that the Sublessee shall not challenge any tax on the ground that
the property so taxed is owned by the Municipality, it being the intent of this
section that the Sublessee shall be taxed on all of the property constituting
the Project as if it were the owner thereof.
SECTION 5.4. Insurance. The Sublessee will maintain the following
insurance on the Project:
(a) Insurance against loss by fire, lightning and other risks from
time to time included under "extended coverage" policies, in amounts not
less than the greater of the amount of the Bonds, or eighty percent of the
actual replacement value of the Building, exclusive of foundations and
excavations, subject to a deductible provision not greater than Two
Hundred and Fifty Thousand Dollars ($250,000).
(b) General public liability insurance against claims for bodily
injury, death or property damage occurring on, in or related to the
occupancy or operation of the
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Project, in the minimum amounts of $500,000 for bodily injury and death to
any one person, $1,000,000 for any one accident, and $1,000,000 for
property damage. The Sublessee may elect to self-insure any or all of this
exposure provided that excess insurance is purchased in amounts which,
when added to the self-insurance amount, shall be not less than the
minimum required by this Section, should the self-insurance amount be
lower.
(c) Workers' compensation insurance to the extent required by law
and to the extent necessary to protect the Municipality and the Project
against workers' compensation claims.
(d) Such other insurance, in such amounts and against risks, as is
commonly obtained in the case of property similar in use of the Project.
Such insurance shall be written by companies of nationally recognized
financial standing legally qualified to issue such insurance. The policies
described in Sections 5.4(a) and (b) shall name as loss payees or additional
insureds, as appropriate, the Municipality, Sublessee, Sublessor and the Trustee
as their interests appear. Any such insurance may be maintained pursuant to a
blanket policy of insurance, provided that insurance required to be maintained
pursuant to Section 5.4(a) shall allocate to the Project the amount of insurance
required pursuant to such Section.
SECTION 5.5. Applications of Insurance Proceeds. The Net Proceeds of
insurance required by paragraph 5.4(a) hereof shall be applied as provided in
Section 6.1 hereof. The Net Proceeds of the insurance required by paragraphs
5.4(b) and (d) hereof shall be applied toward satisfaction of the liability with
respect to which such proceeds were paid.
SECTION 5.6. Additional Insurance Provisions. Every insurance policy
maintained pursuant to Section 5.4 hereof (other than general public liability
or workmen's compensation policy) shall bear a first mortgagee endorsement in
favor of the Trustee. Every policy referred to in paragraph (a) of Section 5.4
shall provide that it will not be canceled except after twenty (20) days'
written notice to the Municipality and the Trustee and that it shall not be
invalidated by any act or neglect of the Municipality or the Sublessor.
Sublessee shall deliver to Sublessor original or duplicate policies or
certificates of insurers evidencing the existence of
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all insurance which is required to be maintained by Sublessee hereunder, such
delivery to be made (i) promptly after the execution and delivery hereof and
(ii) within 30 days prior to the expiration of any such insurance. The Sublessee
shall not obtain or carry separate insurance concurrent in form or contributing
in the event of loss with that required by this Section 5.6 unless the
Municipality, Sublessor and Sublessee are named insureds therein, with loss
payable as provided herein. The Sublessee shall immediately notify the
Municipality, Sublessor and the Trustee whenever any such separate insurance is
obtained and shall deliver to the Trustee and Sublessor the policies or
certificates evidencing the same.
SECTION 5.7. Advances by Sublessor. If the Sublessee shall fail to
maintain the insurance coverage required by this Sublease, to keep the Project
in a reasonably safe condition, or to keep the building and the Leased Machinery
in good repair and good operating condition, all as required to be done by
Sublessee herein, Sublessor may (but shall be under no obligation to) take out
the required policies of insurance and pay the premiums on the same or make the
repairs, renewals and replacements. All amounts so advanced by the Sublessor
shall become an additional obligation of the Sublessee, together with interest
thereon at the rate of ten per cent per annum from the date thereof.
ARTICLE VI
DAMAGE, DESTRUCTION AND CONDEMNATION
SECTION 6.1. Damage and Destruction. If the Project is destroyed or
damaged by fire or other casualty, the Sublessee shall promptly give written
notice thereof to the Sublessor. Unless the Sublessee shall exercise its option
to purchase the Project pursuant to the provisions of Section 10.2 hereof, all
Net Proceeds of insurance resulting from such claims together with the amount of
the deductible (the "Deductible") shall be paid to and held by the Trustee in a
separate trust account, and (i) the Sublessee shall promptly repair, build or
restore the property damaged or destroyed to substantially the same condition as
it existed prior to such damage or destruction, with such changes, alterations
and modifications (including the substitution and addition of other property) as
may be desired by the Sublessee and as will not impair the value, operating
utility or productive capacity or the character of the Project as an Industrial
Development Facility; and (ii) the Trustee shall apply so much as may be
necessary of the Net Proceeds and Deductible of such insurance to payment of the
costs of such repair, rebuilding or restoration as the work progresses. If the
Net Proceeds plus
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the Deductible are not sufficient to pay in full the estimated costs of such
repair, rebuilding or restoration, and provided that Sublessee has maintained
the insurance required by Section 5.4(a) hereof, the Sublessor shall promptly
deposit with the Sublessee in escrow that portion of the cost thereof in excess
of the amount of the Net Proceeds and Deductible, and the Sublessee shall use
the same to complete such repair, rebuilding or restoration. If the Net Proceeds
and the Deductible are not sufficient to pay in full the cost of such repair,
rebuilding or restoration as a result of a failure of Sublessee to maintain the
insurance required by Section 5.4(a) hereunder, the Sublessee shall nevertheless
complete the work thereof and pay that portion of the costs thereof in excess of
the amount of the Net Proceeds and Deductible. Neither the Sublessee nor the
Sublessor shall, by reason of the payment of such excess costs, be entitled to
any reimbursement from the Municipality, the Trustee or the holders or owners of
the Bonds or any abatement or diminution in Basic Rent hereunder (except as
expressly provided in this Section 6.1 or Section 9.6 hereof) or rent under the
Lease. The balance of the Net Proceeds and the Deductible remaining after
payment of all the costs of such repair, rebuilding or restoration shall be paid
into the Bond Fund. Until Substantial Completion of such repair, rebuilding or
restoration, all Basic Rent and other charges payable by Sublessee hereunder
shall be abated as follows: all proceeds of any rent interruption insurance
shall be applied to the payment of Sublessee's obligations hereunder, first to
the payment of all Basic Rent and other amounts due to the Municipality pursuant
to the Lease and thereafter any amounts remaining shall be allocated to the
payment of the remaining Basic Rent and other charges payable hereunder.
Provided that all amounts due under the Lease have been paid in full, all other
amounts due under this Sublease shall be abated in proportion to the extent of
the damage. If a dispute arises between Sublessor and Sublessee concerning the
amount of damage or destruction and costs associated therewith and Sublessor and
Sublessee cannot agree within fifteen (15) days after notice to Sublessor to
resolve said dispute, Sublessor and Sublessee shall jointly submit their dispute
to binding arbitration before the American Arbitration Association under the
Commercial Rules of Arbitration. This arbitration shall be submitted to a single
arbitrator.
SECTION 6.2. Condemnation. If title to, or the temporary use of, the
Project or any part thereof shall be taken under the exercise of the power of
eminent domain by any governmental body or by any person, firm or corporation
acting under governmental authority, the Sublessee shall promptly give written
notice thereof to the Sublessor. Unless the Sublessee shall exercise its option
to purchase the Project pursuant to the provisions of
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Section 10.2 or 6.4 hereof, all Net Proceeds of any award resulting from such
taking shall be paid to and held by the Trustee in a separate trust account; and
(i) the Sublessee shall promptly repair, rebuild or restore the remaining
property to substantially the same condition as it existed prior to such taking,
with such changes, alterations and modifications (including the substitution and
addition of other property) as may be desired by the Sublessee and as will not
impair the value, operating utility or productive capacity or the character of
the Project as an Industrial Development Facility; and (ii) the Trustee shall
apply so much as may be necessary of the Net Proceeds of such award of the costs
of such repair, rebuilding or restoration as the work progresses. If the Net
Proceeds are not sufficient to pay in full the costs of such repair, rebuilding
or restoration, Sublessor shall deposit with the Trustee that portion of the
estimated cost thereof in excess of the amount of the Net Proceeds and Sublessee
shall be entitled to use the same to complete such repair, rebuilding or
restoration. Sublessor shall not, by reason of the payment of such excess costs
be entitled to any reimbursement from the Sublessee, Municipality, the Trustee
or the holders or owners of the Bonds. All Basic Rent and other charges due from
Sublessee hereunder shall be abated during such repair, rebuilding or
restoration in an amount which is proportionate to the damage to the Project,
and, upon completion of such repair, rebuilding or restoration shall be
permanently abated in proportion to the impairment to the value, operating
utility or productive capacity or character of the Project. Any balance of such
Net Proceeds remaining after payment of all the costs of such repair, rebuilding
or restoration shall be paid into the Bond Fund. The Sublessor shall cooperate,
and shall cause the Municipality to cooperate fully as a nominal party with the
Sublessee in the handling and conduct of any prospective or pending condemnation
proceeding with respect to the Project or any part thereof and shall, to the
extent it may lawfully do so, permit the Sublessee to litigate any such
proceeding in the name and behalf of the Sublessor and the Municipality. In no
event shall the Municipality or Sublessor voluntarily settle, or consent to the
settlement of, any prospective or pending condemnation proceeding with respect
to the Project or any part thereof without the written consent of the Sublessee.
SECTION 6.3. Condemnation of Excluded Property. Sublessee shall be
entitled to the Net Proceeds for damages to or takings of Excluded Property, for
damage to or interruption of Sublessee's business or operations, moving
expenses, damage to the value of its leasehold or its leasehold improvements, or
Sublessee's Property, and any other amounts specifically awarded to Sublessee by
the taking authority.
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SECTION 6.4. Sublessee's Options. Notwithstanding anything contained in
this Sublease to the contrary, however, in the event of damage or destruction to
the Project which Sublessee reasonably estimates will require more than six (6)
months to repair, or which is not required to be covered by insurance hereunder,
or in the event of a taking of the entire Project or any part of the parking
thereon, access thereto or any part of the freezer or loading components of the
Project, or that materially and adversely affect Sublessee's use, then,
notwithstanding the provisions of this Section, Sublessee shall have the right
to purchase the Project as provided in said Article X or to terminate this
Sublease, by giving written notice to Sublessor no later than thirty (30) days
following the occurrence of the damage, casualty or taking, as the case may be,
specifying the date of purchase or termination. In the event that Sublessee
elects to purchase the Project, the same shall occur as provided in Article X,
provided further that all of the Net Proceeds shall be used to redeem the Bonds
as provided hereunder and any balance remaining thereafter shall be paid to and
be the sole property of Sublessee. In the event that Sublessee elects to
terminate this Sublease, this Sublease and all obligations of the parties
arising after the date of termination shall terminate and shall be void and
without further recourse to the parties hereto, and the Net Proceeds shall be
disbursed as provided in the Lease. Notwithstanding anything else contained to
the contrary in this Sublease, Sublessor acknowledges and agrees that:
(a) Solely in the event of damage, destruction or taking as set forth in
Section 6.4 below, the option rights provided in Section 10.2(a) and this
Section 6.4 (or in any other section hereof which references such Sections),
shall, at Sublessee's option, be superior to the right of first refusal set
forth in Section 10.2(b) hereof, and can be exercised for the price set forth in
said Section 10.2(a) whether or not a Sale Contract then exists and whether or
not Sublessee has exercised its right of first refusal as provided in Section
10.2(b), provided that Sublessee otherwise complies with the terms and
conditions hereof, and
(b) In the event that Sublessee exercises its option or right of first
refusal rights as provided in Section 10.2 hereof and following the giving of
notice but prior to the closing as provided therein, a damage, destruction or
taking as described in this Section 6.4 occurs, Sublessee shall be entitled to
elect to purchase the Project as provided in this Section 6.4 by giving written
notice thereof to Sublessor as provided herein.
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ARTICLE VII
SPECIAL COVENANTS AND OTHER MATTERS
SECTION 7.1. Sublessee to Hold Municipality Harmless. The Sublessee agrees
to indemnify the Municipality and the Sublessor against any and all claims and
expenses as a result of any action or omission of the Sublessee hereunder.
Without limiting the generality of the foregoing, the Sublessee releases the
Municipality from, agrees that the Municipality shall not be liable for, and
agrees to hold the Municipality harmless against, any loss or damage to property
or any injury to or death of any person that may be occasioned by the Sublessee
or anyone acting under the Sublessee pertaining to the Project or the use
thereof. Notwithstanding the foregoing, however, there is expressly excluded
from this indemnity any claims, costs, expenses, liability or damage, including
without limitation any loss or damage to property or any injury to or death of
any person, which is a result of the default of Sublessor hereunder or under the
Lease, or any other act or neglect of the Sublessor or anyone claiming by,
through or under Sublessor, and the Municipality shall look solely to the
Sublessor for indemnification with respect to any of the same.
Sublessor agrees to indemnify Sublessee against any and all claims,
damages, losses, and expenses occurring as a result of any act or omission of
the Sublessor or any default of the Sublessor hereunder. Without limiting the
generality of the foregoing, Sublessor releases Sublessee from, agrees that the
Sublessee shall not be liable for, and agrees to hold the Sublessee harmless
against, any loss or damage to property or any injury to or death of any person
that may be occasioned by the Sublessor or anyone acting under the Sublessor
pertaining to the Project or the use thereof, or any breach by Sublessor of any
of its representations or warranties hereunder.
Sublessee agrees to indemnify Sublessor against any and all claims,
damages, losses, and expenses occurring as a result of any act or omission of
the Sublessee or any default of the Sublessee hereunder. Without limiting the
generality of the foregoing, Sublessee releases Sublessor from and agrees that
the Sublessor shall not be liable for, and agrees to hold the Sublessor harmless
against, any loss or damage to property or any injury to or death of any person
that may be occasioned by the Sublessee or anyone acting under the Sublessee
pertaining to the Project or the use thereof, or any breach by Sublessee of any
of its representations or warranties hereunder.
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SECTION 7.2. Right of Access. Sublessee agrees that the Authorized
Municipal Representative, the Trustee, the Sublessor and their duly authorized
agents shall have the right at all reasonable times to enter upon the Leased
Land and to examine and inspect the Project on at least one (1) day's notice
except in the event of an emergency. During such access to the Project, all
commercially reasonable measures shall be taken to minimize interference with
Sublessee's use of the Project. The Sublessee further agrees that the
Municipality, the Trustee, the Sublessor and their duly authorized agents shall
have such rights of access to the Leased Land as may be reasonably necessary for
the proper maintenance of the Project in the event of failure by the Sublessor
or Sublessee to perform their respective obligations under Article V hereof, and
Sublessor shall have such rights of access to the Leased Land as may be
reasonably necessary for the proper performance for its obligations pursuant to
said Article V.
SECTION 7.3. Sublessor to Maintain its Corporate Existence. Sublessor
agrees that it will maintain its existence as a corporation in good standing
under the laws of the Commonwealth of Massachusetts, will not dissolve or
otherwise dispose of all or substantially all of its assets and will not
consolidate with or merge into another corporation or permit any other
corporations to consolidate with or merge into it without the consent of the
Bondholders, provided that the Bondholders' consent shall not be required if the
transferee, if a transfer of assets, or the surviving entity, if a consolidation
or merger, becomes fully liable for Sublessor's obligations hereunder, and if
such transferee or surviving entity has a financial strength and net worth
immediately after the transfer or merger which is substantially equal to that of
the Lessee immediately before.
SECTION 7.4. Release of Certain Land.
(a) Notwithstanding any other provision of this Sublease, and
provided that the provisions of Section 7.4(d) hereof are met, the
Sublessee reserves the right, at any time and from time to time, to amend
this Sublease, and the Sublessor agrees to cause the Lease to be
correspondingly amended in accordance with the provisions of Section 8.5
hereof, for the purpose of releasing from this Sublease and the leasehold
estate created hereby and from the Lease and the leasehold estate created
thereby one or more of the following portions of the Leased Land:
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(i) any unimproved part of the Leased Land (on which neither
any Buildings nor Leased Machinery is located but on which roads or
transportation, utility or parking facilities may be located) on
which (1) the Municipality proposes to construct improvements for
lease to the Sublessor which in turn shall be leased by the
Sublessor to the Sublessee or any subsidiary or affiliated
corporation thereof under a different lease or (2) the Sublessee
proposes to construct improvements for use in connection with the
Project but which are or may be separated from the Project; or
(ii) Any part of the Leased Land with respect to which it is
proposed to grant an easement or convey a fee or other title to a
railroad or other public or private carrier or to any public utility
or public body in order that transportation or utility services for
the Project may be provided, increased or improved.
(b) If at the time any such amendment is made any of the Bonds are
Outstanding there shall be deposited with the Trustee by the Sublessor
and/or the Sublessee, as the case may be:
(i) A copy of such amendment to each of the Lease and the
Sublease as executed; and
(ii) A certified resolution of the Authority stating that the
Municipality is not in default under any of the provisions of the
Indenture and the Sublessor is not, to the knowledge of the
Municipality, in default under any of the provisions of the Lease;
giving an adequate legal description of that portion of the Leased
Land to be released; stating the purpose for which the Municipality
desires the release; stating that the improvements which will be
constructed or the facilities and services which will be provided,
increased or improved will be such as will promote the continued use
of the Project as an Industrial Development Facility within the
Municipality and requesting such release;
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(iii) A certified resolution of the Sublessor approving such
amendments to the Lease and the Sublease and a statement by the
president or any vice president of Sublessor that the Sublessor is
not in default under any of the provisions of the Lease;
(iv) A statement by the president or any vice president of
Sublessee that the Sublessee is not in default under any of the
provisions of this Sublease;
(v) A copy of any agreement wherein the Sublessor or Sublessee
(as the case may be) agrees to construct improvements on the portion
of the Leased Land to be released and Sublessor and Sublessee agree
to lease and sublease, respectively, the same and a copy of the
instrument by which the necessary parties convey title to the Leased
Land to be released;
(v) A certificate of an Independent Engineer who is acceptable
to the Trustee and the Bondholders, dated not more than sixty (60)
days prior to the date of the release and stating that, in the
opinion of such Engineer: the portion of the Leased Land so proposed
to be released is necessary or desirable for the purposes specified
in paragraph 7.4(a)(i) or 7.4(a)(ii) hereof; and the proposed
release will not impair the usefulness of the Project, alter the
nature of the Project as an Industrial Development Facility, destroy
the means of ingress thereto and egress therefrom or materially
reduce the value thereof.
(c) No release effected under this Section shall entitle the Lessee
to any abatement or diminution of the rents payable under this Lease.
Provided that the Leased Land so released pursuant to the provisions of
this Section 7.4 is subleased to the Sublessee as contemplated by Section
7.4(a)(i) above, such release effected under this Section shall not
entitle the Sublessee to an abatement or diminution of the amounts payable
hereunder.
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(d) Notwithstanding the foregoing provisions of this Section 7.4,
Sublessee acknowledges and agrees that in the event the proposed release
pursuant to Section 7.4(a)(i) above would materially adversely affect the
utility or value of the Leased Land or the Building, the consent of the
Sublessor to any such release shall be required, which consent shall not
be unreasonably withheld.
SECTION 7.5. Granting of Easements. If no Event of Default shall have
happened and be continuing, and provided that the same will not materially
adversely affect the value of the Leased Land and the Building, and provided
further, subject to the consent of Sublessor, which consent shall be given
provided that the provisions in this Section 7.5 have been met, the Sublessee
may at any time or times grant easements, licenses, rights-of-way (including the
dedication of public highways) and other rights or privileges in the nature of
easements with respect to the Leased Land, free from the lien of the Indenture,
or the Sublessee may release existing easements, licenses, rights-of-way and
other rights or privileges with or without consideration, all at the cost and
expense of Sublessee. The Sublessor agrees that it shall execute and deliver and
will cause and direct the Municipality and the Trustee to execute and deliver
any instrument necessary or appropriate therefor upon receipt of:
(i) A copy of the instrument of grant or release;
(ii) A written application signed by the Sublessee requesting such
instrument; and
(iii) Acertificate executed by the Sublessee, to the effect that
such grant or release is not detrimental to the conduct of the business of
the Sublessee and such grant or release will not impair the effective use
or interfere with the operation of the Project and will not materially
adversely affect the value of the Leased Land or the Building.
SECTION 7.6. Arbitrage Covenants. Each of the Sublessor and Sublessee
covenants that it will not make, or request or permit the Trustee or the
Municipality to make, any use of the proceeds of the Bonds or of any moneys on
deposit to the credit of any of the funds created and established by the
Indenture, which may be deemed to be proceeds of the Bonds pursuant to Section
103(d) of the Internal Revenue Code of 1954 and the applicable regulations
thereunder which, if such use had been reasonably expected on the date of
issuance of the Bonds, would have caused the Bonds to be "arbitrage bonds"
within the meaning
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of said Section and said regulations. The Sublessor and Sublessee further
covenants that it will comply with the requirements of said Section and said
regulations, as the same may be amended from time to time, so long as any Bonds
remain Outstanding (as defined in the Indenture).
SECTION 7.7. Compliance with Laws. The Sublessor shall comply with all
Governmental Requirements relating to the Project in the performance of its
obligations hereunder, including, without limitation, its obligations described
in Articles IV and V and Exhibit C attached hereto. Sublessee shall comply with
all Governmental Requirements relating to the Project in performing its
obligations hereunder and in using the Project for the purposes intended by
Sublessee, but the foregoing shall in no way lessen, alter or otherwise affect
Sublessor's obligations and liabilities under Sections 4.07(e), 7.01 and 7.02 of
the Asset Purchase Agreement dated April 7, 1986.
SECTION 7.8. Limitation of Obligations of Municipality. The Sublessee
recognizes that nothing contained in this Sublease, the Lease or in the
Indenture shall in any way obligate the Municipality to raise any money by
taxation or use other public funds for any purpose in relation to the Project.
Further, the Sublessee recognizes that neither the Municipality nor the
Authority promise to pay any debt or meet any financial obligation to any person
at any time in relation to the Project except (1) from moneys received or to be
received under the provisions of the Lease or of the Indenture or derived from
the exercise of the Municipality's rights under the Lease or the Indenture,
other than moneys received for its own purposes, or (2) as may be required by
law.
In the exercise of the powers of the Municipality and its officers under
the Lease and the Indenture, including, without limitation, the application of
moneys, the investment of funds, the letting or other disposition of the Project
in the event of default by the Sublessor, or the pursuit of any remedy, the
Municipality shall not be accountable to any holder of any of the Bonds, the
Trustee, the Sublessor or the Sublessee for any error of judgment or for any
action taken, or omitted to be taken, in good faith, by it, or by any person for
whose conduct it is legally responsible. The Municipality and its officers shall
be protected in its or their acting upon any paper or document reasonably
believed by it or them to be genuine, and it and they may conclusively rely upon
the advice of counsel and may, but need not, require further evidence of any
fact or matter before taking any action.
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Section 7.9. Consent and Other Actions of Sublessor Under Lease. Sublessor
expressly acknowledges and agrees that the Lease: (a) provides the Sublessor
with the right to consent to certain acts or other matters; and (b) permits
Sublessor to take or omit to take certain actions or to send certain notices. In
the event that the Sublessee proposes to so consent or take or omit to take
certain action or to send notice as provided in Section 7.9(a); or (b) above in
the name of the Sublessor and the Municipality agrees with or is willing to
permit or consent to the same, and provided further that the value of the
Project and the rights and obligations of the Sublessor under the Lease which
have not been assumed by Sublessee under this Sublease will not be materially
adversely affected thereby, then in any such event Sublessor agrees that
Sublessee shall the right to act in the name and on behalf of Sublessor under
the Lease as provided in Section 7.9(a) and (b) above. Without limiting the
generality of the foregoing, Sublessor agrees that it will consent to any of the
same proposed by Sublessee and will cooperate with Sublessee in effecting the
same. In the event that any such act, omission or other matter would not satisfy
the requirements of this Section 7.9, then Sublessor shall have the right to
approve any of the same, which approval shall not be unreasonably withheld or
delayed.
Section 7.10. Hazardous Waste.
(a) To the best of its knowledge and belief, Sublessor represents
and warrants to Sublessee that as of the Commencement Date:
(i) except for any materials or substances which may be
present as a result of the items as noted in Section 7.10(a)(x), no
"hazardous material", "hazardous substance", "hazardous waste",
"oil", "regulated substance", "toxic substance", "restricted
hazardous waste", "special waste", or words of similar import as
defined under any of the Governmental Requirements relating to
environmental conditions existing on, under or emanating from the
Project, or the generation, storage, transportation, utilization,
disposal, management or release of any of the foregoing
(collectively, "Environmental Requirements"), asbestos, urea
formaldehyde foam insulation, polychlorinated biphenyls, radon gas,
flammable explosives, radioactive materials,
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any chemical, contaminant, solvent, material, pollutant or substance
that may be dangerous or detrimental to the Project, the environment
or the health or safety of the owners, lessees or occupants of the
Project or any owners or occupants of any property near the Project,
or any substance, the generation, storage, transportation,
utilization, disposal, management, release or location of which is
prohibited or otherwise regulated pursuant to any of the
Environmental Requirements (collectively, "Hazardous Substances")
has been or is currently generated, transported, utilized, disposed
of, managed, released or located on, under or from the Project
(whether or not in reportable quantities), except for de minimis
releases typically associated with the use of certain portions of
the Project for driving and parking motor vehicles, or has in any
manner been introduced onto the Project, including, without
limitation, the septic, sewage or other waste disposal systems
serving the Project;
(ii) except for the presence of the tanks, as noted in Section
7.10(a)(x), Sublessor does not have any knowledge of any threat of
release of any Hazardous Substance on, under or from the Project;
(iii) Sublessor has not received any notice from any state or
local authority having jurisdiction over the Project, the United
States Environmental Protection Agency or any other Governmental
Authority claiming that (1) the Project's use thereof violates any
of the Environmental Requirements; or (2) the Municipality, the
Trustee, the Sublessor or any of its employees or agents have
violated any of the Environmental Requirements;
(iv) Sublessor has not incurred any liability to the
Municipality, the United States of America or any other Governmental
Authority under any of the Environmental Requirements;
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(v) no lien against the Project has arisen under or related to
any of the Environmental Requirements;
(vi) there are no actions or orders instituted, threatened,
required or completed by any Governmental Authority or any claim
made or threatened by any person against the Sublessor or the
Project (or to the best of its knowledge and belief, the
Municipality, the Trustee, or any other occupant, prior occupant or
prior owner thereof), arising out of or in connection with any of
the Environmental Requirements, or the assessment, monitoring,
cleanup, containment, remediation or removal of, or damages caused
or alleged to be caused, by any Hazardous Substances located on or
under, or emanating from the Project, or generated, stored,
transported, utilized, disposed of, managed or released by the
Sublessor (whether or not on, under or from the Project) (as to
either party the foregoing collectively, the "Environment
Enforcement Actions");
(vii) Sublessor does not have any knowledge that any Hazardous
Substance has been or is currently generated, stored, transported,
utilized, disposed of, managed, released or located on, under or
from any property located within a one-half mile of the Project
("Surrounding Property") in violation of, or allegedly in violation
of any of, the Environmental Requirements;
(viii) Sublessor does not have any knowledge of any threat of
release of any Hazardous Substance on, under or from any Surrounding
Property;
(ix) Sublessor does not have any knowledge of any action or
order instituted or threatened against any person by any
Governmental Authority arising out of or in connection with the
Environmental Requirements involving the assessment, monitoring,
cleanup, containment, remediation or removal of or damages caused or
alleged to be caused by (1) any Hazardous Substances generated,
stored, transported, utilized,
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disposed of, managed, released or located on, under or from any
Surrounding Property; or (2) the threat of release of any Hazardous
Substance on, under or from any Surrounding Property; and
(x) there are two (2) underground storage tanks on or under
the Project, one of which stores gasoline fuel, and one of which
stores diesel fuel, both of which will be removed by Sublessor as
part of Seneca's Work. Additionally, as part of Seneca's Work,
Sublessor shall install a ten thousand (10,000) gallon underground
tank which will store diesel fuel. Sublessor shall test the soil at
or about the tank grave sites and if such tests demonstrate that
leaks occurred, Sublessor shall perform necessary and reasonable
remediation, all in compliance with all Governmental Requirements.
Sublessor acknowledges and agrees that the representations and
warranties contained in this Section 7.10(a) shall be true, accurate
and complete in all material respects as of the date hereof, and as
of the Commencement Date, as applicable, and at all times throughout
the Sublease Term.
(b) Until the Sublease Term expires or is earlier terminated,
Sublessee represents and warrants that it shall not (i) generate, store or
utilize (except to the extent, if any, the same are used in the ordinary
course of using the Project as proposed by Sublessee, provided, however,
that all such storage and utilization is done in compliance with all
Environmental Requirements), transport, dispose of, manage, release or
locate, or permit anyone claiming by, through or under Sublessee to
generate, store, transport, utilize, dispose, manage, release or locate
any Hazardous Substances on, under or from the Project, except for de
minimis releases typically associated with the use of certain portions of
the Project for driving and parking motor vehicles; or (ii) permit any
lien arising under or related to any of the Environmental Legal
Requirements to attach to the Project as a result of violation of any of
its covenants provided in this Section 7.10(b)(i) above. Sublessee shall
indemnify and hold Sublessor harmless against any and all costs, damages,
claims, losses, liabilities and expenses arising or resulting from or
occurring in connection therewith.
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(c) In the event of the violation by either Sublessor or Sublessee
of its representations and warranties contained herein, the defaulting
party shall immediately take all actions which are reasonably necessary to
cure the same, including, without limitation, the assessment, monitoring,
cleanup, containment, removal, remediation or restoration of the Project
as may be required by applicable Environmental Requirements, and shall pay
the cost of the same.
(d) Sublessor represents and warrants to Sublessee that, except as
expressly provided in Subsection 7.10(b) above, Sublessor shall be solely
responsible for (i) the assessment, monitoring, cleanup, containment,
remediation, removal or restoration of any Hazardous Substances generated,
stored, transported, utilized, disposed of, managed, released or located
in, on, under or from the Project; (ii) the release or threat of release
of any Hazardous Substances in, on, under, or from the Project, or in, on,
under or from any Surrounding Property which affects the Project; (iii)
compliance with all Environmental Requirements governing the foregoing;
and (iv) all costs, damages, claims, losses, liabilities and expenses
caused or alleged to be caused to any person, property or interest by or
as a result of any of the foregoing, or by a violation of any of its
representations or warranties contained in this Section 7.10. In each such
instance, Sublessor shall indemnify and hold Sublessee harmless against
any and all costs, damages, claims, losses, liabilities and expenses
arising or resulting from or occurring in connection therewith.
ARTICLE VIII
ASSIGNMENT, SUBLEASING, MORTGAGING, SELLING,
REDEMPTION, PREPAYMENT AND ABATEMENT
SECTION 8.1. Assignment and Subleasing. Except as expressly provided in
this Article VIII, this Sublease may not be assigned, and the Project may not be
subleased, as a whole or in part, without the prior written consent of the
Sublessor, which consent shall not be unreasonably withheld but which is subject
to the consent of the Municipality, the Trustee and the Bondholders.
Notwithstanding the foregoing, however, no consent of any party shall be
required in the event there is an assignment or subletting to a wholly-owned
subsidiary or affiliate of Sublessee or to Sublessee's parent corporation or
subsidiary or affiliate.
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SECTION 8.2. Mortgaging. The Municipality may mortgage all or any part of
the Project and may assign its interest in and pledge the Lease and all moneys
receivable under the Lease to the Trustee pursuant to the Indenture as security
for payment of the Bonds. Each such mortgage, assignment or pledge shall be
subject and subordinate to the Lease and this Sublease.
SECTION 8.3. Redemption of Bonds. In connection with the exercise of any
purchase options as provided to Sublessee in this Sublease, the Sublessor shall
cause the Municipality, at the request at any time of the Sublessee and if the
Bonds are by their terms then callable, shall forthwith take all acts required
by the Indenture to effect the prompt redemption of all or such part of the
Bonds, as may be specified by the Sublessee. It is understood that all expenses
of such redemption shall be paid from money in the hands of the Trustee or by
the Sublessee (subject to the Sublessee's right to receive a credit for all such
amounts as provided in Article X hereof) and not by the Sublessor (unless the
Sublessor, and not the Sublessee, has requested the redemption as provided in
Section 9.3 of the Lease) and not by the Municipality from its general funds.
The Sublessor shall cause the Municipality to cooperate with the Sublessee in
effecting any purchase of Bonds or application of funds pursuant to the
provisions of the Indenture pertaining to the redemption of Bonds and to the
application of Bonds to the satisfaction of payments made or to be made into the
Bond Fund. Any pertinent certificate in connection therewith to be executed by
or on behalf of the Municipality under the Indenture will contain such
information as is reasonable required by the Sublessee.
SECTION 8.4. Prepayment of Rents. In connection with the exercise of any
purchase options as provided to Sublessee in this Sublease at any time the
Sublessee (subject to the Sublessee's right to receive a credit for all such
amounts as provided in Article X hereof) may prepay all or any part of the rents
payable hereunder. In the event of any such prepayment, the portion of the
prepayment which Sublessee designates as corresponding to the Sublease Bond
Payments shall be paid by Sublessor (or shall be paid directly by Sublessee) to
the Municipality to be applied as provided in the Indenture. In the event of a
prepayment in full of the rent due under the Lease or a redemption of the Bonds
at Sublessee's request, the rent payable hereunder shall be permanently abated
by the amount of the Sublease Bond Payments.
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SECTION 8.5. Certain Rent Abatements. If at any time the aggregate moneys
in the Bond Fund shall be sufficient to retire in accordance with the provisions
of the Indenture all of the Bonds at the time Outstanding, and to pay all fees
and charges of the Trustee and the paying agents for the Bonds due or to become
due through the date on which the Bonds are due, under circumstances not
resulting in termination of the Sublease Term, and whether or not the Lessee is
in default under the Lease and whether or not the Sublease is in default
hereunder, if such default will not result in failure to achieve the retirement
of all of the Bonds in accordance with their terms (whether at or before
maturity) or in nonfulfillment of any condition to this obligation, the
Sublessee shall be entitled to use and occupy the Project from the date on which
such aggregate moneys are in the hands of the Trustee, without the payment of
that portion of Basic Rent which corresponds to the Sublease Bond payment
hereunder during that interval (but otherwise on the terms and conditions
hereof). If Bonds are to be retired prior to maturity, this Section is subject
to the condition that such Bonds shall have properly been called for redemption
on a date upon which they may be called for redemption under the Indenture, and
the required notice of redemption shall have been given and the necessary funds
properly deposited.
SECTION 8.6. Installation of Sublessee's Property. The Sublessee may from
time to time in its own discretion and at its own expense, construct, locate or
install Sublessee's Property in or on the Project. All Sublessee's Property
shall remain the sole property of the Sublessee, in which the Sublessor, the
Municipality and the Trustee shall not have any interest, may be modified or
removed at any time while the Sublessee is not in default hereunder after notice
and beyond any applicable grace period and shall not be subject to the lien of
the Indenture, provided, however, that any material damage to the Project
occasioned by such removal shall be repaired at the Sublessee's expense;
provided that Sublessor provides notice of such material damage to Sublessee
within thirty (30) days of the termination of the Sublease; and, provided,
further, that such modification or removal does not adversely affect the
operation of the Project as an Industrial Development Facility.
SECTION 8.7. References to Bonds After Bonds Paid. Upon payment in full of
the Bonds or provision for payment thereof having been made and all fees and
charges of the Trustee and paying agents, all references in this Sublease to the
Bonds and the Trustee shall be ineffective and neither the Trustee nor the
holders of any of the Bonds shall thereafter have any rights
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hereunder, saving and excepting those that shall have theretofore vested and be
unsatisfied.
ARTICLE IX
DEFAULT
SECTION 9.1. Sublessee's Events of Default. The following shall be "events
of default" of Sublessee under this Sublease:
(i) Failure by the Sublessee to pay the rents within five (5)
days after receipt of written notice from Sublessor that such have
not been paid when due under Section 4 hereof.
(ii) Failure by the Sublessee to observe and perform any
covenant, condition or agreement of this Sublease or under any
amendatory or supplemental subleases on its part to be observed or
performed, other than as referred to in the previous paragraph (i),
for a period of thirty (30) days after receipt of written notice,
specifying such failure and in the event such breach cannot be cured
during such time, then failure to cure the same within such
additional time as may be reasonable to cure or correct such default
with due diligence.
(iii) The dissolution or liquidation of the Sublessee or the
filing by the Sublessee of a voluntary petition in bankruptcy, or
failure by the Sublessee promptly to lift or stay any execution,
garnishment or attachment of such consequence as will prevent it
from carrying on its operations at the Project or adjudication (not
set aside within sixty (60) days) of the Sublessee as a bankrupt, or
assignment by the Sublessee for the benefit of its creditors, or the
entry by the Sublessee into an agreement of composition with its
creditors, or the approval by a court of competent jurisdiction of a
petition applicable to the Sublessee in any proceeding for its
reorganization instituted under the provisions of the general
Bankruptcy Act, as amended, or under any similar act which may
hereafter be enacted.
(iv) If any representation or warranty made by the Sublessee
herein or referenced herein shall fail to be true, accurate and
complete in all material respects when made or at all relevant times
during the
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Sublease Term, if the same is not cured within the period provided
in Section 9.1 (ii) above.
The foregoing provisions of this Section are subject to the following
limitations: If by reason of force majeure the Sublessee is unable in whole or
in part to carry out its agreements on its part herein contained, other than the
obligations on the part of the Sublessee contained in Article IV (Rent) and
Sections 5.3 (Taxes) and 5.4 (Insurance) hereof, the Sublessee shall not be
deemed in default during the continuance of such inability the period within
which such obligation is required to be performed and the cure period for any
failure to perform the same shall be extended by the period during which the
same continues. The term "force majeure" as used herein shall mean, without
limitation, the following: act or omission of the Sublessor, acts of God;
strikes, lockouts or other industrial disturbances; acts of public enemies;
orders of any kind of the government of the United States, The Commonwealth of
Massachusetts, or the Municipality or of any of their departments, agencies, or
officials, or of any civil or military authority; insurrections; riots;
epidemics; landslides; lightning; earthquake; fire; hurricanes; storms; floods;
washouts; droughts; arrests; restraint of government and people; civil
disturbances; partial or entire failure of utilities; or any other cause or
event not reasonably within the control of the Sublessee. The Sublessee agrees,
however, to remedy with all reasonable dispatch the cause or causes preventing
the Sublessee from carrying out is agreements; except, that the settlement of
strikes, lockouts and other industrial disturbances shall be entirely within the
discretion of the Sublessee, and the Sublessee shall not be required to make
settlement of strikes, lockouts and other disturbances by acceding to the
demands of the opposing party or parties when such course is in the judgment of
the Sublessee unfavorable to the Sublessee.
The Sublessor may grant extensions of time for the remedy of a default
with the consent of the Municipality and the Trustee to the extent that the same
is required pursuant to the provisions of the Lease.
SECTION 9.2. Remedies on Sublessee's Default. Whenever any event of
default referred to in Section 9.l hereof shall have happened and be continuing,
the Sublessor may have access to and inspect, examine and make copies of the
books and records and any and all accounts, data and income tax and other tax
returns of the Sublessee only as they relate to the Project. Sublessor shall
also be entitled to take any one or more of the following remedial steps to the
extent necessary or appropriate to recover
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the rent and other amounts payable to the Sublessor under this Sublease in the
event of any event of default occurring pursuant to the provisions of Section
9.1(i) above, but shall not be entitled to exercise any other rights or remedies
hereunder unless and until the Municipality or the Trustee exercise their
respective rights and remedies under the Lease or the Indenture as a result of
such event of default of Sublessee which causes a default of Sublessor under the
Lease and then only to the extent and in the manner so exercised by the
Municipality or the Trustee:
(i) Provided that Sublessor uses reasonable efforts to re-let
the Project as provided below, collect all installments of rent
payable under Subsections 4.2(a) and 4.2(b) hereof for the remainder
of the Lease Term to be on a monthly basis as the same become due
and payable hereunder, after deducting therefrom the net proceeds of
such reletting without the necessity of bring an action each month,
anything to the contrary contained elsewhere in this Sublease,
notwithstanding, Sublessor may re-enter the Project, including the
Excluded Property, and take possession of the Project without
terminating this Sublease and sublease the Project for the account
of the Sublessee. Under no circumstances shall Sublessor be entitled
to accelerate the Basic Rent or other charges payable by Sublessee
hereunder unless (i) Sublessee files a petition in bankruptcy or
(ii) the Municipality declares all of Sublessor's installments due
and payable under the terms of the Lease due solely to an act or
omission of Sublessee, but only as and to the extent and for so long
as such amounts are accelerated thereunder.
(ii) Sublessor may terminate the Sublease Term, exclude the
Sublessee from possession of the Project and use its best efforts to
sublease the Project to another for the account of the Sublessee,
holding the Sublessee liable for all rent and other payments due up
to the effective date of such subleasing and for the excess, if any,
of the rent and other amounts payable by the Sublessee under this
Sublease, had the Sublease Term not been terminated, over the rents
and other amounts which are paid by such new Sublessee under such
new Sublease as provided in subsection (i) above.
(iii) Sublessor may take whatever action at law or in equity
may appear necessary or desirable to collect rents due, or to become
due, or to enforce performance
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and observance of any obligation, agreement or covenant of the
Sublessee hereunder including without limitation, if the same has
continued beyond any applicable cure period, the right but not the
obligation, to cure any and all of the same hereunder, and to expend
such moneys and perform such other acts as are in Sublessor's sole
discretion necessary or appropriate to cure the same applicable cure
periods.
Any amounts collected pursuant to action taken under this Section,
including any proceeds from leasing other disposition of all or any part of the
Project, shall be paid into the Bond Fund and applied in accordance with the
provisions of the Indenture, or, if the Bonds have been fully paid (or provision
for payment thereof has been made in accordance with the provisions of the
Indenture), shall be paid to the Sublessor.
While any Bonds are Outstanding and except as provided in Section 1002 of
the Indenture, Sublessor shall not exercise any of the remedies on default
without having first advised the Municipality and the Trustee in writing what
remedy it proposes to exercise. If the Sublessor receives no written objection
from the Trustee or the Municipality as to the prudence of such remedy within
ten days after such advice, it may exercise the remedy indicated therein for
breach of any obligation described in Section 9.1(i) above, but shall not
otherwise proceed to exercise any remedy with respect to any other event of
default without satisfying the provisions of Section 9.2 above.
SECTION 9.3. No Remedy Exclusive. No remedy herein conferred upon or
reserved to either party is intended to be exclusive of any other available
remedy or remedies, but each and every such remedy shall be cumulative and shall
be in addition to every other remedy given under this Sublease or now or
hereafter existing at law or in equity or by statute. No delay or omission to
exercise any right or power accruing upon any default shall impair any such
right or power or shall be construed to be a waiver thereof, but any such right
and power may be exercised from time to time and as often as may be deemed
expedient.
SECTION 9.4. Attorneys' Fees and Expenses. If either party should default
under any of the provisions hereof and the nonbreaching party should employ
attorneys or incur other expenses for the collection of rent or the enforcement
or performance or observance of any obligation or agreement on the part of the
defaulting party herein contained, the defaulting party agrees that it will on
demand therefor pay to the nonbreaching party the reasonable fee of such
attorneys and such
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other expenses so incurred by the nonbreaching party, together with interest
thereon at the rate of ten per cent (10%) per annum from the date incurred until
paid.
SECTION 9.5. No Waiver Implied. If any agreement contained herein should
be breached by either party and thereafter waived by the other party, such
waiver shall be limited to the particular breach so waived and shall not be
deemed to waive any other breach hereunder.
SECTION 9.6. Sublessor's Default. The following shall constitute a default
of Sublessor under this Sublease:
(i) Failure by the Sublessor to observe and perform any
covenant, condition or agreement of the Sublessor under the Lease.
(ii) Failure by the Sublessor to observe and perform any
covenant, condition or agreement of the Sublessor under the
Sublease, (x) with respect to any monetary default for a period of
five (5) days following the receipt of written notice specifying
such failure, or (y) for any nonmonetary default, for a period of
thirty (30) days after receipt of written notice specifying such
failure, and in the event such breach cannot be cured during such
time, then such additional time as may be reasonable to cure or
correct such default with due diligence, except that in the event
the default relates to the performance of the freezer, and so long
as the default is not caused by the negligence or wilful misconduct
of Sublessee, it must be cured within three (3) days of receipt of
written notice.
(iii) The dissolution or liquidation of the Sublessor or the
filing of the Sublessor of a voluntary petition or bankruptcy, or
failure by Sublessor promptly to lift or stay any execution,
garnishment or attachment of such consequence as will prevent it
from carrying out its obligations hereunder or adjudication (not set
aside within sixty (60) days of the Sublessor's bankruptcy) or
assignment by the Sublessor for the benefit of its creditors, or the
entry by Sublessor into an agreement or composition with its
creditors, or the approval by a court of competent jurisdiction of a
petition applicable to the Sublessor in any proceeding for its
reorganization instituted under the provisions of the
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General Bankruptcy Act, as amended, or under any similar act which
may hereafter be enacted.
(iv) Any representation or warranty made by the Sublessor
herein or referenced herein shall fail to be true, accurate and
complete in all material respects when made or at all relevant times
during the Sublease Term, if the same is not cured within the period
provided in Section 9.6(ii) above.
The foregoing provisions of this Section 9.6 are subject to the following
limitations: (a) if by reason of force majeure as defined in Section 9.1 above
(provided that reference to act or omission of Sublessee therein shall for
purposes of this Section 9.6 be deemed to refer to act or omission of
Sublessor), Sublessor is unable in whole or in part to carry out its agreements
on its part herein contained, other than any monetary obligations of Sublessor
contained herein, the Sublessor shall not be deemed in default during the
continuance of such inability and the period within which such obligation is
required to be performed and the cure period for any failure to perform the same
shall be extended by the period during which the same continues; and (b) in the
event that such default of Sublessor is proximately caused in material part by
an Event of Default by Sublessee hereunder, then no such default of Sublessor
shall exist to the extent and only to the extent that the same is proximately
caused by such Event of Default.
Whenever any Sublessor default referred to in this Section 9.6 above has
continued beyond applicable cure periods, Sublessee shall have the right, but
not the obligation to cure any and all of the same hereunder and/or under the
Lease, and shall be entitled to expend such moneys and perform such other acts
as are in Sublessee's sole discretion necessary or appropriate to cure the same,
and Sublessee shall be entitled to deduct the reasonable cost thereof
(including, without limitation, reasonable attorney's fees) from all rents and
other charges payable by Sublessee hereunder. In the event that the Lease is
terminated as a result of any such Sublessor default thereunder which is not so
proximately caused by default of Sublessee hereunder or in the event of a
default of Sublessor thereunder which cannot be reasonably cured by Sublessee,
Sublessee shall be entitled to terminate this Sublease and in the event the
Lease is terminated, enter into a direct lease with the Municipality on all of
the terms and conditions of the Lease and all rights and obligations of the
parties hereunder and of the Sublessor under the Lease shall terminate and be of
no further force and effect. In the event Sublessor fails to cure any default
beyond any applicable cure period, Sublessee shall have the right, but not
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the obligation, to terminate this Sublease and all of the rights and obligations
of the parties hereunder shall terminate and be of no further force and effect.
ARTICLE X
OPTIONS IN FAVOR OF SUBLESSEE
SECTION 10.1. Options to Purchase. The Sublessee shall have the option to
purchase as provided in Sections 6.2 and 6.4 hereof, or this Article X below.
SECTION 10.2. Option to Purchase or Right of First Refusal.
(a) At any time during the first eighteen (18) months of the
Sublease Term, the Sublessee shall have the option to purchase Sublessor's
rights under Sections 11.2 and 11.3 of the Lease to purchase the Project
and thereupon Sublessor shall cause the Project to be conveyed to
Sublessee simultaneously with the purchase of such rights, either by means
of a direct transaction between the Municipality and the Sublessee or by a
purchase of the Project in which Sublessee is designated as it nominee to
take title, or by other means as Sublessee shall reasonably specify. In
each event, the closing of the transaction shall occur subject to the
conditions and in the manner provided in this Section 10.2. In the event
the option is exercised, Sublessee shall pay Sublessor Two Million Four
Hundred Thousand and 00/100 ($2,400,000.00) Dollars, less any amounts set
forth in this Article X. Said option shall be exercised by Sublessee by
giving written notice to Sublessor on or before the expiration of eighteen
(18) full calendar months following the Commencement Date, and specifying
a date for purchase which shall be not less than sixty (60) days nor more
than one hundred five (105) days from the date such notice is mailed, and
the purchase of the Project shall occur simultaneously with the purchase
of Sublessor's option rights. Sublessor shall promptly give all such
notices, make all such arrangements, and do all such acts, all at such
times, as shall be necessary or appropriate to enable the conveyance of
the Project to occur simultaneously with the purchase of Sublessor's
option rights. In the event that Sublessor does not take or does not
timely take all such action and/or any other impediment to closing at such
time exists under any of the Bond Documents or the Lease, then the date
for closing of the purchase of the option right shall be deemed to be
extended
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until such time as Sublessor has complied with the provisions hereof
and/or such impediment has been removed, and the conveyance of the Project
can occur as provided herein. In the event that Sublessor does not
accomplish all of the foregoing, as are applicable to its failure to act
and after expiration of any cure period, then Sublessor hereby grants
Sublessee an irrevocable power of attorney, coupled with an interest, as
more fully provided in Section 7.9 above to accomplish any or all of the
same in the name and on behalf of Sublessor and hereby acknowledges and
agrees that the Municipality and the Trustee may conclusively rely
thereon. In the event that Sublessee does not give the notice provided in
this Section 10.2(a), the provisions of this Section 10.2(a) shall be
deemed to have no further force or effect. Notwithstanding any other
provision of this Sublease or the Lease, this option to purchase may not
be assigned to any party which is not a permitted Sublessee or assignee
pursuant to the provisions of Section 8.1 hereof without the prior express
written consent of the Sublessor, which consent may be withheld for any
reason or no reason whatsoever. Additionally, Sublessee shall have the
right to extend the closing if any necessary action under the Bond
Documents or the Lease cannot be accomplished at the scheduled time.
(b) If, at any time after the period provided in Section 10.2(a)
above, Sublessor enters into a bona fide contract to sell the Project
("Sale Contract"), Sublessor shall promptly notify Sublessee thereof (but
in no event shall such notice be delivered more than five (5) business
days following the execution of the Sale Contract nor less than sixty (60)
days prior to the closing thereunder), Sublessee shall have a right of
first refusal to purchase the Project at the purchase price ("Price") and
terms ("Terms") set forth in the Sale Contract. For the purpose hereof,
the Sale Contract shall include all documents forming a part of the
agreement between Sublessor and the other party or parties to the Sale
Contract. Sublessee shall exercise such right by giving written notice to
Sublessor as provided herein no later than twenty (20) days following
receipt of such Sale Contract. Notwithstanding any other provision of this
Sublease or the Lease to the contrary, this right of first refusal may not
be assigned to any party which is not a permitted Sublessee or assignee
pursuant to the provisions of Section 8.1 hereof without the prior express
written consent of the Sublessor, which consent may be withheld for any
reason or no reason whatsoever.
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<PAGE>
(c) If Sublessee elects not to exercise its right of first refusal
set forth in Section 10.2(b) above, Sublessor may sell the Project to the
party, at the price and on the terms specified in the Sale Contract. In
the event of any material change in any of the foregoing, Sublessor shall
promptly notify Sublessee who shall again have a right of first refusal
with respect thereto as provided in Section 10.2(b) above. In the event
that such sale does not occur, and Sublessor later enters into another
Sale Contract, Sublessor shall notify Sublessee, and Sublessee shall have
the rights provided in Section 10.2(b) above.
(d) The transactions provided for in this Section 10.2 and Article
XI of the Lease shall be closed in accordance with the following terms and
conditions:
(i) Sublessor shall take all actions necessary pursuant to
this Section 10.2 and Article XI of the Lease to cause the
Municipality to transfer the Project and/or Sublessor's rights
pursuant to Articles XI or XII thereof (as the case may be) to
Sublessee at or prior to the date of closing hereunder and shall set
aside the amount then due to the Municipality for acquiring title to
the Project and/or redeeming the Bonds in an escrow account held by
Sublessor's designee which shall be reasonably acceptable to
Sublessee.
(ii) When the Municipality conveys the Project, Sublessor
shall deliver the portion of either: (1) Two Million Four Hundred
Thousand and 00/100 ($2,400,000.00) Dollars if Sublessee exercises
its purchase option; or (2) the Price if Sublessee exercises its
right of first refusal, to the Municipality in each case on account
of Sublessee in the amount required to purchase the Project and/or
to redeem the Bonds pursuant to Articles XI or XII of the Lease. The
remainder of the funds, less deductions for (a) costs normally paid
by a seller of commercial real estate (such as documentary stamp tax
fees, recording fees for mortgage discharges and the like; and (b)
any amounts paid by Sublessee pursuant to the provisions of Sections
8.3 or 8.4 hereof, shall be retained by Sublessor. Sublessor shall
also
49
<PAGE>
deliver to Sublessee a proper bill of sale for the personal property
and fixtures included in the Project and the Excluded Property, an
assignment of its rights under Articles XI and XII of the Lease, and
shall deliver such other documents and information, and shall take
such other action, as reasonably required by Sublessee. In
connection with such conveyance of the Project, Sublessor and
Sublessee shall be required to satisfy such conditions and take all
such action as may be reasonably required by the parties and/or are
typically required of buyers and sellers of commercial property in
Massachusetts. Without limiting the generality of the foregoing,
Sublessor shall be required to deliver title to the Project free and
clear of all defects, liens and encumbrances except those which were
previously accepted by Sublessee, evidenced by a title policy issued
to Sublessee and were not objected to by Sublessee at such time and
each party, for example, shall be required to provide a good
standing certificate and an estoppel certificate to the other and
each party shall be required to deliver to the other party such
information and documents as they may reasonably require (such as a
termination of the Sublease, FIRPTA and mechanic's liens and parties
in possession affidavits and the like).
(iii) If Sublessee does not exercise its option to purchase
the Project or its right of first refusal and the Project is not
otherwise sold by Sublessor to a third party, then Sublessor agrees
to purchase the Project from the Municipality and shall thereafter
lease the Project to Sublessee for one (1) year with four five-year
options to extend said lease under terms and conditions, which will
be substantially identical to this Sublease, except as it relates to
the Bond and the option rights, none of which shall have any further
force or effect when the Sublease is terminated, and except for the
rent and Lease Term provisions which will be as stated in a certain
Letter of Intent dated January 26, 1995 executed by the parties.
50
<PAGE>
This provision shall survive the expiration of the Sublease.
(iv) In no event shall Sublessor enter into any easement or
other agreement affecting title to the Project which will be prior
to the Sublessee's option rights.
SECTION 10.3. Sublease Prior to Indenture. This Sublease and all rights of
Sublessee hereunder (including, without limitation, the options respectively
granted to the Sublessee in this Article shall be and remain prior and superior
to the Indenture in all respects. Without limiting the generality of the
foregoing, Sublessee may exercise the rights set forth in this Article X whether
or not the Sublessee is in default hereunder, if such default will not result in
nonfulfillment of any condition to the exercise of any such option and excluding
monetary defaults which will be cured at the Closing.
ARTICLE XI
MISCELLANEOUS
SECTION 11.1. Surrender of Project. Except as otherwise expressly provided
in this Sublease, at the expiration or sooner termination of the Sublease Term,
the Sublessee agrees to surrender possession of the Project peaceably and
promptly to the Sublessor in as good condition as at the commencement of the
Sublease Term, loss by fire or other casualty covered by insurance and ordinary
wear, tear and obsolescence, and acts of God and matters which are the
responsibility of Sublessor hereunder only excepted.
SECTION 11.2. Notices. All notices, certificates or other communications
hereunder shall be sufficiently given and shall be deemed given when mailed by
registered or certified mail, postage prepaid, or sent by telegram, or by a
reputable overnight carrier service, addressed as follows:
If to the Sublessor:
1162 Pittsford-Victor Road
Pittsford, New York 14534
Attention: Devra Bevona, Treasurer
51
<PAGE>
with a duplicate copy addressed to:
Brian R. Smith, Esq.
Robinson & Cole
One Commercial Plaza
Hartford, Connecticut 06103-3597
If to the Sublessee:
1855 Boston Road
Wilbraham, Massachusetts 01095
Attention: Gerald E. Sinsigalli
President, FoodService Division
with a duplicate copy addressed as above and marked:
Attention: Larry W. Browne
Senior Vice President, Corporate Finance,
and General Counsel
Either party may, by notice given hereunder, designate any further or different
addresses to which subsequent notices, certificates or other communications
shall be sent.
SECTION 11.3. Binding Effect. This Sublease shall inure to the benefit of
and shall be binding upon the Sublessor, the Sublessee and their respective
successors and assigns, subject, however, to the limitations contained in
Sections 7.3 and 8.1 hereof.
SECTION 11.4. Severability. If any part of this Sublease shall, for any
reason, be finally adjudged by any court of competent jurisdiction to be
unconstitutional or invalid, such judgment shall not affect, impair or
invalidate the remainder of this Sublease but shall be confined in its operation
to the part thereof as to which such judgment has been rendered.
SECTION 11.5. Amounts Remaining in Bond Fund. Any amounts remaining in the
Bond Funds upon expiration or sooner termination of the Sublease Term, as
provided in this Sublease, after payment in full of the Bonds or provision for
payment thereof having been made and the fees, charges and expenses of the
Trustee and paying agents in accordance with the Indenture and payment of all
sums
52
<PAGE>
then due to the Municipality from the Sublessor pursuant to the Lease shall
belong to and be paid to the Sublessor by the Trustee as overpayment of rents
unless Sublessee has exercised its rights pursuant to the provisions of Article
X hereof in which event the same shall be paid to Sublessee and accounted for at
the closing for the purpose of the Project.
SECTION 11.6. Consents. Whenever the consent of either party hereto is
required, such consent shall not be unreasonably withheld or delayed, except as
may otherwise be expressly provided herein.
SECTION 11.7. Amendments. This Sublease may not be amended or modified
except by a writing executed by the party against whom such amendment or
modification is sought to be enforced. Sublessor covenants and agrees that it
will not amend or modify the Lease or fail to exercise its rights thereunder
unless Sublessee has consented thereto, which consent shall not be unreasonably
delayed or withheld.
SECTION 11.8. Recording. This Sublease and every assignment and
modification hereof may not be recorded but in the event not so recorded, a
notice thereof shall be recorded in the Hampden County Registry of Deeds.
SECTION 11.9. Captions. The captions or heading in this Sublease are for
convenience only and in no way define, limit or describe the scope or intent of
any provision of this Sublease.
SECTION 11.10. Counterparts. This Sublease may be executed in several
counterparts, each of which shall be an original and all of which shall
constitute but one and the same Sublease.
SECTION 11.11. Law Governing. This Lease is entered into with the
intention that the law of The Commonwealth of Massachusetts shall govern its
construction.
EXECUTED as a sealed instrument as of the date first written above, and
delivered on June 9, 1995.
SUBLESSOR:
53
<PAGE>
SSP COMPANY, INC.
By_________________________________
Its:____________________________
Attest:_________________________
SUBLESSEE:
FRIENDLY ICE CREAM CORPORATION
By_________________________________
Gerald E. Sinsigalli, President
FoodService Division
Attest:_________________________
Laura E. Gormally,
Assistant Clerk
54
<PAGE>
State of New York
County of _______________, ss.
On this day of _______________, 1995, before me appeared _____________
____________________, to me personally known, who, being by me duly sworn, did
say he is the _______________ of SSP COMPANY, INC., a Massachusetts corporation,
and that this instrument was signed and sealed on behalf of such corporation
pursuant to a vote or consent of its board of directors acknowledged such
instrument to be the free act and deed of such corporation.
-----------------------------------
Notary Public
My Commission Expires:
Commonwealth of Massachusetts
County of Hampden, ss.
On this ninth day of June, 1995, before me appeared Gerald E. Sinsigalli,
to me personally known, who, being by me duly sworn, did say he is the
President, FoodService Division, of FRIENDLY ICE CREAM CORPORATION, a
Massachusetts corporation, and that this instrument was signed and sealed on
behalf of such corporation pursuant to a vote or consent of its board of
directors acknowledged such instrument to be the free act and deed of such
corporation.
-----------------------------------
Notary Public
Barbara A. Courtney
My Commission Expires: March
29, 2002
55
<PAGE>
EXHIBIT A
A certain parcel of land situated on Sheridan Street and Padgette Street,
in Westover Industrial Air Park in Chicopee, Hampden County, Massachusetts,
being bounded and described as shown on a certain plan entitled "Plan of Land in
Chicopee, Massachusetts, Prepared For: S.S. Pierce Co.," drawn by W.D. Pharmer,
dated October 4, 1978, which plan is recorded herewith, being further bounded
and described as shown on said plan as follows:
Beginning at a concrete bound on the northerly side of Sheridan Street at
the intersection of Sheridan Street and Padgette Street, said bound having the
coordinates N: 7,308.316, E: 30,145.740 as established by the New York
Corporation of Engineers in their 19'5 Westover Air Force Base survey; thence
running along a curve concave to the northeast with a radius of thirty (30)
feet, a distance of forty-five and 74/100 (45.74) feet to a concrete bound;
thence running N 31(degrees) 07' 17" W along the easterly side of Padgette
Street, a distance of twenty and 49/100 (20.49) feet to a concrete bound;
thence by a curve concave to the southwest with a radius of five hundred five
(505) feet, a distance of three hundred four and 36/100 (304.36) feet to a
concrete bound; thence running N 65(degrees) 3' 12" W, a distance of one
hundred one and 96/100 (101.96) feet to a concrete bound; thence by a curve
concave to the northeast with a radius of one hundred thirty-five (135) feet,
a distance of sixty-eight and 18/100 (68.18) feet to a concrete bound; thence
running N 57(degrees) 41' 50" E, a distance of two hundred twenty-six and
94/100 (226.94) feet to a point; thence running N 73(degrees) 36' 14" E, a
distance of one hundred fifteen and 40/100 (115.40) feet to a point; thence
running N 89(degrees) 30' 29" E, a distance of five hundred fifty-seven and
30/100 (557.30) feet to a point; thence running N 55(degrees) 54' 01" E, a
distance of one hundred thirty-six and 00/100 (136.00) feet to a point; thence
running S 29(degrees) 09' 52" E, a distance of three hundred forty-five and
82/100 (345.82) feet to a point at the northerly side of Sheridan Street;
thence by a curve concave to the north with a radius of nine hundred
seventy-five (975) feet, a distance of two hundred sixty and 00/100 (260.00)
feet to a concrete bound; thence running S 76(degrees) 27' 33" W, a distance
of two hundred thirty-six and 77/100 (236.77) feet to a concrete bound; thence
running by a curve concave to the south with a radius of one thousand
twenty-five (1,025) feet, a distance of two hundred sixty-seven and 36/100
(267.36) feet to a concrete bound at the point of beginning.
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Containing 7.947 acres.
57
<PAGE>
So much of the premises as may be within the boundaries of Sheridan Street
and Padgette Street are subject to the rights of the grantor, its successors and
assigns, and all others lawfully so entitled to use the same in common with the
grantee, its successors and assigns, for all purposes for which public streets
are commonly used, including, but not by way of limitation, the right to pave,
curb and otherwise improve the same for such purposes, and to install, maintain
and use sidewalks and to install, maintain and use utility systems in, on and
over the same, which easement rights are also reserved hereby.
Subject to and with the benefit of such easements and rights in, over and
under the premises as are of record.
58
<PAGE>
EXHIBIT B
All right, title and interest of Sublessor (and to the extent applicable)
Lessee in and to:
(i) all building equipment and building fixtures located or to be
located at Padgette and Sheridan Streets, Chicopee, Massachusetts (the
"Project Site").
(ii) all refrigeration machinery and equipment to be acquired and
located in the Project, together with all additions, renewals,
substitutions and replacements thereto and therefore and all property
incorporated or to be incorporated therein.
(iii) all fixtures, machinery and equipment acquired or to be
acquired by the Lessee with the proceeds from the Bonds issued under and
secured by that certain Mortgage and Indenture of Trust, dated as of
September 1, 1979, between the City of Chicopee acting by and through its
Industrial Development Financing Authority and BayBank Valley Trust
Company, Trustee including all additions, renewals, substitutions and
replacement thereto and therefore and all property incorporated or to be
incorporated therein.
(iv) the construction Contract between the Lessee and Edward J.
O'Leary Company, Inc. dated September 14, 1979 together with all plans,
specifications and general intangibles pertaining to the construction of a
building at the Project Site.
59
<PAGE>
EXHIBIT C
WORK LETTER
1. SENECA'S WORK. Sublessor agrees to perform the following at its own
cost and expense ("Seneca's Work"):
(a) Refrigeration Equipment. Put all the refrigeration equipment in
working condition. Sublessor will add refrigeration equipment to the
freezer which will cause the freezer to maintain a temperature of minus 20
degrees Fahrenheit at 95 degrees Fahrenheit ambient in the freezer area at
all times, including, but not limited to, if there is a failure of some of
the refrigeration equipment which requires such equipment to be repaired
or replaced. This equipment to be run using Freon as a refrigerant
(coolant). Sublessor shall pay a total of One Hundred Thousand Dollars
($100,000.00) towards the cost of such Equipment. Sublessee shall have the
right to give its prior approval of the location and specifications of the
refrigeration equipment, which approval it may withhold in its sole
discretion. The specifications shall be as indicated on Exhibit C-2. In no
event shall any of the equipment be floor-mounted. Sublessor shall give
such plans to Sublessee within fifteen (15) days of the execution of this
Sublease and Sublessee shall have ten (10) days to review such plans. If a
dispute arises between Sublessor and Sublessee concerning the plans and
Sublessor and Sublessee cannot agree within fifteen (15) days after the
ten (10) day period to resolve such dispute, Sublessor and Sublessee shall
jointly submit their dispute to binding arbitration before the American
Arbitration Association under the Commercial Rules of Arbitration. This
arbitration shall be submitted to a single arbitrator.
(b) Removal of Underground Tanks. Remove the gasoline fuel tank and
the diesel fuel tanks; it will install a 10,000 gallon underground diesel
fuel tank. Such work shall be in compliance with all Governmental
Requirements. Upon completion of such work, Sublessor shall deliver a
certification from the professional who has performed such work. Upon
execution of the Sublease, Sublessor shall promptly apply for, and
diligently seek to secure all Governmental Requirements in connection with
such removal and installation; Sublessor will complete all testing and
removal within thirty (30) days of receipt of all necessary Governmental
Requirements unless such Governmental Requirements require a different
time period.
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<PAGE>
(c) Equipment. All Equipment will be in working order and needed
certificates will be supplied by Sublessor.
(d) Racks. Will remove all storage racks, including having the floor
bolts from the removed racks flush with the floor and will leave the
Project in broom-clean condition.
(e) Fuel Pumps. Subject to the approval of the Fire Marshall for the
Municipality, relocate the fuel pumps's islands from the south side of the
curb cut leading to the garage where they are currently located to the
north side of the driveway and install two fuel pumps, or one split fuel
pump with two (2) nozzles (either of which will have a total forty (40)
gallon per minute flow-rate capacity) at a specific location to be
identified by the Sublessee prior to the commencement of any such work.
Certify that the fuel pumps meet all Governmental Requirements and are
operational.
2. FRIENDLY'S WORK. Friendly's agrees to perform, at the sole cost and
expense of Sublessor, all of the Work identified on Exhibit C-1, attached to and
made a part of this Sublease.
3. GENERAL TERMS AND CONDITIONS. Each party shall obtain all governmental
approvals, permits and licenses necessary for the performance of its obligations
under this Sublease. All Work shall meet the standards and specifications of the
authorities having jurisdiction thereof. Each party shall pay and discharge all
bills duly presented for goods and materials delivered and for all services
performed in connection with its Work. In the event either party fails to make
any such payment and a claim of lien to secure payment thereof is filed against
the Leased Land, the parties who requested such Work shall within thirty (30)
days from the date such claim is filed, (i) pay and discharge such lien, or (ii)
notify the other party that the claim upon which such claim is based has no
validity and is being contested in good faith in which event such party may bond
off such liens with a bond from a good and solvent surety company. In the event
such party fails to make or provide for such payment, the other party may pay
and discharge such lien and withhold sums so paid plus interest at the Prime
Rate, from any money due to such party under the Sublease. Each party covenants
and represents to do all of its Work in compliance with all Governmental
Requirements; to do all such Work in a good and workmanlike
61
<PAGE>
manner employing materials of good quality; to employ for such Work responsible
contractors whose labor will work without interference with other labor working
on the Leased Land; to perform such Work with a minimum of interference to any
other contractors or employees at the Leased Land; and to require all
contractors to carry workers' compensation insurance in accordance with
statutory requirements and comprehensive public liability insurance covering
such contractors on or about the Leased Land in amounts that equal the limits
set forth herein and submit certificates evidencing such coverage prior to
commencement of such Work.
62
<PAGE>
EXHIBIT C-2
SPECIFICATIONS
Refrigeration Equipment to be added:
Three (3) Russell Split Systems Model ULD27L44-UHU4-851. Each system will
provide 84,800 BTUH at -30 degrees F Suction and 95 degrees F ambient for a -20
degrees F room. Each system will use refrigerant R404A and will have hot gas
defrost. Three (3) Systems will include all tubing and fittings for Freon and
condensate drains, pipe covering, Freon, heat tape for drains, sleepers for
condensing units, miscellaneous steel to hang evaporators, power and control
wiring. The power wiring is figured for 460V, 3 phase and will be available
within 300 feet of condensing units and the existing panel can accept two (2) 70
amp breakers. Will add structural steel (with approved drawings) to support the
new condensing units and evaporators. The existing freezer and cooler systems
will be set for -20 degrees F room operation. The suction hold back valves will
be removed from the two (2) systems in the freezer.
The total tonnage for the refrigeration system will be forty-five (45)
tons.
63
<PAGE>
EXHIBIT D
All building equipment, building fixtures, refrigeration and freezer
equipment installed or to be installed on the premises described in the attached
Exhibit A.
64
<PAGE>
FIRST AMENDMENT TO SUBLEASE
Dated as of June 9, 1995 Between SSP Company, Inc.,
Successor-in-Interest to S.S. Pierce Company, as Sublessor and
Friendly Ice Cream Corporation, as
Sublessee
THIS FIRST AMENDMENT TO SUBLEASE is made and entered into this twentieth
day of October, 1995, by and between SSP COMPANY, INC., a Massachusetts
corporation with a principal place of business at 1162 Pittsford-Victor Road,
Pittsford, New York 14534, Successor-in-Interest to S.S. Pierce Company
("Sublessor") and FRIENDLY ICE CREAM CORPORATION, a Massachusetts corporation
with a principal place of business at 1855 Boston Road, Wilbraham, Massachusetts
01095 ("Sublessee").
WITNESSETH:
WHEREAS, by Sublease dated as of June 9, 1995, between the Sublessor and
the Sublessee (the "Sublease"), the Sublessor subleased to the Sublessee and the
Sublessee subleased and took from the Sublessor, for the term and upon the terms
and conditions therein set forth, the Project as defined in the Sublease; and
WHEREAS, the Sublease contains a number of defined terms establishing
certain dates and periods under the Sublease, which dates and periods are not
specified in the Sublease but are determined with reference to events which were
to occur following the execution thereof;
WHEREAS, the parties agree that it is appropriate to establish such dates
and periods for purposes of avoiding confusion and disagreement concerning them
in the future.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto, intending to be legally bound hereby, agree as
follows:
1. The term "Commencement Date" shall mean September 8, 1995.
2. The term "Completion Date" shall mean September 1, 1995.
-1-
<PAGE>
3. The "Sublease Term" shall mean that period of time commencing on the
Commencement Date of September 8, 1995 and ending on August 31, 2004.
4. The date for commencement of payment of Basic Rent pursuant to Section
4.2 of the Sublease is December 1, 1995.
5. For purposes of Section 10.2(a) of the Sublease, the period within
which the Sublessee shall have the option to purchase Sublessor's rights under
Sections 11.2 and 11.3 of the Lease to purchase the Project shall commence on
September 8, 1995 and continue through (and including) March 7, 1997. The
written notice to Sublessor provided in Section 10.2(a) may be given on or
before the expiration of such period.
6. The period within which Sublessee has a right of first refusal with
respect to the Project as provided in Sections 10.2(b) and (c) of the Sublease
shall commence on March 8, 1997 and continue throughout the Sublease Term.
7. The parties hereto agree that all references in the Sublease to the
defined terms, dates and periods of time described in Paragraphs 1 through 7
above shall be deemed to refer to such terms, dates and periods of time as
defined or established herein.
8. The parties agree that notice of the provisions of this First Amendment
may be recorded in the Hampden County Registry of Deeds.
9. Except as amended by this First Amendment to Sublease, the Sublease
shall remain in full force and effect and is hereby ratified and affirmed.
IN WITNESS WHEREOF, Sublessor and Sublessee have executed this First
Amendment to Sublease as a sealed instrument as of the day and year first above
written.
WITNESS: SUBLESSOR
SSP Company, Inc., successor-
in-interest to S. S. Pierce
-2-
<PAGE>
Company
By:
- -------------------------------- ------------------------------------
Name: Kraig H. Kayser
Title: President
SUBLESSEE
Friendly Ice Cream Corporation
By:
- -------------------------------- ------------------------------------
Name: Gerald E. Sinsigalli
Title: President, FoodService
Division
-3-
<PAGE>
EXHIBIT 10.12
================================================================================
MASTER LICENSE
AND
DISTRIBUTION AGREEMENT
FOR THE TERRITORY OF KOREA
Effective Date: October 12, 1996
among
FRIENDLY'S INTERNATIONAL, INC.
as Company
and
HANSUNG ENTERPRISE CO., LTD.
as Master Licensee
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Article Page
1. CERTAIN DEFINITIONS ..................................................... 2
2.LICENSE, MASTER LICENSE AND DISTRIBUTION RIGHTS ........................... 4
2.1 Grant of License, Master License and Distribution Rights ....... 4
2.2 Government Approval ............................................ 5
2.3 Effective Date ................................................. 6
2.4 Exclusive Relationship ......................................... 6
2.5 Term ........................................................... 6
2.6 Representations and Warranties of Master Licensee .............. 7
2.7 Representations and Warranties of Company ...................... 7
3. DEVELOPMENT OBLIGATIONS ................................................. 9
3.1 Sales Targets and Development Schedules ........................ 9
3.2 Development Obligations in North Korea ......................... 10
3.3 Company Shoppes and Restaurants ................................ 10
3.4 Company Business Presence ...................................... 11
3.5 Company Approved Licensees ..................................... 11
4. PURCHASE OF PRODUCTS .................................................... 11
4.1 Purchase Obligations ........................................... 11
4.2 Approved Products Suppliers .................................... 11
4.3 Purchase Procedures ............................................ 12
4.4 Prices and Payment ............................................. 13
4.5 Warranty ....................................................... 13
5. MASTER LICENSEE-OWNED SHOPPES ........................................... 14
5.1 Condition Appearance And Operation Of Shoppes .................. 14
5.2 Shoppe Menu .................................................... 15
5.3 Procedures For Shoppes ......................................... 15
5.4 Compliance With Laws And Good Business Practices ............... 15
5.5 Management And Personnel ....................................... 16
6. SERVICES AND OBLIGATIONS ................................................ 16
6.1 Initial Services of Company .................................... 16
6.2 Initial and Continuing Training ................................ 17
6.3 Master Licensee Training Center ................................ 17
6.4 Continuing Services of Company ................................. 18
6.5 Certification Inspection of Shoppes ............................ 18
6.6 Marketing Programs ............................................. 19
6.7 Annual Sales Forecast and Development Plan ..................... 19
6.8 License Marketing and Services ................................. 19
6.9 Additions and Modifications to the Friendly's System ........... 20
6.10 Items Used by Shoppes .......................................... 20
7. LICENSEES AND LICENSE AGREEMENTS ........................................ 20
7.1 Licensees and License Agreements Utilized by Master Licensee ... 20
7.2 Termination/Expiration of Licenses ............................. 21
7.3 Enforcement, Inspection and Assistance by Master Licensee ...... 21
7.4 License Services ............................................... 22
i
<PAGE>
8. FEES AND OTHER PAYMENTS ................................................. 22
8.1 Development Fee ................................................ 22
8.2 Royalty Fees ................................................... 22
8.3 Payment for Base Support Services .............................. 22
8.4 Manner of Payment .............................................. 23
8.5 Interest on Late Payments ...................................... 23
8.6 Withholding Taxes .............................................. 23
8.7 Currency and Place of Payment .................................. 23
8.8 Payment Approvals .............................................. 23
9. SYSTEM STANDARDS/MANUALS ................................................ 25
9.1 System Standards and Development of Territory System
Standards Manual ............................................. 25
9.2 Modification of the Territory System Standards Manual .......... 26
10. MARKS .................................................................. 26
10.1 Grant License .................................................. 26
10.2 Ownership of the Marks ......................................... 27
10.3 Registration ................................................... 27
10.4 Licensing of Licensees ......................................... 27
10.5 Registration of Authorized User Instruments .................... 27
10.6 Infringements .................................................. 28
10.7 Use of the Marks ............................................... 28
11. INSURANCE .............................................................. 28
12. CONFIDENTIAL INFORMATION ............................................... 29
13. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION ............................ 30
13.1 Independent Contractors ........................................ 30
13.2 Master Licensee's Indemnification of Company and the
Marks Owner .................................................. 30
13.3 Company's Indemnification of Master Licensee ................... 30
14. REPORTS ................................................................ 31
15. INSPECTIONS AND AUDITS ................................................. 31
16. ASSIGNMENTS ............................................................ 32
16.1 Assignment by Company .......................................... 32
16.2 Assignment by Master Licensee .................................. 32
16.3 Assignment to an Affiliate ..................................... 32
17. TERMINATION ............................................................ 32
17.1 By Company ..................................................... 32
17.2 By Master Licensee ............................................. 33
17.3 By Either Party ................................................ 33
17.4 Status of Products after Termination ........................... 33
18. RIGHTS AND OBLIGATIONS UPON TERMINATION OR
EXPIRATION ............................................................ 34
18.1 Payment of Amounts Due to Company .............................. 34
18.2 Change of Identification ....................................... 34
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18.3 Discontinuance of Use of Friendly's System ..................... 35
18.4 Covenant Not To Compete ........................................ 35
18.5 Rights Upon Termination or Expiration .......................... 36
18.6 Closing ........................................................ 37
18.7 Price for Assignment of Licenses ............................... 37
18.8 Continuing Obligations ......................................... 37
19. GENERAL PROVISIONS ..................................................... 37
19.1 Severability ................................................... 37
19.2 Substitution of Valid Provision ................................ 37
19.3 Force Majeure .................................................. 38
19.4 Cumulative Remedies ............................................ 38
19.5 Attorneys' Fees ................................................ 38
19.6 Governing Law .................................................. 38
19.7 Interpretation ................................................. 38
19.8 Informal Dispute Resolution .................................... 39
19.9 Arbitration .................................................... 39
19.10 Delivery of Notices and Payments ............................... 39
19.11 Waiver ......................................................... 40
19.12 U.S. Government Regulations .................................... 40
SCHEDULES
1 OWNERSHIP SCHEDULE
2 LICENSING SCHEDULE
3 DISTRIBUTION SCHEDULE
EXHIBITS ATTACHED:
A-1 LIST OF PROPRIETARY PRODUCTS
A-2 LIST OF NON-PROPRIETARY PRODUCTS
B LIST OF MARKS
EXHIBIT TO BE ATTACHED:
C LICENSE AGREEMENT FORM
iii
<PAGE>
MASTER LICENSE AND DISTRIBUTION AGREEMENT FOR THE TERRITORY
OF KOREA
-----------------------
This MASTER LICENSE AND DISTRIBUTION AGREEMENT (the "Agreement") is made
and entered into as of the 12th day of October, 1996 (the "Effective Date"), by
and between FRIENDLY'S INTERNATIONAL, INC., a corporation organized under the
laws of the State of Delaware, U.S.A., with its office at 1855 Boston Road,
Wilbraham, Massachusetts, U.S.A. 01095 ("Company"), and HANSUNG ENTERPRISE CO.,
LTD., a corporation organized under the laws of the Republic of Korea, with its
principal office at Hansung Bldg., 88, Samsung-Dong, Kangnam-Ku, Seoul, the
Republic of Korea ("Master Licensee").
W I T N E S S E T H:
WHEREAS, Company has developed a system for establishing, operating and
licensing distinctive, high quality ice cream shoppes ("Shoppes" and as more
particularly defined below) serving the public under the name "Friendly's Great
American Ice Cream" and Company licenses the operation of Shoppes
internationally in accordance with such system, which is referred to as the
Friendly's System (as more particularly defined below); and
WHEREAS, Company desires to expand through the development of Shoppes
operated under the Friendly's System and the Marks (as hereinafter defined) in
the Territory (as hereinafter defined); and
WHEREAS, Master Licensee recognizes the distinctiveness and value of the
Friendly's System, the advantages which may be obtained by using the Friendly's
System in, and, if necessary, by adapting it to, the Territory, and desires to
acquire (i) a license to use and, if necessary, to adapt the Friendly's System
and the Marks for the purpose of owning and operating Shoppes in the Territory
and (ii) a master license to use and, if necessary, to adapt the Friendly's
System and the Marks for the purpose of sub-licensing Shoppes in the Territory;
and
WHEREAS, Company has extensive experience in the manufacture and
production and supply of various products (as hereinafter defined) and is
willing to grant to Master Licensee the right and license to distribute and sell
the Products in the Territory; and
WHEREAS, Master Licensee desires to obtain the right and license from
Company to distribute and sell the Products in the Territory; and
WHEREAS, Master Licensee and Company are to enter into this Agreement for
the Territory pursuant to which Master Licensee will pay fees as described
herein; and
NOW, THEREFORE, in consideration of the premises, covenants and agreements
contained herein and other good and valuable consideration, the parties agree as
follows:
<PAGE>
ARTICLE 1. CERTAIN DEFINITIONS
Unless defined below, terms used in this Agreement are defined and
construed in the context in which they appear. As used in this Agreement, the
following terms shall have the meanings defined in this Article 1 unless a
different meaning is plainly required by the context:
1.1 "Affiliates" shall mean and include partnerships, corporations and
other legal entities that directly or indirectly control, are controlled by or
are under common control with either of the parties hereto. To the extent
obligations are imposed on Affiliates in this Agreement, each party hereto shall
cause its Affiliates to perform such obligations as described herein.
1.2 "Agreement Year" shall mean the twelve month period commencing on
January 1 of each calendar year, except that the first Agreement Year shall
commence on the Effective Date and conclude on the second December 31st
following the Effective Date.
1.3 "Base Support Services" shall mean: (a) providing operating manuals,
(b) providing standard plans and specifications for Shoppes, (c) providing
initial training in the United States for Master Licensee's certified trainers,
and (d) providing samples of promotional materials, media, point of purchase
materials and other marketing and advertising samples used by Company in the
United States.
1.4 "Development Fee" shall mean the non-refundable development and
service fee Master Licensee shall pay to Company pursuant to Paragraph 8.1 as
consideration for Company's grant of the Ownership Rights, the Licensing Rights
and the Distribution Rights to Master Licensee for the Territory and the
services Company shall provide to Master Licensee.
1.5 "Development Period" shall have the meaning set forth in Paragraph
3.1.
1.6 "Development Schedules" shall have the meaning set forth in Paragraph
3.1.
1.7 "Distribution Rights" shall have the meaning set forth in Paragraph
2.1.
1.8 "Dollars" or "$" shall mean the legal currency of the United States.
1.9 "Friendly's System" shall mean Shoppes established pursuant to
Company's plans and specifications for construction, remodeling, decorating,
equipment and layout, and operated in accordance with Company's 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),
menus, 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 Company may modify from time to time).
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1.10 "Gross Sales and Revenues" shall mean, subject to Paragraph 8.2(b),
all gross sales and revenues, whether for cash or credit, that Master Licensee
derives from any activity authorized or right granted pursuant to this
Agreement, including, without limitation, gross sales and revenues from Master
Licensee's (i) operation of its own Shoppes, (ii) granting of Friendly's System
sub-licenses to Licensees, and (iii) sale and distribution of Proprietary
Products in connection with the Distribution Rights granted hereunder.
1.11 "Legal Requirements" shall mean all laws, ordinances, regulations,
rules, administrative orders, decrees and policies of any Territory government,
governmental agency or department.
1.12 "LIBOR" shall mean, in respect of any relevant sum or any relevant
period, the rate shown on page "3750" (or any equivalent successor page thereto)
on the Telerate Monitor Screen as being the rate per annum at which Dollar
deposits are offered for one month at or about 11:00 a.m. (London time) on the
day before the first day of such period.
1.13 "License Agreement" shall mean each license agreement to be entered
into and used by Master Licensee to grant licenses to Licensees as approved by
Company pursuant to Paragraph 7.1 hereof.
1.14 "Licensee" shall mean the party authorized by a License Agreement to
operate a Shoppe.
1.15 "Licensing Rights" shall have the meaning set forth in Paragraph 2.1.
1.16 "Marks" shall mean the trademarks, logos, slogans and commercial
symbols listed on Exhibit B attached hereto (whether any such Marks are
registered or not) including "Friendly's" and "Friendly's Great American Ice
Cream", as the same may be amended from time to time, and such other trademarks,
logos, slogans, trade dress, and commercial symbols as Company may authorize for
use from time to time to identify Shoppes and the services and products
offered, sold or used therein.
1.17 "Marks Owner" shall mean Company or its successors and assigns as
owner of the Marks in the Territory.
1.18 "Non-Proprietary Products" shall mean the approved food, beverage and
other products served and sold by Shoppes, as listed on Exhibit A-2 attached
hereto.
1.19 "North Korea" shall mean the Democratic People's Republic of Korea.
1.20 "Ownership Rights" shall have the meaning set forth in Paragraph 2.1.
1.21 "Proprietary Products" shall mean the approved food, beverage and
other products served and sold by Shoppes, as listed on Exhibit A-1 attached
hereto.
1.22 "Products" shall mean, collectively, Proprietary Products and
Non-Proprietary Products.
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<PAGE>
1.23 "Rights" shall have the meaning set forth in Paragraph 2.1.
1.24 "Royalty Fee" shall mean the fees Master Licensee shall pay to
Company pursuant to Paragraph 8.2 as consideration for the license of the Marks
to Master Licensee.
1.25 "Shoppe" shall mean a Friendly's Ice Cream Shoppe consisting of all
structures, facilities, appurtenances, grounds, landscaping, signs, furniture,
fixtures, equipment and entry, exit, parking and other areas, as well as, the
approved food, beverage and other products served and sold by Friendly's Ice
Cream Shoppes for consumer consumption and not for resale which are prepared in
accordance with Friendly's standards, specifications and secret recipes.
1.26 "South Korea" shall mean the Republic of Korea.
1.27 "System Standards" shall mean the standards specified in writing from
time to time by Company as the same may be amended, modified, supplemented or
deleted from time to time.
1.28 "Territory" shall mean (i) South Korea and (ii) subject always to
Paragraph 3.2, North Korea.
1.29 "Territory System Standards" shall mean the System Standards, as
adapted to the Legal Requirements and local customs of, or appropriate to
promote the commercial success of Shoppes in, the Territory by Master Licensee
and approved by Company in accordance with the procedure described in Paragraph
9.1 hereof.
ARTICLE 2. LICENSE, MASTER LICENSE AND DISTRIBUTION RIGHTS
2.1 Grant of License, Master License and Distribution Rights. (a) Subject
to all of the terms and conditions hereof, Company grants to Master Licensee,
for and during the Term (as defined in Paragraph 2.5 below) of this Agreement,
and within the Territory: (i) the exclusive right and license to own and operate
Shoppe's ("the "Ownership Rights"); (ii) the exclusive right and master license
to grant Friendly's System sub-licenses to Licensees (the "Licensing Rights");
and (iii) the exclusive right to sell and distribute Friendly's ice cream and
related Products (the "Distribution Rights") (the Ownership Rights, the
Licensing Rights and the Distribution Rights being hereinafter collectively
referred to as the "Rights").
(b) Master Licensee's right to exercise the Licensing Rights is subject to
(i) the establishment of the training center and Licensee support program in
accordance with Paragraph 6.3 and (ii) the execution by each Licensee of a
legally binding acknowledgment (in the form annexed hereto or as contained in a
License Agreement) stating that, if the rights of Master Licensee under the
License Agreement become vested in Company, Company is entitled to exercise all
of such rights of Master Licensee (including any rights of termination) in
accordance with the License Agreement and may enforce same against Licensee
without the consent of or reference to Master Licensee.
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<PAGE>
(c) The Rights herein granted are limited to the Territory and confer no
rights upon Master Licensee to use or license the use of the Friendly's System
or the Marks outside the Territory, or to operate or license others to operate
Shoppes outside the Territory or to sell or license the sale of Products outside
the Territory. Master Licensee shall use the Friendly's System only in the
Territory in connection with the Ownership Rights and the Licensing Rights.
Master Licensee will not, directly or indirectly: use any part of the Friendly's
System outside the Territory (except for advertising outside the Territory in
accordance with the terms hereof); communicate any part of the Friendly's System
to any other natural or legal person except Master Licensee's employees and
Licensees for use inside or outside the Territory; or seek to establish or
obtain proprietary rights, registration of any of the Marks or other evidence of
Friendly's System ownership anywhere in the world except as expressly authorized
by Company in writing in advance. Master Licensee shall use its best efforts to
cause its Affiliates and Licensees to strictly comply with the restrictions
described in the foregoing sentence.
(d) Company and Master Licensee acknowledge a mutual interest in future
discussions on potential business interests in other market areas, including,
without limitation, Russia and South East Asia, and upon Master Licensee's
request, Company will enter into good faith discussions with Master Licensee as
soon as practicable towards evaluating Master Licensee's proposal for business
in such other markets.
2.2 Government Approval. Master Licensee shall, if required pursuant to
the Legal Requirements, at its cost and expense, take any and all steps to
obtain Korean government approvals of this Agreement, and any material amendment
hereto or modification hereof (if required or agreed to by the parties)
("Amendment") including approval from the Korean Fair Trade Commission ("FTC")
and the foreign exchange bank remittance authorization. Master Licensee agrees
to obtain all necessary approvals of this Agreement in its current form, and any
Amendment, including but not limited to meeting personally with appropriate
governmental officials and providing the FTC or other applicable governmental
authority with any documents or other written evidence necessary to obtain such
approvals. If the FTC or other applicable governmental authority refuses to
approve this Agreement in its current form, or any Amendment in the form agreed
to by the parties, then the parties hereto agree to negotiate with the FTC or
other applicable governmental authority to obtain approval of this Agreement or
any Amendment without substantive change. If the FTC or other applicable
governmental authority does not approve this Agreement or any Amendment after
such negotiation, the parties agree to negotiate with one another for a
reasonable period of time, but not to exceed six (6) months, to reach an
agreement that will permit such approval of this Agreement or any Amendment. If
the parties hereto are unable to reach an agreement which would permit all such
approvals within such time period, then this Agreement shall terminate
immediately upon notice thereof from either party hereto to the other. Master
Licensee shall have the right to petition or submit materials to the FTC or any
other governmental authority to obtain any approval or authorization relating to
this Agreement or any Amendment; provided, however, that Master Licensee shall
make such petition or submission jointly with Company upon Company's request.
Master Licensee agrees not to submit any information to any governmental
authority in the Territory in respect of an approval or authorization without
Company's prior written consent.
5
<PAGE>
2.3 Effective Date. (a) Unless otherwise specifically provided for in this
Agreement, this Agreement shall be effective upon its execution by both parties
hereto.
(b) For the purpose of enforcement of any Paragraph of this Agreement
which is specifically provided to be effective on execution of this Agreement,
any other provisions of this Agreement relating to enforcement of the rights and
obligations of the parties under such Paragraphs, or any one of them, shall be
effective to enforce such Paragraph.
2.4 Exclusive Relationship. Except as otherwise provided herein,
including, without limitation, Paragraphs 3.3 and 3.5 hereof, and provided that
Master Licensee is in compliance with this Agreement, Company and its
Affiliates, and their direct and indirect subsidiaries shall not develop, manage
or locate, or grant a license or franchise for, any Friendly's System in the
Territory and shall not sell the Products to any party other than Master
Licensee in the Territory or to any party that Company reasonably believes will
resell the Products in the Territory; provided, however, Company and other
Friendly's System licensees and franchisees having Shoppes located outside the
Territory may advertise within the Territory.
2.5 Term. (a) The initial term of this Agreement shall commence on the
Effective Date and expire twenty (20) years following the Effective Date (the
"Initial Term"). Upon expiration of the Initial Term, Master Licensee shall have
the right to renew the Rights granted hereunder for (a) a period of ten (10)
years, upon expiration of which Master Licensee shall have the right to renew
the Rights for an additional ten (10) years, or (b) for a single period of
twenty (20) years as may be agreed between the parties (each a "Renewal Term")
subject to obtaining all required governmental approvals, if any, and the
requirements of this Paragraph 2.5. The Initial Term and any Renewal Term are
collectively referred to herein as the "Term".
(b) No later than six (6) months prior to expiration of the third
Development Period of the Initial Term the parties must commence good faith
negotiations of the terms and conditions of a Renewal Term. Such negotiations
may be held and renewal may occur only if (a) Master Licensee has substantially
complied with all of the terms and conditions of this Agreement during the
Initial Term including without limitation the Development Schedules, and (b)
such Renewal Term is authorized under the Legal Requirements then in effect or,
as applicable, at the beginning of the Renewal Term. If such negotiations are
commenced, the parties shall at that time prepare suggested Development
Schedules for the first Development Period of the Renewal Term.
(c) If all of the conditions of Paragraph 2.5(b) have been met,
twenty-four (24) months prior to the expiration of the Initial Term the parties
shall commence discussion of the final terms and conditions of the Renewal Term
including without limitation the Development Schedules to be in effect for the
first Development Period of the Renewal Term. If the parties have not agreed on
such terms and conditions by the date eighteen (18) months prior to the
expiration of the Initial Term, this Agreement shall expire at the end of the
Initial Term in accordance with its terms. Any default by Master Licensee under
this Agreement occurring subsequent to the day on which the terms and conditions
of renewal are agreed must be cured prior to the expiration of the Initial Term
or no renewal shall occur.
6
<PAGE>
2.6 Representations and Warranties of Master Licensee. Master Licensee
hereby represents and warrants to Company as follows:
(a) Master Licensee is duly organized and validly existing under the laws
of South Korea, has all necessary power and authority to enter into and perform
its obligations under this Agreement and all documents executed in connection
herewith, and to carry on its business and to own and lease its properties, as
presently conducted, owned and leased.
(b) There are no proceedings pending seeking to dissolve or to liquidate
Master Licensee, and no action has been taken by the Board of Directors or the
shareholders of Master Licensee authorizing any such proceedings.
(c) The persons executing this Agreement and all other documents executed
in connection herewith on behalf of Master Licensee have been duly authorized to
perform such actions on behalf of Master Licensee. This Agreement and all other
documents executed in connection herewith constitute the valid, legal and
binding obligations of Master Licensee and are enforceable in accordance with
their respective terms, subject to applicable bankruptcy laws and general
principles of equity.
(d) Neither the execution, delivery or performance of this Agreement or
any other document executed in connection herewith, nor the consummation of the
transactions contemplated therein, will violate Master Licensee's Articles of
Incorporation, or constitute or create a violation of or default under, with the
giving of notice, the passage of time or both, or result in the creation or
imposition of any lien, security interest or encumbrance under, any contract,
agreement, loan, note, mortgage, security agreement, deed to secure debt,
guarantee, lease (capital or operating) or any other document or instrument, or
any law, rule, regulation, ordinance, or any judicial or administrative decree,
rule or order to which Master Licensee is a party or by which it or its
properties is or may be bound.
(e) There is no arbitration, litigation or administrative proceeding
pending, or to the knowledge of Master Licensee, threatened, in which Master
Licensee is or may be a party, or which may affect Master Licensee or its
property, which would materially adversely affect the ability of Master Licensee
to enter into or perform its obligations under this Agreement or any other
document executed in connection herewith, or have a material adverse effect on
the business, prospects or finances of Master Licensee if determined adversely
to Master Licensee. Master Licensee is not the subject of any pending
bankruptcy, insolvency, receivership or similar proceeding, and is not a party
to, subject to, or in default in any material respect with, any writ,
injunction, decree, judgment, award, determination, direction or demand of any
arbitrator, court or governmental agency or instrumentality that would adversely
affect the ability of Master Licensee to enter into or perform its obligations
under this Agreement.
(f) All information provided to Company regarding Master Licensee, its
directors, shareholders and officers is true and correct.
2.7 Representations and Warranties of Company. Company hereby represents
and warrants to Master Licensee as follows:
7
<PAGE>
(a) Company is duly organized, validly existing and in good standing under
the laws of the State of Delaware, has all necessary power and authority to
enter into and perform its obligations under this Agreement and all other
documents executed in connection herewith and to carry on its business and to
own and lease its properties, as presently conducted, owned and leased.
(b) There are no proceedings pending seeking to dissolve or to liquidate
Company, and no action has been taken by the Board of Directors or the
shareholders of Company authorizing any such proceedings.
(c) The persons executing this Agreement and all other documents executed
in connection herewith on behalf of Company have been duly authorized to perform
such actions on behalf of Company. This Agreement and all other documents
executed in connection herewith constitutes the valid, legal and binding
obligations of Company and, to the best knowledge of Company, are enforceable in
accordance with their respective terms, subject to applicable bankruptcy laws
and general principles of equity.
(d) Neither the execution, delivery or performance of this Agreement or
any document executed in connection herewith, nor the consummation of the
transactions contemplated therein, will violate Company's Articles of
Incorporation or By-laws, or constitute or create a violation of or default
under, with the giving of notice, the passage of time or both, or result in the
creation or imposition of any lien, security interest or encumbrance under, any
contract, agreement, loan, note, mortgage, security agreement, deed to secure
debt, guarantee, lease (capital or operating) or any other document or
instrument, or any law, rule, regulation, ordinance, or any judicial or
administrative decree, rule or order to which Company is a party or by which it
or its properties is or may be bound.
(e) There is no arbitration, litigation or administrative proceeding
pending, or to the knowledge of Company, threatened, in which Company is or may
be a party, or which may affect Company or its property, which would materially
adversely affect the ability of Company to enter into or perform its obligations
under this Agreement or any other document executed in connection herewith, or
have a material adverse effect on the business, prospects or finances of Company
if determined adversely to Company. Company is not the subject of any pending
bankruptcy, insolvency, receivership or similar proceeding, and is not a party
to, subject to, or in default in any material respect with, any writ,
injunction, decree, judgment, award, determination, direction or demand of any
arbitrator, court or governmental agency or instrumentality that would adversely
affect the ability of Company to enter into or perform its obligations under
this Agreement.
(f) All information provided to Master Licensee regarding Company, its
directors, officers and shareholders is true and correct.
(g) To the best of its knowledge, Company owns all rights in and to the
Marks and Friendly's System and it may grant to Master Licensee the Rights and
it may do so without the approval or consent of anyone and the grant of such
rights to Master Licensee does not materially violate any agreement binding upon
or any obligation of Company.
8
<PAGE>
(h) To the best of Company's knowledge, the Friendly's System does not
violate or infringe any patent, copyright, or other proprietary rights of any
third party.
ARTICLE 3. DEVELOPMENT OBLIGATIONS
3.1 Sales Targets and Development Schedules. (a) Master Licensee covenants
and agrees to comply with all sales targets and development schedules referred
to below (collectively referred to herein as the "Development Schedules"):
(i) the development schedules for the operation of Shoppes owned by
Master Licensee (each an "Ownership Schedule");
(ii) the development schedules for the licensing of Shoppes by
Master Licensee to Licensees (each a "License Schedule"); and
(iii) the development schedules for the sale and distribution of
Products (each a "Distribution Schedule").
The parties acknowledge the difficulty in fixing Development Schedules for the
entire Initial Term. Accordingly, the Initial Term shall be divided into four
successive periods of five (5) years (each a "Development Period") and the
parties shall agree on Development Schedules to be in effect during each
Development Period. The Ownership Schedule, License Schedule and Distribution
Schedule to be in effect during the first Development Period are attached to
this Agreement as Schedules 1, 2, and 3, respectively.
(b) No later than eighteen (18) months prior to the expiration of each
Development Period (except the last Development Period), the parties shall agree
on the Development Schedules to be in effect during the next Development Period.
If the parties cannot agree on any Development Schedule to be in effect during
any Development Period, or if Master Licensee fails to comply with any
Development Schedule, Company shall be entitled to take any or all of the
following actions:
(i) terminate the Ownership Rights for Shoppes not already in
operation at the time of such termination, except for any such
Shoppe developed after such termination which is specifically
approved in writing by Company;
(ii) terminate the Licensing Rights for Shoppes not already in
operation at the time of such termination; and
(iii) convert the Distribution Rights to non-exclusive status, and
thereafter Company shall have the option to grant additional parties
the right to sell and distribute Products within the Territory.
Notwithstanding the foregoing, Company shall not have the right to terminate or
modify any of the Rights for Master Licensee's failure to comply with any
Development Schedule during the first three years of the Initial Term, provided
that Master Licensee has paid in full and when due the minimum Royalty Fees for
such three years pursuant to Paragraph 18.2(a).
9
<PAGE>
For the avoidance of doubt, if the parties cannot agree on the Development
Schedules for any Development Period, neither party shall have the right to
terminate this Agreement.
3.2 Development Obligations in North Korea. Master Licensee shall commence
sales, operations, and development in North Korea within five (5) years of the
Effective Date in accordance with a development schedule to be mutually agreed
by the parties hereto. If Master Licensee fails to develop the territory of
North Korea within such period in accordance with such schedule, Company shall
have the right to terminate all of Master Licensee's Rights with respect to
North Korea.
3.3 Company Shoppes and Restaurants. Notwithstanding the Rights granted to
Master Licensee under this Agreement, Company, its Affiliates and their direct
and indirect subsidiaries shall have the exclusive right, anywhere in the
Territory, to own, develop, manage, lease, license or operate the Friendly's
full-menu restaurant concept known as "Friendly's Restaurants" and similar to
the "Friendly's Restaurants" concept operated in the United States except as
modified to accommodate local tastes and customs. If Company desires to exercise
any such rights, or if Company is contacted by a third party in the Territory
seeking a relationship with Company in respect of such rights, Company shall
first contact Master Licensee to discuss in good faith whether and the terms
upon which Master Licensee may be interested in purchasing the rights to develop
the "Friendly's Restaurants" business in the Territory and Master Licensee shall
inform Company of its interest within forty-five (45) days of being contacted by
Company; provided, however, that Company shall have no obligation to reach an
agreement with Master Licensee on the exercise of Company's rights with respect
to Friendly's Restaurants. In the event that Master Licensee is not involved in
the "Friendly's Restaurants" business in the Territory, and so long as the
Rights granted hereunder remain exclusive, Company shall ensure that the
operator of each "Friendly's Restaurant" procures all of its Proprietary
Products from Master Licensee. Company, its Affiliates and their direct and
indirect subsidiaries shall not have the right to own, develop, manage, lease or
operate Shoppes in the Territory.
[Intentionally Left Blank]
10
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3.4 Company Business Presence. If Company intends to establish a business
presence in the Territory for the purpose of operating any of its businesses in
the Territory, Company shall discuss with Master Licensee in good faith whether
and the terms upon which Master Licensee may be interested in participating in
such business presence or businesses in the Territory and Master Licensee shall
inform Company of its interest within forty-five (45) days of being contacted by
Company and if there is such interest Master Licensee shall thereafter engage in
continuous good faith negotiations in this regard; provided, however, that
Company shall have no obligation to reach an agreement with Master Licensee in
this regard.
3.5 Company Approved Licensees. Notwithstanding any Rights granted to
Master Licensee under this Agreement, Company shall have the right to request
Master Licensee to enter into a License Agreement with any person or entity that
Company specifies in writing; provided that such proposed Licensee meets the
qualifications and standards for Licensees, if any, established by Master
Licensee and approved by Company prior thereto; and provided, further, that
Company shall first obtain Master Licensee's prior written approval for such
Company-specified Licensee, which approval shall not be unreasonably withheld,
delayed or conditioned. Master Licensee, in granting any such License Agreement
to a Company-specified Licensee, will not unreasonably withhold, delay or
condition its consent to any variations from the terms of Master Licensee's then
current form of License Agreement. Any such facilities will be credited toward
satisfaction of the obligations of Master Licensee under the Licensing Schedule.
ARTICLE 4. PURCHASE OF PRODUCTS
4.1 Purchase Obligations. Master Licensee agrees and undertakes to
diligently and conscientiously use all reasonable efforts to promote and expand
the sale of the Products in the Territory in accordance with the Distribution
Schedule, including but not limited to regularly and at its own expense
distributing promotional literature and carrying out market surveys.
Company agrees and undertakes to make every reasonable effort to fill the orders
of Master Licensee with all reasonable dispatch.
4.2 Approved Products and Suppliers. (a) The reputation and goodwill of
Shoppes 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.
Company has developed Proprietary Products which are prepared by or for the
Company according to its proprietary and secret recipes and formulas. Company
has developed standards and specifications for Products, including, without
limitation, 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 Shoppes.
Company has and will periodically approve suppliers and distributors of the
Products that meet Company standards and requirements, including, without
limitation, standards and requirements relating to product quality, prices,
consistency, reliability, financial capability, labor relations and customer
relations. Master Licensee agrees that it shall, and it shall cause Licensees,
in satisfaction of the Rights granted under this Agreement to:
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(1) purchase the Proprietary Products listed in Exhibit A-1 and
other Proprietary Products developed by Company from time to time pursuant
to secret recipes or formulas, only from Company or a third party licensed
by Company to prepare and sell such Proprietary Products; and
(2) purchase all Non-Proprietary Products listed in Exhibit A-2 that
meet Company standards and specifications from suppliers Company has
approved.
(b) Master Licensee shall ensure that adequate inventory of Products are
maintained by it in the Territory so as to be able at all times to meet without
delay the reasonably anticipated demand for Products during the ensuing thirty
(30) day period.
(c) Company 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. Company may concentrate purchases with one or more distributors or
suppliers to obtain lower prices and/or the best advertising support and/or
services for any group of Shoppes. Approval of a distributor or other supplier
may be conditioned on requirements relating to the frequency of 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 Company further evaluation of such distributor or other
supplier.
(d) Notwithstanding the above, Master Licensee has the right to request
Company approval of alternative suppliers or distributors of Non-Proprietary
Products and Company is willing to consider alternative suppliers and
distributors. All costs associated with evaluating the products and/or services
of the first ten (10) prospective suppliers and/or distributors proposed by
Master Licensee to Company in any calendar year shall be paid by Company. Master
Licensee shall pay all such costs for any additional prospective suppliers
and/or distributors proposed by Master Licensee to Company in any calendar year.
Master Licensee agrees to notify Company and submit to Company all information,
specifications and samples, at Master Licensee's expense, that Company
reasonably requests if Master Licensee proposes to purchase any Non-Proprietary
Product from a distributor or other supplier who has not been previously
approved by Company. Company will notify Master Licensee within a reasonable
time whether Master Licensee is authorized to purchase such Non-Proprietary
Product from such distributor or other supplier.
(e) Company may, from time to time, conduct market research and testing to
determine consumer trends and the marketability of new food products and
services. Master Licensee agrees to cooperate and assist Company by
participating in Company customer surveys and market research programs, test
marketing new food products and services in any Shoppe and providing Company
with timely reports and other relevant information regarding such customer
surveys and market research.
4.3 Purchase Procedures. (a) Orders for Products shall be in writing and
in such form as Company notifies Master Licensee, addressed to Company as set
forth in Article 19 hereof.
(b) Within five (5) business days of receipt of an order, Company shall
indicate its acceptance, in whole or part, or rejection of such order in writing
to Master Licensee. The
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failure of Company to indicate its rejection or acceptance within the said five
(5) business days of receipt of an order shall be deemed to constitute
acceptance.
(c) Accepted orders will be shipped EXW Friendly's Factory, Wilbraham,
Massachusetts, U.S.A. Delivery at such factory shall constitute delivery to
Master Licensee and risk of loss shall pass at that time. Title shall not pass
until payment for such Products has been made in full by Master Licensee to
Company. Accepted orders shall be shipped by appropriate carriage and packing
shall be adequate under normal overseas transport conditions to prevent damage
or deterioration.
(d) Master Licensee shall take all reasonable steps to ensure that the
Products are properly transported, handled and stored so as to prevent any
damage thereto. Upon Master Licensee's request, Company shall render reasonable
assistance to Master Licensee in the transport, handling, and storage of the
Products in the U.S.A. Upon receipt of appropriate supporting documentation,
Master Licensee shall reimburse Company forthwith for all costs and expenses, if
any, incurred by Company in connection with such assistance.
(e) Unless required pursuant to the Legal Requirements, Master Licensee
shall not alter or add to the packaging, brand names, trade names, trademarks or
other markings affixed by Company to the Products without the prior written
consent of Company.
4.4 Prices and Payment. (a) The prices to be paid for Products by Master
Licensee to Company shall be in accordance with Paragraph 4.3(c) and with a
price list to be supplied by Company to Master Licensee. The first price list
shall be submitted by Company to Master Licensee on the Effective Date, and
Company shall have the right to submit a revised price list at any time and from
time to time. Any price changes shall become effective thirty (30) days after
Master Licensee's receipt thereof. Price changes shall not apply to Products
already ordered but for which Company has not yet been paid.
(b) Payment for Products shall be made within thirty (30) days after
Master Licensee receives the relevant invoice and evidence that Company has
shipped the relevant Products. The payment provisions set out in Paragraphs 8.5,
8.6, 8.7, 8.8, and 8.9 shall also apply to payments for Products.
Notwithstanding any provision in this Agreement to the contrary, Company shall
have the right, at any time during the Term and exercisable upon thirty (30)
days prior written notice, to compel Master Licensee to make all payments for
Products hereunder through an irrevocable letter of credit.
4.5 Warranty. Company specifically and expressly warrants that the
Products manufactured or sold by Company shall be safe, of good quality, and
comply with descriptions, specifications and specimens of such Products. MASTER
LICENSEE EXPRESSLY ACKNOWLEDGES AND AGREES THAT IT SHALL BE SOLELY RESPONSIBLE
FOR DETERMINING AND ADVISING COMPANY WHETHER EACH PRODUCT COMPLIES WITH THE
LEGAL REQUIREMENTS, AND IF NOT, THE ACTION TO BE TAKEN BY COMPANY TO EFFECT
COMPLIANCE. ALL COSTS OF COMPLIANCE SHALL BE FOR THE ACCOUNT OF AND BE PAID BY
MASTER LICENSEE. Company shall indemnify and hold harmless Master Licensee
and/or any Licensee from any loss, damage, cost and expense (including without
limitation, reasonable
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legal fees) suffered by Master Licensee and/or a Licensee as a result of any
breach of the foregoing warranty.
ARTICLE 5. MASTER LICENSEE-OWNED SHOPPES
5.1 Condition, Appearance And Operation Of Shoppes. Master Licensee agrees
that:
(1) none of the Shoppes it owns and operates will be used for any
purpose other than the operation of a Shoppe in compliance with this
Agreement;
(2) Master Licensee will maintain the condition and appearance of
its Shoppes, its equipment, furniture, furnishings, signs and the premises
in accordance with Company specifications and standards as in effect from
time to time and consistent with the image of a Shoppe as an efficiently
operated business offering high quality food service and observing the
highest standards of cleanliness and sanitation;
(3) Master Licensee will perform all periodic maintenance with
respect to the decor, equipment, furniture, furnishings and signs of each
of its Shoppes and the premises 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 each such Shoppe at reasonable intervals;
(b) interior and exterior repair of each such Shoppe; and
(c) repair or replacement of damaged, worn out or obsolete
equipment, furniture, furnishings, and signs.
(4) Master Licensee will not make any material alterations to any of
its Shoppes, or to the appearance of any of its Shoppes as originally
developed, without Company prior written approval;
(5) Company has the right to require that Master Licensee remodel,
redecorate, reequip, modernize and refurnish each of its Shoppes to
reflect any changes in Shoppes that Company prescribes as Company's
then-current standards and specifications. Company shall inform Master
Licensee immediately of such changes as well as what action Master
Licensee should take to reflect such changes. Company and Master Licensee
shall in good faith discuss the manner in which any remodeling,
redecorating, reequiping, modernizing or refurnishing shall be implemented
taking into account current market conditions. Company has the right to
approve the layouts, designs, and new equipment, furniture and furnishings
Master Licensee uses in any remodeling, redecorating and reequipping; and
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(6) Master Licensee will place or display at each of its Shoppes
(interior and exterior) only such signs, emblems, lettering, logos and
display and advertising materials that Company from time to time approves.
5.2 Shoppe Menu. (a) Master Licensee agrees that each of its Shoppes will
offer for sale all food and beverage products and services that Company from
time to time requires. Company shall inform Master Licensee immediately of such
changes in the Shoppe menu and Company and Master Licensee shall in good faith
discuss the manner in which any such change shall be implemented taking into
account current market conditions. Master Licensee agrees that each such Shoppe
will sell only Products that Company has approved. No Shoppe owned by Master
Licensee may offer for sale or sell at the premises of such Shoppe or any other
location any unapproved products, or use the premises of such Shoppe for any
purposes other than the operation of the Shoppe.
(b) Company has the right to approve any Shoppe's offering of Products or
services on a test basis, which approval Company may condition in any reasonable
manner. Company will have the right to stop the test at any time after its
commencement.
5.3 Procedures For Shoppes. Master Licensee agrees that each Shoppe will
conduct business in the ordinary course seven days a week (excluding holidays
Company or Master Licensee specifies, if any) during business hours for like
businesses in similar locations, except as Company may otherwise authorize in
writing. Master Licensee acknowledges that approved Shoppe hours may vary from
one location to another depending on conditions in the market where the Shoppe
is located.
5.4 Compliance With Laws And Good Business Practices (a) Master Licensee
agrees to secure and maintain in force in Master Licensee's name all required
licenses, permits and certificates relating to the operation of each of its
Shoppes. Master Licensee further agrees to operate each Shoppe in full
compliance with all applicable Legal Requirements including, without limitation,
all government regulations relating to health and sanitation, insurance, and
withholding and payment of national, provincial and local income taxes, and
sales taxes. All of Master Licensee's advertising must be completely factual, be
in good taste in Company judgment and conform to the highest standards of
ethical advertising. Master Licensee agrees that in all dealings with Company,
Master Licensee's customers, Licensees, suppliers and public officials, Master
Licensee will adhere to the highest standards of honesty, integrity, fair
dealing and ethical conduct. Master Licensee agrees to refrain from any business
or advertising practice which may be injurious to Company business or to the
goodwill associated with the Marks and other Shoppes.
(b) Master Licensee agrees to notify Company, by telephone within
forty-eight (48) hours, excluding hours falling on weekends or holidays,
followed within five (5) days by written notification, including copies of any
shop or process received of: (i) the commencement of any action, suit or
proceeding relative to any Shoppe; (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 any Shoppe; and (iii) any notice of violation of any law, ordinance or
regulation relating to health or safety. Master Licensee agrees that Master
Licensee will not accept service of process for Company and on Company's behalf.
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5.5 Management And Personnel. Master Licensee agrees that at all times
Master Licensee will, in respect of each Shoppe owned by Master Licensee, (i)
employ on terms reasonably satisfactory to Company a general manager who shall
have principal operational responsibility for such Shoppe and who shall have
such qualifications and experience as Company shall reasonably require and who
shall have completed Company's or Master Licensee's approved training program,
and (ii) employ on a full-time basis a manager and an assistant manager, each of
whom has completed the Company training program (collectively, the general
manager, manager and assistant manager are referred to as "Friendly's Shoppe
Managers"). Each Shoppe shall at all times be under the direct on-premises
supervision of a Friendly's Shoppe Manager. Master Licensee agrees to hire all
employees of its Shoppes and be exclusively responsible for the terms of their
employment and compensation and for the proper training of Master Licensee's
employees in the operation of each of its Shoppes. Master Licensee agrees to
require all employees to maintain a neat and clean appearance and to conform to
the standards of dress and/or uniforms that Company specifies from time to time
for any Shoppe. Master Licensee agrees not to recruit or hire any of Company's
employees or any employees of any Friendly's Restaurant operated by Company or
by a Shoppe licensee without obtaining the Company's 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 the Company or the
licensee. Company agrees not to recruit or hire any of Master Licensee's
employees or any employees of a Shoppe operated by Master Licensee or a Licensee
without obtaining Master Licensee's or, as the case may be, such Licensee's
prior written permission unless six months have expired since such employee's
termination of employment with Master Licensee or such Licensee.
ARTICLE 6. SERVICES AND OBLIGATIONS
6.1 Initial Services of Company. (a) Company shall instruct and consult
with Master Licensee's personnel on adaptation of the Friendly's System to the
operation of Shoppes in the Territory and the development, operation and
franchising of Shoppes. In connection with such services, Company shall furnish
written and other materials and various of its personnel to communicate the
Friendly's System to Master Licensee. Written and other materials and
instruction and consultation furnished by Company personnel will relate to: (1)
preparation, packaging, sale and delivery of products authorized for sale at
Shoppes; (2) development, preparation and packaging of new products Company
develops for sale at Shoppes; (3) specifications, standards and operating
procedures utilized by Shoppes, and any modifications thereof; (4) approved
equipment, furniture, furnishing, signs, food products, operating materials and
supplies; (5) development and implementation of local advertising and
promotional programs, and (6) general operating and management procedures of
Shoppes.
(b) Company shall furnish such assistance in the form of Company's
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").
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(c) Instruction and consultation by Company personnel shall be provided
solely in the U.S. (other than in connection with initial certification
inspections of new Shoppes) through the initial training program described in
Paragraph 6.2 and by telephone, facsimile transmission, telex and
correspondence.
6.2 Initial and Continuing Training. (a) Within thirty (30) days after the
Effective Date, Master Licensee shall designate and notify Company in writing of
at least two (2) trainees, up to a limit of seven (7) trainees, to attend an
initial training program devised by Company. The first trainee Master Licensee
sends to attend Company's initial training program must commence training within
ninety (90) days after the Effective Date, provided that Company shall have at
least thirty (30) days' prior written notice of the date Master Licensee desires
its first trainee to commence training. The training program will include
classroom instruction and field training and will be furnished at Company's
training facility and/or at a Shoppe or a Friendly's Restaurant, and will last
for such duration as Company determines to be necessary. At least two (2) of
Master Licensee's trainees must complete the training program to Company's
satisfaction. If Company, in its sole discretion, determines that any of such
persons are unable to complete the training program satisfactorily, upon
Company's request Master Licensee agrees to hire, as soon as practicable, a
replacement who must complete Company's training program to Company's
satisfaction. Company may also offer such refresher or supplemental training
programs to Master Licensee at such places as Company designates. By giving
Master Licensee at least thirty (30) days prior written notice, Company has the
right to require attendance at any refresher or supplemental training program by
Master Licensee or any of its designated trainees, the total number of which
shall not exceed two (2) employees in any given year. No tuition charge will be
made for required initial training programs. Master Licensee will be responsible
for the travel, local transportation, lodging and meal expenses, and
compensation of Master Licensee's trainees incurred while attending the training
program and any refresher or supplemental training programs the Company offers
to Master Licensee or requires Master Licensee or its designated trainees to
attend. Reasonable charges may be made by the Company for training materials and
the Company may require Master Licensee to purchase certain equipment to be used
in such training.
(b) The training program shall cover, among other things, the subjects
described in Paragraph 6.1 hereof. Upon completion of the instruction of Master
Licensee's trainees, Company shall determine, in its sole discretion, which of
such trainees have successfully completed the instruction program and shall
issue to Master Licensee certificates of completion for such trainees
("Certified Employees") as of that date. Master Licensee will employ at least
two (2) Certified Employees throughout the Term; provided, however, that there
may be less than two (2) Certified Employees for a reasonable period of time in
the event that one or more of the Certified Employees terminates his employment
with Master Licensee without adequate notice or is summarily terminated by
Master Licensee and no Company training programs for his or their replacement
are immediately available.
6.3 Master Licensee Training Center. No later than the execution of the
first License Agreement by Master Licensee, Master Licensee shall establish a
training center in Seoul, South Korea and Certified Employees shall be
responsible for implementing mandatory training programs for Shoppe personnel in
accordance with training standards and procedures prescribed by Company from
time to time. Upon the implementation of such
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training programs by such Certified Employee(s) to Company's satisfaction,
Company shall not object to certification by a Certified Employee of Shoppe
personnel who successfully complete such training programs. Master Licensee
shall also implement a license services program under which Master Licensee
shall be required to provide services to Licensees comparable to the initial and
continuing services and training provided by Company to Master Licensee under
this Agreement.
6.4 Continuing Services of Company. To the extent relevant to the
Territory, Company shall periodically furnish to Master Licensee the results of
any research, development and testing programs undertaken in the U.S. (and, to
the extent deemed relevant by Company, in other countries) relating to one or
more of: (a) new product or service development; (b) Shoppe design, layout,
fixtures, equipment, lighting and construction; (c) Shoppe image, decor, logo
design and trademarks; (d) pricing strategies; (e) advertising and marketing
concepts and programs; (f) Shoppe operations; (g) services to Licensees; and (h)
Licensee and employee training. Company personnel shall be available for
periodic consultation with personnel of Master Licensee. The parties agree that,
to the extent possible, such consultation shall be by telephone, facsimile
transmission, telex and correspondence. Company shall have the right, but no
obligation, to conduct at any time, through employees, agents or consultants,
visits to the Territory, which may include a quality assurance and operational
inspection of each Shoppe in existence or under development at such time,
consultation with Master Licensee on development, operations, marketing, and
other matters of mutual interest, and review of the annual budget and
development plan then in effect or proposed under Paragraph 6.7. Such visits
shall be scheduled by Company and Master Licensee shall cooperate with Company's
requested schedule. Master Licensee shall not be obligated to reimburse Company
for any expenses relating to any visit to the Territory by Company's employees,
agents or consultants not at the request of Master Licensee. If Master Licensee
requests that Company personnel travel to the Territory, Master Licensee shall
pay all travel, meal and lodging expenses of such personnel and a per diem fee
established by Company from time to time.
6.5 Certification Inspection of Shoppes. Company may, at its option,
inspect each Shoppe for the purpose of certifying that it meets all Territory
System Standards. Master Licensee shall provide at least sixty (60) days prior
written notice to Company of the proposed opening of a Shoppe operated by Master
Licensee and at least thirty (30) days prior written notice of the proposed
opening of a Shoppe operated by a Licensee; provided, however, that Master
Licensee shall give Company more notice if required to accommodate travel
arrangements, work schedules or governmental travel authorization. Master
Licensee shall use its reasonable efforts to obtain all governmental visas,
permits, licenses and travel authorizations of all appropriate governmental
agencies to allow Company's inspectors to visit and inspect Shoppes within the
Territory. If Company cannot obtain travel arrangements or authorization, or
Company elects not to perform the opening inspection, Master Licensee shall
assign two (2) Certified Employees to inspect the Shoppes in consultation with
Company to certify that it complies with Territory System Standards and has been
constructed in accordance with plans approved by Company. Company or Master
Licensee shall make its inspection prior to opening and, if the inspecting party
certifies the Shoppe for opening, it shall open no later than fifteen (15) days
after such inspection. If the Shoppe is not certified for opening, the
inspecting party shall prepare and deliver to this Agreement's other party and
the relevant Licensee a list of items to be completed before or
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after opening and Master Licensee shall take, or shall cause such Licensee to
take, all reasonably necessary action to timely cure the deficiencies specified
by Company on such list. Master Licensee shall not permit the opening of any
Shoppe until certified for opening by Company or Master Licensee's Certified
Employees, or until all items specified by the inspecting party to be completed
prior to opening have been completed. The parties envision that Master Licensee
will be certified by Company to open Master Licensee operated Shoppes or assist
Licensees in opening Shoppes without the assistance of Company on or before the
initial ten (10) Shoppes are opened in the Territory. Until such time that
Master Licensee is certified to open Shoppes, which certification shall not
unreasonably be withheld, Master Licensee shall reimburse Company for the
travel, meal, lodging and incidental expenses of Company's personnel conducting
such certification inspection. After Master Licensee is certified to open
Shoppes, Company shall pay all of its expenses associated with certification
inspections except such inspections conducted by Company upon Master Licensee's
request.
6.6 Marketing Programs. Master Licensee shall be responsible for
developing and implementing local and national marketing programs and Company
shall provide advice and consultation, and samples for adaptation for local
usage, for such programs. To the extent feasible, Master Licensee will cooperate
with other Friendly's System master licensees in developing and implementing
joint marketing programs as Company directs. "Marketing programs" shall include,
without limitation, all forms of advertising, publicity, promotion, market
research and public relations activities. Company may require submission of
samples of all major marketing programs and related materials developed by
Master Licensee for approval prior to implementation and use. Company shall give
Master Licensee written notice of approval, disapproval or modifications within
thirty (30) days after receipt thereof. If Master Licensee receives no notice
from Company, after confirming Company's receipt of such materials, then such
materials shall be deemed approved. All samples submitted to Company shall
include a true and accurate English language translation. Master Licensee agrees
to spend an amount of at least three percent (3%) of Gross Sales and Revenues
for marketing programs and advertising purposes in the Territory. Master
Licensee shall require each Licensee in the Territory to spend an amount of at
least three percent (3%) of its gross revenues for marketing and advertising
purposes.
6.7 Annual Sales Forecast and Development Plan. Prior to the commencement
of each Agreement Year, Master Licensee shall furnish to Company a sales
forecast and development plan (the "Annual Plan") for such Agreement Year in a
summary format developed by Master Licensee setting forth a plan in respect to
annual sales by distribution channel and planned development. The Annual Plan
shall be for informational purposes only, and shall have no effect on the
Development Schedules, and Company shall provide Master Licensee advice and
consultation about the Annual Plan. Within twenty (20) days after the end of
each quarter during each Agreement Year, Master Licensee shall submit to Company
a summary update on the Annual Plan showing whether targets have been met and
any adjustments proposed by Master Licensee to the Annual Plan.
6.8 License Marketing and Services. Within one hundred twenty (120) days
after the Effective Date, Master Licensee shall formulate and implement a
license marketing strategy, which will include, among other things, preparation
of offering materials for dissemination to prospective Licensees, procedures for
responding promptly to requests for information from prospective Licensees,
evaluation and qualification of prospective
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Licensees, and proper documentation of the grant of licenses consistent with
Paragraph 7.1 hereof.
6.9 Additions and Modifications to the Friendly's System. Company reserves
the right, from time to time, by adoption or amendment of System Standards, to
add, amend, modify, delete or enhance any portion of the Friendly's System
(including any of the Marks and System Standards) as may be necessary in the
judgment of Company to change, maintain, or enhance the Marks or the reputation,
efficiency, competitiveness and/or quality of the Friendly's System; or to adapt
to it new conditions, materials or technology, or to better serve the public.
Company will disclose to Master Licensee, to the extent relevant to the
Territory, additions and modifications to the Friendly's System made anywhere in
the world and which have been developed by or are otherwise available to
Company. Master Licensee shall, if requested by Company, use any such additions
and modifications which Company has approved for use in the operation and
franchising of Shoppes. Master Licensee shall disclose to Company all ideas,
concepts, methods, improvements, services, techniques and products relating to
the operation of Shoppes conceived by Master Licensee and Licensees during the
Term and Company shall have a non-exclusive, royalty-free and world-wide right
to incorporate same in the Friendly's System for use in all Shoppes or
Friendly's Restaurants operated by Company and its licensees and franchisees
world-wide.
6.10 Items Used by Shoppes. Master Licensee shall be responsible for
purchasing or procuring sources for all items other than Products necessary for
use by Shoppes, including, without limitation, fixtures, furniture, equipment,
amenities, supplies and materials ("General Items"). Company may, to the extent
feasible, assist Master Licensee in purchasing or procuring General Items
appropriate for use in the Territory from sources of supply located in the U.S.
Master Licensee shall be allowed to participate in Company's purchasing programs
for General Items in the U.S. on the same terms as Company or its vendors make
available to other Friendly's franchisees in the U.S., subject to any additional
costs or Legal Requirements that may apply to such purchasing programs. Company
may prescribe minimum product standards for General Items for use in the
Territory. Company shall consider local factors and conditions in prescribing
such standards. Master Licensee shall recommend reputable suppliers (which may
include Company, Master Licensee or Affiliates) for General Items to Licensees.
ARTICLE 7. LICENSEES AND LICENSE AGREEMENTS
7.1 Licensees and License Agreements Utilized by Master Licensee. (a)
Prior to entering into each License Agreement, Master Licensee shall provide to
the Company such information as is reasonably requested by the Company regarding
the financial condition, reputation and other matters in respect of maintaining
the high standards of licensees of the Friendly's System. Company shall have the
right to approve all potential Licensees, which approval shall not be
unreasonably withheld or delayed and shall be based solely on the foregoing
factors.
(b) The form of License Agreements used by Master Licensee to grant
licenses to Licensees for the operation of Shoppes shall be substantially in the
form of Exhibit C to be attached hereto. Company shall supply the U.S. standard
form license agreement as amended
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from time to time to Master Licensee and Master Licensee shall modify such
agreement to be consistent with the changes from the U.S. standard form included
in the original form of License Agreement annexed hereto, and to conform to
Legal Requirements and other commercially necessary requirements. Master
Licensee may translate into Korean the form License Agreement to be attached as
Exhibit C and use such Korean-language form as the License Agreement to be
entered into with Licensees; provided, however, that any such translation shall
be approved by Company prior to entering into the first License Agreement and
provided, further, that Master Licensee shall modify the Korean-language form
from time to time as required above. Master Licensee shall report to Company all
fees, payments, compensation or other consideration paid by Licensees. Master
Licensee may enter into a License Agreement without the prior approval of
Company as long as such License Agreement does not materially deviate from the
License Agreement attached hereto as Exhibit C or the Korean-language License
Agreement approved by Company. For any material deviations, Master Licensee
shall obtain the prior written approval of Company, which such approval shall
not be unreasonably withheld or delayed. A copy of each executed License
Agreement and any ancillary documents between Master Licensee and its Licensees
and Affiliates shall be provided to Company within thirty (30) days after
execution of the License Agreement.
7.2 Termination/Expiration of Licenses. Master Licensee shall ensure that
the term of all License Agreements do not extend beyond the Term of this
Agreement. Upon the termination or expiration of a license for the operation of
a Shoppe, Master Licensee shall require the Licensee, to promptly and
expeditiously: (1) either vacate the premises or modify the premises and
operation of the Shoppe operated by the former Licensee to remove its
identification as a Shoppe and refrain from any use, in any manner or for any
purpose, of the Marks or the Friendly's System; (2) deliver to Master Licensee
all copies of the Territory System Standards Manual and all other materials
relating to the Friendly's System which Master Licensee or Company have
designated Confidential Information; and (3) deliver to Master Licensee or
provide evidence of complete destruction of all signs, advertising materials,
forms and other materials containing the Marks or otherwise identifying or
relating to Shoppes.
7.3 Enforcement, Inspection and Assistance by Master Licensee. Master
Licensee shall strictly enforce each and every License Agreement for a Shoppe
and shall require that Licensees strictly comply with all of the terms and
conditions of such License Agreements. Master Licensee shall demand Licensee
compliance with all Territory System Standards and shall diligently and
continuously supervise and monitor the operation of all Shoppes operated by
Licensees, including, without limitation, periodically inspecting Shoppes for
compliance with Territory System Standards, preparing quality assurance
inspection reports, furnishing assistance to Licensees and Friendly's Shoppe
Managers to correct deficiencies in operations or capital items, conducting
follow-up inspections, diligently enforcing Licensee reporting and payment
obligations, auditing Licensees to assure proper record-keeping and Gross Sales
and Revenue reporting and, when necessary, terminating licenses and enforcing
termination and post-termination rights against non-complying Licensees. Master
Licensee's enforcement obligations under each License Agreement may include the
pursuit of legal remedies available under local law and cooperation with Company
if Company seeks enforcement of any License Agreement on behalf of Company or
Master Licensee.
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7.4 License Services. All services and assistance provided to Licensees in
connection with the development and operation of Shoppes shall be provided by
Master Licensee.
ARTICLE 8. FEES AND OTHER PAYMENTS
8.1 Development Fee. Master Licensee shall pay to Company the Development
Fee in the amount of Three Hundred and Fifty Thousand Dollars ($350,000) within
fourteen (14) days after the Effective Date.
8.2 Royalty Fees. (a) Master Licensee shall pay to Company a continuing
royalty fee in an amount equal to two and one-half percent (2.5%) of Master
Licensee's Gross Sales and Revenues (the "Royalty Fee"). The minimum Royalty Fee
to be paid by Master Licensee in the calendar years 1997, 1998 and 1999 shall be
$117,000, $235,000 and $355,000, respectively, and during each of these three
years, the aggregate Royalty Fee to be paid at the end of the second quarter
shall be in an amount which is at least fifty percent (50%) of the minimum
Royalty Fee due and payable that year.
(b) Master Licensee shall submit to Company a quarterly statement by the
20th day of the calendar month following the end of each calendar quarter,
setting forth a break-down in reasonable detail of Master Licensee's Gross Sales
and Revenues during such quarter and the Royalty Fee due thereon. Value added
taxes collected from customers and paid to the appropriate taxing authority,
customs duties imposed on Products listed in any price schedule delivered
pursuant to Paragraph 4.4, and the discounted portion of employee meals, and
sales of cigars, cigarettes and newspapers shall not be included in Gross Sales
and Revenues. Discounts on prices whether by way of coupons, promotions or
otherwise shall not be deducted from Gross Sales and Revenues.
(c) Within thirty (30) days after the submission of such quarterly
statement, Master Licensee shall pay the actual Royalty Fee due on Gross Sales
and Revenues except that payment may be, in relevant part, based upon an
estimate of the Royalty Fee due on Gross Sales and Revenues attributable to
sales of Products to Shoppes operated by Licensees. Master Licensee shall pay
any shortfall between the estimated Royalty Fee and the actual Royalty Fee at
the time the next payment of Royalty Fees is due. In the event of any
overpayment, Company shall credit such overpayment towards the next quarter's
Royalty Fee. The initial statement under this Agreement shall cover the period
beginning on the Effective Date and terminating at the end of the first full
quarter of the calendar year following such date. The final Royalty Fee payment
shall fall due on the date twenty (20) days after the expiration or termination
of this Agreement. Company shall have the right to audit all reports and royalty
payments on its own behalf or through an auditor appointed by Company. All
expenses of such audit shall be paid by Company, but if the result thereof shows
a shortfall of greater than 5 % between what was reported to Company and the
figures obtained by the audit, all expenses of the audit shall be paid by Master
Licensee.
8.3 Payment for Base Support Services. During the calendar years 1996 and
1997 Company shall be responsible for all of its expenses incurred for Base
Support Services and provided to Master Licensee. If during that time Company
incurs costs for services
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which are not Base Support Services which exceed $50,000, Master Licensee shall
reimburse Company in the amount of fifty percent (50%) of all amounts above
$50,000 up to a maximum of $25,000 in any given year.
8.4 Manner of Payment. Subject to Paragraph 4.4(b), all fees and other
payments to be made by Master Licensee to Company under this Agreement shall be
made by telegraphic transfer in immediately available funds to such bank as
Company may from time to time designate.
8.5 Interest on Late Payments. All fees and other payments due under this
Agreement shall bear interest from and after the due date at an annual rate of
four percent (4%) over LIBOR calculated as of such due date. Any withholding
taxes on such interest shall be paid in accordance with Paragraph 8.6.
8.6 Withholding Taxes. If payments due under this Agreement are subject to
withholding or other income taxes under applicable Legal Requirements or U.S.
laws, the withholding party shall withhold and pay such taxes to the appropriate
tax authority and promptly deliver to the other party receipts of tax
authorities for all taxes paid or withheld. Master Licensee acknowledges and
agrees not to withhold any value-added taxes from any payment due to Company
under this Agreement. Master Licensee shall also pay in a timely manner any and
all customs duties and fees in connection with the importation of Products.
Master Licensee shall provide all reasonable assistance to enable Company to
obtain any tax credit, exemptions or refunds which may be due to Company with
respect to any withholding or other taxes.
8.7 Currency and Place of Payment. All payments payable by Master Licensee
to Company under this Agreement shall be paid in Dollars, unless Company, at its
option, permits or directs payment in another currency at the exchange rate
required to purchase Dollars or such other currency prevailing on the date of
remittance to Company at a bank of recognized international standing specified
by Company (the "Exchange Rate"). Master Licensee shall use its best efforts to
assure that Company will be paid in Dollars. If Company directs payment in
another currency, the costs of exchange from the currency of the Territory to
the other currency in excess of the costs to convert Territory currency to
Dollars may be deducted from the payment, provided that reasonable supporting
documentation of such costs are provided to Company with the payment. If for any
reason an amount is received in a currency other than Dollars without Company's
direction or consent, Master Licensee's obligations under this Agreement shall
be discharged only to the extent that Company may purchase Dollars with such
other currency in accordance with normal banking procedures upon receipt of such
amount. If the amount in Dollars which may be so purchased, after deducting any
costs of exchange and any other related costs, is less than the relevant sum
payable under this Agreement, Master Licensee shall immediately pay Company the
shortfall.
8.8 Payment Approvals. Master Licensee undertakes to use its best efforts
to obtain and maintain in full force and effect all governmental authorizations
and approvals and to obtain or effect any new or additional governmental
authorizations or approvals, as may be required or advisable in respect of
Master Licensee's obligation to make payments in Dollars as required hereunder.
In the event Master Licensee cannot make any payment in Dollars because any such
authorization or approval is not available under applicable Legal
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Requirements or has been withdrawn for reasons other than the misconduct of
Master Licensee, Company shall have the right in its sole discretion to: (i)
require Master Licensee to pay Dollar amounts due through account(s) maintained
by Master Licensee in a country from which Dollar payments may be made; or (ii)
allow Master Licensee to suspend performance of its obligation to make payment
in Dollars hereunder until such authorization or approval becomes available or
is reinstated; provided, however, that during such suspension period (X) Master
Licensee shall pay all amounts due and owing to Company under this Agreement in
local currency to an account maintained by Company in the Territory and (Y)
Master Licensee may propose to Company countertrade transactions in respect of
such local currency, which Company may accept or reject. As soon as possible
after such authorization or approval becomes available or is reinstated Master
Licensee shall resume making payments in Dollars hereunder. Notwithstanding the
foregoing, if the suspension period referred to herein remains in effect for
more than three (3) years, Company shall have the right, in its sole discretion,
to terminate this Agreement upon ninety (90) days written notice to Master
Licensee without penalty or the obligation to purchase any License Agreement.
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ARTICLE 9. SYSTEM STANDARDS/MANUALS
9.1 System Standards and Development of Territory System Standards Manual.
(a) Master Licensee covenants that it shall comply with all System Standards
applicable to master licensees of Company, and all Territory System Standards.
As soon as practicable after execution of this Agreement, Company shall furnish
to Master Licensee a copy of the Friendly's U.S. System Standards Operations
Manual and other materials which are typically furnished to U.S. Friendly's
System franchisees to familiarize such franchisees with the Friendly's System.
Company will loan to Master Licensee during the Term 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
Company will prescribe from time to time for Shoppes and information relative to
Master Licensee's obligations under this Agreement and in the operation of a
Shoppe. Company may modify the Operations Manual from time to time to reflect
changes in the specifications, standards and operating procedures of Shoppes, to
disclose information concerning new Products and services which Company may
develop for sale at Shoppes, to specify types, brands, and models of equipment
which Master Licensee 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 Shoppe. Master Licensee must keep its copy of the Operations
Manual current by immediately inserting all modified pages Company furnished to
Master Licensee and destroying the then obsolete pages. In the event of a
dispute relative to the contents of the Operations Manual, the master copies
Company maintains at Company's principal office will be controlling. Except for
disclosure to Licensees, Master Licensee 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 any Shoppe, or permit its
removal from any Shoppe without Company's prior approval. In the event a new
version of the Operations Manual is provided to Master Licensee, Master Licensee
must immediately return the then obsolete version to Company. To the extent the
Operations Manual contains any specification, standard or operating procedure
concerning the operation of Shoppes, such provision shall be deemed to be
incorporated into this Agreement so long as such provisions satisfy the Legal
Requirements. All references to this Agreement include all such specifications,
standards and operating procedures. The Operations Manual provided by Company to
Master Licensee shall be in the English language. All translations shall be at
the sole cost and expense of Master Licensee. All copyrights in any such
translated materials shall be assigned by Master Licensee to Company upon
Company's request.
(b) At least ninety (90) days prior to the execution of the first License
Agreement for a Shoppe or thirty (30) days prior to the opening of any Master
Licensee-owned Shoppe, Master Licensee shall submit proposed Territory System
Standards, if any, for review and approval by Company. Master Licensee shall
also submit simultaneously therewith for Company's review and approval a written
quality assurance and enforcement program. Company will notify Master Licensee
in writing of Company's acceptance or rejection of such proposed Territory
System Standards and programs, specifying the reasons for any rejections within
30 days after receipt. Master Licensee shall make such changes as reasonably
specified by Company and resubmit the proposed Territory System Standards and
programs until approved in good faith by Company. If despite its exercise of
reasonable
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commercial judgment, Company is unable to approve the proposed Territory System
Standards within six (6) months of submission, then either party may terminate
this Agreement under Paragraph 17.3. The Friendly's System, modified as
hereinabove provided, shall be reflected in a development and operations manual
(which may consist of one or more volumes) for the Territory containing
Territory System Standards for the development and operation of Shoppes (the
"Territory System Standards Manual"). To the extent that Company modifies or
enhances the System Standards, as it deems appropriate from time to time, Master
Licensee shall modify the Territory System Standards and the Territory System
Standards Manual to conform to such modifications and enhancements. Company from
time to time may establish minimum standards for Shoppes based on the System
Standards and such other standards as Company deems appropriate for the
commercial success of Shoppes. These minimum standards may be enhanced by Master
Licensee and Master Licensee shall develop and specify its own standards,
provided that such standards shall be subject to Company's review and approval.
9.2 Modification of the Territory System Standards Manual. Company, in its
reasonable judgment, may periodically deem it necessary or advisable to modify
the Territory System Standards Manual to comply with Company's minimum standards
for Shoppes and Master Licensee will implement such modifications as soon as
practicable after written notification from Company. Company and Master Licensee
shall in good faith discuss the manner in which any modifications shall be
implemented taking into account current market conditions. If despite their
exercise of reasonable commercial judgment, Company and Master Licensee are
unable to agree on how such modifications shall be implemented within six (6)
months of notification, then either party may terminate this Agreement under
Paragraph 17.3. In the event of a dispute relative to the contents or meaning of
the Territory System Standards Manual, the version maintained by Company at its
principal offices shall be controlling. Master Licensee will reserve such rights
as are necessary to implement modifications to the Friendly's System and
Territory System Standards Manual, as herein contemplated, to cause Licensees to
comply therewith, and to preserve the confidentiality of the Confidential
Information in all License Agreements that it executes for the operation of
Shoppes.
ARTICLE 10. MARKS
10.1 Grant of License. Subject to earlier termination in accordance with
the terms hereof, Company hereby grants to Master Licensee during the Term
(subject to renewal on the terms described herein), the exclusive license to use
the Marks in connection with owning, operating and licensing Shoppes and selling
Products in the Territory and to license the Marks to Licensees in connection
with the operation of Shoppes in the Territory. Except as otherwise provided
herein and provided that Master Licensee is in compliance with this Agreement,
Company shall not grant a license for use of the Marks for owning, operating or
licensing Shoppes or for the sale of Products in the Territory during the Term.
Subject to Paragraph 3.3, Company shall, however, have the exclusive right to
use the Marks for owning, operating or licensing Friendly's Restaurants in the
Territory during the Term. The license granted herein is limited to the
Territory and confers no rights upon Master Licensee or its Licensees to use the
Marks outside of the Territory, or to sell Products outside of the Territory,
except for advertising purposes approved by Company or its Licensees.
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10.2 Ownership of the Marks. The Company warrants that, to the best of its
knowledge, it is the current owner of all rights in and to the Marks in the
Territory. Master License acknowledges that neither Master Licensee, its
Affiliates or Licensees have any, nor will they acquire any, proprietary
interest whatsoever in the Marks and that the rights of Master Licensee and
Licensees to use the Marks are derived solely from this Agreement and are
limited to the exercise of the Rights granted pursuant to and in compliance with
this Agreement and applicable Territory System Standards prescribed in the
Territory System Standards Manual. Unauthorized use of the Marks by Master
Licensee or Licensees shall constitute a breach hereof and an infringement of
the rights of the Marks Owner in and to the Marks. All usage of the Marks by
Master Licensee and Licensees, and any goodwill established thereby, shall inure
to the exclusive benefit of the Marks Owner. This Agreement does not confer any
goodwill or ownership interests in the Marks upon Master Licensee or Licensees.
Master Licensee will take all commercially reasonable steps to preserve the
goodwill and prestige of the Marks. Master Licensee acknowledges that upon
expiration or termination of this Agreement, no monetary value shall be
attributable to any goodwill associated with the use of the Marks by Master
Licensee or Licensees.
10.3 Registration. (a) As permitted by applicable Legal Requirements, the
Marks Owner has registered or applied for registration of certain of the Marks,
as indicated in Exhibit B (the "Principal Marks") with the appropriate
governmental agencies in the Territory and will bear the cost thereof. Neither
Company nor the Marks Owner represent or warrant that the Marks are registerable
in the Territory. The Marks Owner shall pay for all costs associated with
registration and renewal of the Marks in the Territory. Master Licensee will
cooperate with the Marks Owner in obtaining Marks registrations. Company shall
have the right to designate a supplemental or substitute trademark or trademarks
to identify Shoppes as part of a worldwide System Standards change and such
supplemental or substitute trademarks shall be included in the definition of
Marks.
(b) Master Licensee may request Company to register additional trademarks
or servicemarks which would benefit the development of Shoppes and distribution
of Products in the Territory. Such request shall be accompanied by a written
proposal containing complete information regarding the additional trademark or
servicemark. Company may, in its sole discretion, register such trademarks or
servicemarks, but shall have no obligation to do so. If Company elects to
register such trademarks or servicemarks it shall be the sole owner thereof.
Master Licensee shall not use, or authorize any usage of any such additional
trademarks or servicemarks without Company's prior written consent.
10.4 Licensing of Licensees. If and to the extent that Company determines
that sublicensing of the Marks presents risks of diminution or loss of rights to
the Marks under the Legal Requirements, the Marks owner shall have the right and
obligation to enter into a direct trademark license agreement with each Licensee
that operates a Shoppe or, pursuant to a power of attorney in form and substance
acceptable to Company, authorize Master Licensee to enter into such agreement on
Company's behalf. Master Licensee shall amend License Agreements that it enters
into with Licensees accordingly to incorporate such trademark license agreement
and to provide for cross default provisions in both agreements.
10.5 Registration of Authorized User Instruments. As permitted by
applicable Legal Requirements, Company shall cause the Marks Owner to execute
separate instruments
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to enable Master Licensee to register with appropriate government agencies and
departments the rights of Master Licensee to use the Marks and the rights of
Licensees as authorized users of the Marks, and Master Licensee will exercise
its best efforts to cause such instruments to be registered with such government
agencies and departments.
10.6 Infringements. Master Licensee shall notify Company immediately of
any infringement of or challenge to the use of any Mark within the Territory, or
any claim of any rights in any Mark, or any confusingly similar trademark,
within the Territory, of which Master Licensee becomes aware. Master Licensee
shall exercise its best efforts to protect the Marks within the Territory and,
upon written direction from and at the expense of the Marks Owner, take such
action as shall be necessary or advisable to protect and maintain the Marks.
Company shall have the right in its sole discretion to take such action as it
deems appropriate in connection with any infringement, challenge or claim and
the right to exclusively control any settlement, litigation or proceeding
arising out of the alleged infringement, challenge or claim or otherwise
relating to any Mark. Company hereby represents and warrants that to the best of
its knowledge the Marks do not violate or infringe any copyright, trademark,
service mark or other proprietary rights of any third party. Company shall
indemnify and hold harmless Master Licensee from any loss, damage, cost and
expense (including without limitation reasonable legal fees) suffered by Master
Licensee as a result of any breach of the foregoing representation and warranty.
10.7 Use of the Marks. Master Licensee shall cause Licensees to use only
the Marks to identify their Shoppes. Master Licensee and Licensees shall not
incorporate any Mark as part of any corporate or trade name or with any prefix,
suffix or other modifying trademarks, logos, words, terms, designs or symbols,
or in any modified form, or use any Mark in connection with the sale of any
unauthorized product or service or in any other manner not expressly authorized
under this Agreement or License Agreements approved by Company, and shall
display the Marks and give notices of trademark registrations in the manner
prescribed in the Territory System Standards Manual and obtain such licenses,
permits and authorizations relating thereto as may be necessary or advisable
under applicable Legal Requirements.
ARTICLE 11. INSURANCE
At all times during the Term, Master Licensee shall maintain in effect, at
its expense, and shall procure that all Licensees maintain, such insurance as is
maintained by prudent businesses in accordance with standard industry practice
in South Korea. If in accordance with standard industry practice in Korea, all
such insurance policies shall name Company and the Marks Owner as additional
insureds. If Master Licensee names Company as an additional insured then,
subject to applicable Legal Requirements, Company shall name Master Licensee as
an additional insured on policies of insurance maintained by Company in respect
of the business contemplated hereunder. If Master Licensee fails or refuses to
maintain required insurance coverage, Company, at its option and in addition to
its other rights and remedies hereunder, may obtain such insurance coverage on
behalf of Master Licensee and Master Licensee shall fully cooperate with Company
in its effort to obtain such insurance policies, promptly execute all forms or
instruments required to obtain or maintain any such insurance, allow any
inspections of any Shoppes which are required to obtain or
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maintain such insurance and pay to Company, on demand, any costs and premiums
incurred by Company in this regard. Master Licensee's obligation to obtain and
maintain the insurance described herein shall not be limited in any way by
reason of any insurance maintained by Company.
ARTICLE 12. CONFIDENTIAL INFORMATION
Company possesses confidential information which shall be furnished to
Master Licensee and designated at or before the time of disclosure as
confidential (hereinafter referred to as the "Confidential Information"). The
Confidential Information includes, but is not limited to, the following: (1)
methods and procedures relating to the development and operation of Shoppes
whether contained in the Operation Manual or otherwise; (2) secret recipes of
ice cream and other frozen desserts and related topping, menu analysis and
methods of preparation of Products and services offered in Shoppes; (3) methods,
procedures and techniques for preparing, packaging, marketing, selling and
delivering Products and services offered in Shoppes; (4) knowledge of test
programs, concepts and results relating to the planning, development and testing
of the Friendly's System and Products and services offered in Shoppes; (5)
sources for purchase of food, beverages and other ingredients used by Shoppes;
(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 Shoppes. Company and Master Licensee
agree that the Confidential Information shall be used by Master Licensee only in
the exercise of the Rights granted under this Agreement and shall not be
disclosed to others, provided that disclosure of Confidential Information by
Master Licensee to its Licensees in the Territory shall be deemed authorized
disclosure. Master Licensee shall: (a) not use the Confidential Information in
any other business or capacity; (b) maintain the confidentiality of the
Confidential Information during and after the Term and shall not disclose the
Confidential Information to its shareholders or any natural or legal person that
is not (1) an employee of Master Licensee or of an Affiliate; or (2) a party to
or bound by this Agreement or a License Agreement which is issued pursuant to
this Agreement; (c) not make unauthorized copies of any portion of the
Confidential Information disclosed in written, videotape or other form; and (d)
adopt and implement all reasonable procedures prescribed from time to time by
Company to prevent unauthorized use or disclosure of the Confidential
Information. Notwithstanding anything to the contrary contained in this
Agreement, the restrictions on Master Licensee's disclosure and use of the
Confidential Information shall not apply to the following: (x) information,
concepts, methods, procedures or techniques which are or become generally known
in the restaurant business in the Territory, or known to Master Licensee, other
than through disclosure (whether deliberate or inadvertent) by Master Licensee;
(y) the disclosure of the Confidential Information in judicial or administrative
proceedings to the extent that Master Licensee is legally compelled to disclose
such information, provided Master Licensee shall have used its best endeavors to
obtain, and shall have afforded Company the opportunity to obtain an assurance
satisfactory to Company of confidential treatment for the information required
to be so disclosed; and (z) Master Licensee's consultants, advisors and
professionals reviewing such information who are subject to appropriate
confidentiality and disclosure restrictions or who agree to maintain the
confidentiality of such information in accordance with the terms hereof. Master
Licensee will require its directors, officers, employees, agents and Licensees
to maintain the confidentiality of all Confidential
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Information of the Friendly's System and to agree not to use Confidential
Information in any business or commercial activity other than the operation of
Shoppes pursuant to this Agreement. Company shall regard information disclosed
by Master Licensee identified as confidential at the time of disclosure as
subject to the same obligations (and exclusions) of confidentiality as imposed
on Master Licensee with respect to Confidential Information.
ARTICLE 13. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION
13.1 Independent Contractors. Company and Master Licensee are and shall be
independent contractors and nothing herein is intended to make either party a
general or special agent, legal representative, subsidiary, joint venturer,
partner, fiduciary, employee or servant of the other for any purpose. Master
Licensee will indicate its status as an independent contractor. Neither Company
nor Master Licensee shall make any express or implied agreements, guaranties or
representations, or incur any debt, in the name of or on behalf of the other or
represent that their relationship is other than a license relationship, and
neither Company nor Master Licensee shall be obligated by or have any liability
under any agreements or representations made by the other, nor shall Company be
obligated for any damages to any person or property directly or indirectly
arising out of the operation of a Shoppe, including that which is caused by the
negligent or willful action or failure to act of Master Licensee, its Affiliates
or Licensees.
13.2 Master Licensee's Indemnification of Company and the Marks Owner.
Master Licensee will indemnify and hold Company and the Marks Owner harmless
against, and reimburse Company and the Marks Owner, and their respective
officers, directors, employees, agents and affiliates (collectively the
"Indemnitees") for any loss, liability or damages (actual or consequential) or
taxes (other than income and withholding taxes imposed on amounts paid by Master
Licensee to Company), and all reasonable costs and expenses of defending any
claim brought or tax levied against any one or more of the Indemnitees in any
judicial, administrative or arbitration proceeding in which any one or more of
the Indemnitees is named as a party, which any Indemnitee may suffer, sustain or
incur by reason of, arising from or in connection with the ownership,
development, operation or licensing of Shoppes by Master Licensee or Licensees,
except to the extent any such claim arises out of the negligent, reckless or
intentional acts or omissions of the Company or the affected Indemnitee. Company
will give Master Licensee prompt written notice of any such claim made against
any Indemnitee and to offer Master Licensee a reasonable opportunity to assume
the defense thereof. The indemnities and assumptions of liabilities and
obligations herein shall continue in full force and effect subsequent to and
notwithstanding the expiration or termination of this Agreement, provided that
the cause of action accrues during the Term or in connection with
post-termination obligations of Master Licensee.
13.3 Company's Indemnification of Master Licensee. Company will indemnify
and hold Master Licensee harmless against, and reimburse Master Licensee, for
any loss, liability or damages (actual or consequential) or taxes (other than
income and withholding taxes imposed on amounts paid by Company to Master
Licensee), and all reasonable costs and expenses of defending any claim brought
or tax levied against Master Licensee in any judicial, administrative or
arbitration proceeding in which Master Licensee is named as a party, which
Master Licensee may suffer, sustain or incur by reason of, arising from or in
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connection with the active negligence of any officer, employee, agent of
Company, or Company. This indemnity shall exclude any claim arising from
allegations of negligent specification of System Standards by Company or the
negligent training of Master Licensee or any of its personnel by Company. The
indemnities and assumptions of liabilities and obligations herein shall continue
in full force and effect subsequent to and notwithstanding the expiration or
termination of this Agreement, provided that the cause of action accrues during
the Term.
ARTICLE 14. REPORTS
Master Licensee shall furnish to Company:
(a) within thirty (30) days after the end of each calendar
month a report reflecting the estimated Gross Sales and Revenues of Master
Licensee for such prior calendar month and Licensees with sufficient detail to
determine the source thereof and calculation of Royalty Fees; and (2) within
thirty (30) days after the end of each quarter, a current list of all Licensees
by location and all Shoppes under development, opened, closed and transferred to
a different Licensee during the month; and
(b) such other reports and information relating to the
operation of Shoppes by Licensees, payments made by Licensees to Master
Licensee, and the calculation of amounts due and payable by Master Licensee to
Company, in such form and for such periods and at such times, as Company from
time to time reasonably prescribes. Master Licensee will reserve sufficient
rights, and shall exercise reasonable diligence to obtain, all statements,
reports and information from Licensees which are required to comply with this
Agreement.
ARTICLE 15. INSPECTIONS AND AUDITS
Company and its agents shall have the right at any time during regular
business hours upon seven (7) days prior written notice to inspect Master
Licensee's Friendly's ice cream division and any Shoppe operated by Master
Licensee or any Licensee and to audit the books and records of any such Shoppe
and relevant books and records of Master Licensee, its Affiliates and Licensees.
Master Licensee hereby authorizes entry by Company and its agents to Master
Licensee's headquarters and any Shoppe under its direct or indirect control.
Master Licensee and its Affiliates shall cooperate fully, and Master Licensee
shall cause each License Agreement to include a provision which obligates
Licensees to cooperate fully, with representatives and agents of Company making
any such inspections and audits and shall permit representatives and agents of
Company to take photographs, movies or videotapes of such Shoppes, to interview
employees thereof and to make copies of such books and records at Company's
expense.
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ARTICLE 16. ASSIGNMENTS
16.1 Assignment by Company. Company may assign this Agreement without
restriction provided that the assignee succeeds to all of the rights and
obligations of Company hereunder. Company shall give Master Licensee thirty (30)
days prior written notice of any assignment hereunder.
16.2 Assignment by Master Licensee. Master Licensee acknowledges that the
rights and duties created by this Agreement are personal to Master Licensee and
that Company has entered into this Agreement on the basis of the collective
character, business ability and financial capacity of Master Licensee and its
management. Neither this Agreement (or any interest in it), nor any material
assets of Master Licensee or material portion thereof, nor all or any portion or
an interest representing voting control or majority ownership in Master Licensee
may be voluntarily or involuntarily, directly or indirectly, sold, assigned or
otherwise transferred by Master Licensee or its owners, without the prior
written approval of Company whether by merger, consolidation, reorganization,
issuance or redemption of capital stock or other corporate action. Any sale,
assignment or transfer without such approval shall constitute a breach hereof
and convey no rights to or interest in this Agreement; provided, however, if
Master Licensee is a public company, then Master Licensee shall require
Company's prior written approval only for the sale, assignment or other transfer
of this Agreement, all or a material portion of the assets of Master Licensee or
one-half (1/2) or more of the equity of Master Licensee with the consent of
Master Licensee's Board of Directors.
16.3 Assignment to an Affiliate. Master Licensee shall have the right to
assign its rights and obligations under this Agreement to an Affiliate, which
assignment shall be permitted upon delivery of written notice to Company. Such
assignment shall also be conditioned upon: (a) the execution and delivery to
Company of a written instrument of assignment acceptable to Company, which
acceptance shall not be unreasonably withheld, delayed or conditioned; (b) the
assignee's execution and delivery to Company of a written certificate that it
has, as of five (5) days prior to the assignment, and will maintain during the
Term, the insurance coverage specified in Article 11 hereof ; and (c) the
assignee's execution and delivery to Company of an officers' certificate within
thirty (30) days prior to the date of transfer identical to the officers'
certificate Master Licensee shall execute and deliver upon signing of this
Agreement, except that the assignee's officers' certificate shall provide
additional information concerning any and all lines of business conducted by the
assignee and its affiliates.
ARTICLE 17. TERMINATION
17.1 By Company. Without prejudice to any other rights and remedies it may
have, Company may terminate this Agreement effective upon delivery of written
notice of termination to Master Licensee in the event that: (a) within ten (10)
business days of Master Licensee's failure to pay, when due, any amount payable
to Company; (b) Master Licensee violates Paragraph 16.2 by making an assignment
without Company's approval; (c) Master Licensee suffers any bankruptcy,
examinership, receivership, liquidation, dissolution, insolvency, or experiences
an inability to pay debts as they become due or winding up of
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<PAGE>
Master Licensee; (d) Master Licensee or any of its principal owners (defined as
an owner of twenty-five percent (25%) or more of the equity of Master Licensee)
are indicted or convicted of a felony; (e) the material assets of Master
Licensee or any Affiliate are condemned, expropriated or otherwise taken over by
a governmental authority; (f) an audit performed by or on behalf of Company
reveals an intentional misrepresentation by Master Licensee of any material
accounting or financial information, or information regarding quality assurance
or marketing programs; (g) Master Licensee has made any material
misrepresentation or omission to Company in its application to become a Master
Licensee; or (h) Master Licensee or any Affiliate challenges the validity of the
Marks or Company's or the Marks Owner's rights to or ownership of the Marks and
does not take steps to withdraw such challenge within thirty (30) days after
written notice is delivered to Master Licensee.
Effective upon delivery of written notice of termination to Master Licensee and
without diminishing any of Company's rights under Paragraph 17.1(a)-(h), in the
event that Master Licensee breaches any other provision of this Agreement or of
the exhibits or schedules attached hereto, and such breach is curable, and
Master Licensee fails to take reasonable steps to cure such breach within thirty
(30) days after written notice of such breach is delivered to Master Licensee,
or fails to cure such breach within ninety (90) days after such notice is
delivered to Master Licensee.
17.2 By Master Licensee. Without prejudice to any other rights and
remedies it may have, Master Licensee shall have the right to terminate this
Agreement if (a) Company breaches any provision of this Agreement and does not
cure such breach or furnish evidence of diligent and continuing action
undertaken by Company to cure such breach, within ninety (90) days after written
notice of such breach is delivered to Company; (b) Company has made any material
misrepresentation or omission to Master Licensee upon which Master Licensee
materially relied in making its decision to enter into this Agreement; and (c)
Company suffers any bankruptcy, examinership, receivership, liquidation,
dissolution, insolvency, or experiences an inability to pay debts as they become
due or winding up of Company.
17.3 By Either Party. If the parties are unable to agree on (i) Territory
System Standards within the time frame described in Paragraphs 9.1 or 9.2, or
(ii) changes to this Agreement permitting government approvals to be obtained as
described in Paragraph 2.2, then either party may terminate this Agreement by
written notice to the other. If this Agreement is terminated under this
Paragraph 17.3, Master Licensee will receive no refund of the Development Fee.
17.4 Status of Products after Termination Upon the termination of this
Agreement, Company shall have the right to purchase back from Master Licensee
all or any part of the unsold stock of the Products then in the control or
possession of Master Licensee. The repurchase price shall be the sum of the
price and related costs paid by Master Licensee to purchase the Products in
question and have them delivered to a designated warehouse in the Territory.
Company's failure to notify Master Licensee within fifteen (15) days of the
termination hereof of its intention to repurchase such Products shall deprive
Company of the right to exercise this repurchase option. Master Licensee shall
be permitted to continue to sell and distribute the Products purchased from
Company or its Affiliates, unless otherwise
33
<PAGE>
repurchased pursuant to this paragraph for three (3) months after the
termination of this Agreement.
17.5 In the Event of War. If war is declared by any government in the
Territory or armed hostilities exist which render all or a substantial part of
the Territory uninhabitable or unsafe for travel: (i) so long as all sums
payable to Company pursuant to this Agreement are paid as and when they come
due, this Agreement shall continue in full force and effect; (ii) if as a
result of such war or armed hostilities any sum due Company hereunder is not
paid when due, either party (the "suspending party") may, upon giving the other
party at least ninety (90) days written notice, suspend performance of its
obligations hereunder until such war or hostilities have ceased; provided,
however, that Master Licensee shall remain liable for the amount of any payment
it failed to make prior to the date on which suspension takes effect; and (iii)
within ninety (90) days after such war or hostilities have ceased, the
suspending party shall give the other party notice of its intention to either
resume performance of its obligations hereunder or terminate this Agreement,
whereupon the suspending party shall resume its performance or this Agreement
shall terminate. During the suspension period, Master Licensee shall use
diligent efforts to discontinue use and display of the Marks by itself and
Licensees.
ARTICLE 18. RIGHTS AND OBLIGATIONS UPON TERMINATION OR EXPIRATION
18.1 Payment of Amounts Due to Company. Upon termination or expiration of
this Agreement, Master Licensee will pay to Company all Royalty Fees and any
other amounts due Company at the date of such termination or expiration which
are unpaid. Such payments shall be made within thirty (30) days after the
amounts due Company are determined in accordance herewith. Master Licensee shall
contemporaneously with such payments furnish a complete accounting of all
Royalty Fees and any other amounts due Company.
18.2 Change of Identification. After the expiration of this Agreement or
its termination pursuant to Paragraph 17.1 above, if Company so directs, Master
Licensee shall promptly and expeditiously undertake, and cause Licensees to
promptly and expeditiously undertake (including without limitation the
commencement and diligent prosecution of judicial and arbitration proceedings
against Licensees), all reasonable efforts to promptly and expeditiously: (a)
cease all use of the Marks at all Shoppes, and thereafter refrain from
identifying any restaurant as a current or former Shoppe or licensee of, or
otherwise associated with, Company, and refrain from any other use of the Marks,
or any colorable imitation thereof, in any manner or for any purpose; (b) remove
all signs and sign faces bearing Marks from both the interior and exterior of
all Shoppes; (c) deliver to Company all copies in the possession of Master
Licensee and Licensees of the Territory System Standards Manual, the Operations
Manual and all other manuals and materials relating to the Friendly's System and
all advertising materials, forms, and other materials containing the Marks or
otherwise identifying or relating to a Shoppe; (d) cease using supplies, printed
materials and other items bearing the Marks; (e) take such action as may be
required to change its legal name to another name not using the word
"Friendly's" or equivalent words or otherwise confusingly similar to
"Friendly's", and shall cancel all fictitious name or equivalent
34
<PAGE>
authorizations relating to use by Master Licensee and Licensees of the Marks and
file with the appropriate government agencies and departments instruments
terminating registered user rights of Master Licensee and Licensees; and (f)
furnish to Company, within ninety (90) days after the effective date of
termination or expiration, evidence reasonably satisfactory to Company of
compliance by Master Licensee and Licensees with the foregoing obligations.
Notwithstanding the foregoing, clauses (a), (b), (c), (d), (e) and (f) of this
Paragraph 18.2 shall not apply to Licensees with respect to whose License
Agreements Company exercises its option pursuant to Paragraph 18.5 hereof. If
upon termination of this Agreement under Paragraph 17.2, Master Licensee fully
complies with its post-termination obligations under Paragraph 18.2, the
provisions of Paragraph 18.4 shall not apply to Master Licensee or its
Affiliates. If this Agreement is terminated in accordance with Paragraph 17.2
above, Master Licensee and its Affiliates may continue to use the Marks and the
Territory System Standards in effect at the time of termination and the Rights
on an exclusive basis until the earlier to occur of two (2) years thereafter or
thirty (30) days after Master Licensee's written notice of discontinuance of use
thereof without any obligation to pay Company any Royalty Fees during such
period. If during such period Master Licensee ceases to actively utilize any of
the Rights, any such non-utilized Right shall cease.
18.3 Discontinuance of Use of Friendly's System. Upon termination or
expiration of this Agreement, except as noted above in Paragraph 18.2, Master
Licensee and Affiliates shall immediately cease to use in any business or
otherwise any portion of the Friendly's System, including the Confidential
Information of Company, and Company shall immediately cease to use Confidential
Information of Master Licensee.
18.4 Covenant Not To Compete. Master Licensee acknowledges and agrees that
Company has invested a substantial amount of time and money in developing the
Friendly's System, the Marks, and the Confidential Information and that Company
would be unable to protect the Friendly's 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 Company
and 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 Company
information, marketing strategies, operating policies and other elements of the
System from unauthorized appropriation. Therefore, Master Licensee agrees that
during the term of this Agreement, neither Master Licensee, Master Licensee's
Managers nor any of Master Licensee's officers, directors, stockholders,
partners or any member of Master Licensee's or their immediate family or
families will: (a) have any direct or indirect or beneficial interest or perform
services as an officer, director, manager, employee or develop restaurants or
shops which are the same as or similar to that of Friendly's Restaurants or
Shoppes which otherwise competes with Friendly's Restaurants or Shoppes
(provided that Master Licensee may develop restaurants where sales of ice cream
products and frozen desert products do not constitute more than 2% of gross
sales) or, (b) not, directly or indirectly, distribute or sell any products or
items which might reasonably be expected to compete with or otherwise hinder the
distribution and sale of the Products in the Territory. Master Licensee
understands and acknowledges that the determination of any similarity to or
competition with Friendly's Restaurants or Shoppes is dependent on many factors,
including but not limited to, marketing strategies; menu; size, configuration,
decor and "trade dress"; operating methods and policies; and hours of service.
Master Licensee further understands that because
35
<PAGE>
of the possibility of changes in the Friendly's System and the emergence of new
unforeseen competing Friendly's Restaurant and Shoppe concepts, determining
whether or not any restaurant business is the same or similar to, or competes
with, Friendly's Restaurant or Shoppes will depend on the facts and
circumstances existing at the time such determination is made. Master Licensee
further agrees that, subject to Paragraphs 18.2 and 2.5, for a period of two (2)
years after the termination of this Agreement, Master Licensee and all of such
persons will be subject to the same restriction on competing activities within
the Territory (provided that Master Licensee may develop restaurants where sales
of ice cream products and frozen desert products do not constitute more than 2%
of gross sales). Notwithstanding the foregoing, upon expiration of the Term and
Master Licensee's satisfaction of the post-termination obligations under
Paragraphs 18.1 and 18.2, the parties agree that Master Licensee shall not be
subject to the provisions of Paragraph 18.4. For purposes hereof, an indirect
interest will be presumed to exist if such interest is that of the spouse or of
a parent or child of another person, in addition to other forms of indirect or
beneficial interests. If any of the persons to whom the foregoing restrictions
apply are not parties to this Agreement and have access to Confidential
Information, Master Licensee agrees to cause all such persons to execute and
deliver to Master Licensee and the Company an agreement containing the foregoing
restrictions.
18.5 Rights Upon Termination or Expiration. The parties acknowledge that
the interests of Licensees are of utmost importance in the event of early
termination of this Agreement. Accordingly, the parties agree to use reasonable
efforts to minimize the disruption of the respective businesses of Licensees. In
addition to and not in lieu of the parties' rights and obligations under
Paragraphs 18.1, 18.2, 18.3 and 18.4 hereof, upon early termination of this
Agreement, or upon events giving rise to early termination this Agreement, at
the option of Company, exercised by giving written notice to Master Licensee
prior to early termination in the case of (a) below and within 10 days after
early termination in the case of (b) below:
(a) Master Licensee shall assign to Company or its designee(s) all
of its rights under this Agreement, including the Rights, and any approval,
registration, authorization or filing with any governmental authority which is
required for the operation of Shoppes in the Territory and held or made in the
name of Master Licensee whereupon Company (or such designee) shall expressly
assume the obligations of Master Licensee under this Agreement and in respect of
the government filings referred to above; and
(b) in consideration of the payment provided in Paragraph 18.7
hereof, Master Licensee shall assign to Company or its designees all of its
rights under the License Agreements for Shoppes operated by Licensees whereupon
Company shall expressly assume the obligations of Master Licensee under such
License Agreements.
Upon the early termination of this Agreement, if Company does not exercise its
option to assume Master Licensee's obligations in respect of any License
Agreement, Master Licensee and Company agree to meet and enter into good faith
negotiations to determine the terms and conditions for servicing any then
existing Licensees for the remainder of the relevant License Agreement. If the
parties are unable to agree on such terms and conditions, the servicing of such
Licensees shall be determined by informal dispute resolution in accordance with
Paragraph 18.8 and failing that, by arbitration in accordance with Paragraph
19.9.
36
<PAGE>
18.6 Closing. Company shall have at least ninety (90) days to prepare for
closing the transaction referred to in Paragraph 18.5, and all License
Agreements must be transferred free and clear of any liens, charges and
encumbrances. Master Licensee shall take any and all actions as may be required
by the Legal Requirements, and shall use its best efforts to obtain any
governmental authorizations or approvals, to ensure the effectiveness of any
assignment made hereunder, as between Master Licensee and Company and as against
all third parties, including without limitation, Licensees.
18.7 Price for Assignment of Licenses. As consideration for the
assignments provided for in Paragraph 18.5(b) hereof, Company shall pay Master
Licensee a sum to be mutually agreed between the parties. In the event the
parties cannot agree on such amount within thirty (30) days after early
termination of this Agreement, the price shall be determined by arbitration in
accordance with Paragraph 19.9. If Master Licensee terminates this Agreement
other than in accordance with Paragraph 17.2, Company shall not be required to
make any payment to Master Licensee under this Paragraph 18.7. If Master
Licensee terminates this Agreement in accordance with Paragraph 17.2, the amount
of the payment to be made by Company under Paragraph 18.5(b) shall be determined
by an independent certified public accountant with an internationally recognized
accounting firm with offices in the Territory chosen by Company. Such amount
shall be binding on the parties.
18.8 Continuing Obligations. All obligations of Company and Master
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 or by their nature expire.
ARTICLE 19. GENERAL PROVISIONS
19.1 Severability. Except as expressly provided to the contrary herein,
each section, paragraph, term and condition of this Agreement shall be
considered severable and if, for any reason, any 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,
arbitrator, agency or tribunal with competent jurisdiction in a proceeding to
which Company is a party, that ruling shall apply only to the jurisdiction of
such court, arbitrator, agency or tribunal and shall not impair the operation
of, or have any other effect upon, such other terms and conditions of this
Agreement as may remain otherwise intelligible, which shall continue to be given
full force and effect and bind the parties hereto, although any provision held
to be invalid shall be deemed not to be a part of this Agreement in such
jurisdiction from the earlier of the date on which the time for appeal expires
or receipt by Company or Master Licensee of a notice of non-enforcement thereof.
Notwithstanding the foregoing, either party may terminate this Agreement if a
provision is held invalid or unenforceable that materially and adversely affects
the rights or obligations of the party, or substantially diminishes the
fundamental benefits of this Agreement for the party.
19.2 Substitution of Valid Provision. If, under any applicable and binding
law or rule, any provision of this Agreement is invalid or unenforceable, the
parties shall modify such invalid or unenforceable provision to the extent
required to be valid and enforceable.
37
<PAGE>
The parties agree to be bound by any promise or covenant imposing the maximum
duty permitted by law which is subsumed within the terms of any provision
hereof, as though it were separately articulated in and made a part of this
Agreement, that may result from striking from any of the provisions hereof any
portion or portions which are held to be unenforceable in a final, unappealable
ruling, or from reducing the scope of any promise or covenant to the extent
required to comply with such ruling.
19.3 Force Majeure. Neither Company nor Master Licensee shall be liable
for loss or damage or deemed to be in breach of this Agreement if its failure to
perform its obligations results from: (a) windstorms, rains, floods,
earthquakes, typhoons, mudslides or other similar natural causes; (b) fires,
strikes, embargoes or riot; (c) legal restrictions; or (d) any other similar
event or cause beyond the control of the party affected. Any delay resulting
from any of such causes shall extend performance accordingly or excuse
performance, in whole or in part, as may be reasonable, except that no such
cause other than a governmental or judicial order shall excuse payment of
amounts owed at the time of such occurrence or payment of the Development Fee,
Royalty Fees and other amounts due to Company subsequent to such occurrence.
19.4 Cumulative Remedies. The rights of Company and Master Licensee
hereunder are cumulative and no exercise or enforcement by Company or Master
Licensee of any right or remedy hereunder shall preclude the exercise or
enforcement by Company or Master Licensee of any other right or remedy hereunder
or which Company or Master Licensee is entitled by law to enforce.
19.5 Attorneys' Fees. If a claim for amounts owed by Master Licensee to
Company is asserted in any proceeding before a court of competent jurisdiction
or arbitrator, or if Company or Master Licensee is required to enforce this
Agreement in a judicial or arbitration proceeding, the party prevailing in such
proceeding shall be entitled, subject to applicable Legal Requirements, to
reimbursement of its expenses, including reasonable accounting and legal fees.
19.6 Governing Law. This Agreement and the validity, performance,
construction and effect of this Agreement shall be governed by the laws of the
State of New York, except to the extent that the laws of the Territory may
preempt New York law.
19.7 Interpretation. The preambles to this Agreement are a part of this
Agreement, which constitutes the entire agreement of the parties (all prior
representations, negotiations and agreements being merged into this Agreement),
and there are no other oral or written understandings or agreements between
Company and Master Licensee relating to the subject matter of this Agreement.
Except as otherwise expressly provided herein, 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. References to statutory provisions shall be
construed as references to those provisions as replaced, amended, modified or
re-enacted from time to time. 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. This Agreement shall be executed in
two (2) counterparts, each of which shall be deemed an original.
38
<PAGE>
19.8 Informal Dispute Resolution. Prior to filing any arbitration
proceeding pursuant to Paragraph 19.9, the party intending to file such a
proceeding shall be required to notify the other party in writing of the
existence and the nature of any dispute. Company and Master Licensee each agree
that within fifteen (15) business days of the other party's receipt of such
notice, the Chief Executive Officer or other senior executive officer of both
Company and Master Licensee shall meet in Honolulu, Hawaii, in order to attempt
to resolve the dispute amicably. If such informal dispute resolution attempts
prove to be unsuccessful, the notifying party may initiate an arbitration
proceeding as described in Paragraph 19.9.
19.9 Arbitration. All controversies, disputes or claims arising in
connection with, from or with respect to this Agreement which are not resolved
within fifteen (15) days after either party shall notify the other in writing of
such controversy, dispute or claim, may be submitted for arbitration.
Arbitration proceedings shall be conducted in accordance with and shall be
subject to the then current Rules of Conciliation and Arbitration of the
International Chamber of Commerce in effect from time to time and the
arbitration proceedings shall be conducted in Seoul if Company is the claimant
and in Boston, Massachusetts if Master Licensee is the claimant. Within 25 days
after receipt of the notice referred to above, each party shall select one
arbitrator. The two arbitrators shall promptly select a third arbitrator who
shall have been an owner or an operator in a management or executive capacity of
a food service company that offers and sells its products or services to
consumers internationally through franchises or, if no such person can be found,
a person who has served as an arbitrator or mediator in disputes involving
businesses which offer and sell products and services to consumers
internationally. The arbitrators shall have the right to award or include in
their award any relief which is deemed proper under the circumstances, including
without limitation, money damages (with interest on unpaid amounts from date
due), specific performance and injunctive relief. The arbitrators shall issue a
written opinion explaining the reasons for the decision and award. The award and
decision of the arbitrators shall be conclusive and binding upon all parties
hereto and judgment upon the award may be entered in any court of competent
jurisdiction. The parties acknowledge and agree that any arbitration award may
be enforced against either or both of them in a court of competent jurisdiction
and each waives any right to contest the validity or enforceability of such
award. The parties further agree to be bound by the provisions of any statute of
limitations which would be otherwise applicable to the controversy, dispute or
claim which is the subject of any arbitration proceeding initiated hereunder.
Without limiting the foregoing, the parties shall be entitled in any such
arbitration proceeding to the entry of an order by a court of competent
jurisdiction pursuant to an opinion of the arbitrators for specific performance
of any of the requirements of this Agreement. In any arbitration proceedings,
the prevailing party shall be entitled to be reimbursed for all costs and
expenses of the arbitration, including travel costs and reasonable attorney's
fees. This provision shall continue in full force and effect subsequent to and
notwithstanding expiration or termination of this Agreement. Notwithstanding any
provision hereof to the contrary, either party may also seek injunctive and/or
any other form of equitable or preliminary relief from any court of competent
jurisdiction.
19.10 Delivery of Notices and Payments. All notices, reports and other
information and supporting records permitted or required to be delivered by the
provisions of this Agreement shall be delivered to:
39
<PAGE>
Company: Friendly's International, Inc.
1855 Boston Road,
Wilbraham, Massachusetts 01095
Tel: 413-543-2400
Fax: 413-543-3186
Attn: Larry W. Browne
Master Licensee: Hansung Enterprises Co., Ltd.
Hansung Building 88, Samsung-dong
Kangnam-gu, Seoul, Korea
Tel: 822-511-7887
Fax: 822-511-0701
Attn: Jong-Kwan Lim,
Managing Director, Overseas Business Department
The address of each party for notice may be modified from time to time by notice
to the other party. Company shall not be obligated to give any notice to any
Affiliate or Licensee, and notice to Master Licensee shall constitute sufficient
notice to each Affiliate and Licensee of Master Licensee to which such notice is
applicable. Notices shall be deemed so delivered at the time delivered
personally by the party giving same to the other party, one (1) business day
after sending by telex, cable or comparable electronic system and three (3)
business days after sending by air courier service.
19.11 Waiver. Company and Master Licensee 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 either party shall be without prejudice to any other rights the party
have, will be subject to continuing review by the granting party, and may be
revoked, in the granting party's sole discretion, at any time and for any
reason, effective upon delivery to the other party of ten (10) days' prior
written notice. Company and Master Licensee 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 exact compliance with every term,
condition and covenant herein, or to declare any breach thereof to be a default
and to terminate this Agreement 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 of Company or Master Licensee 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 either party to exercise any right, power or option,
whether of the same, similar or different nature, with respect to any other
Shoppe; or the acceptance by Company of any payments from Master Licensee after
any breach by Master Licensee of this Agreement.
19.12 U.S. Government Regulations. (a) Master Licensee shall not, without
the prior written consent of Company, disclose, sublicense or sell any of the
information or rights it receives from Company under this Agreement to any
person, or any government agency of any nation, if such disclosure, sublicense
or sale would be regarded by any
40
<PAGE>
governmental agency or department of the U.S. as a breach of the Foreign Assets
Control Regulations, 31 C.F.R. Section 500 et seq. (1988), or the Transaction
Control Regulations, 31 C.F.R. Section 505 et seq. (1988). Master Licensee shall
obtain a similar commitment from each of its Licensees.
(b) Master Licensee shall refrain from making any payments to third
parties which would cause Company to be in violation of the U.S. Foreign Corrupt
Practices Act, 15 U.S.C. Sections 78dd-1, 78dd-2 (1988).
IN WITNESS WHEREOF, the parties hereto have executed, sealed and delivered
this Agreement in two (2) counterparts on the Effective Date.
Company:
FRIENDLY'S INTERNATIONAL, INC., a
corporation organized under the laws
of the State of Delaware U.S.A.
By: /s/ Larry W. Browne
------------------------------------
Title: President and Managing Director
Master Licensee:
HANSUNG ENTERPRISE CO.,
LTD., a corporation organized under the
laws of Korea
By: /s/ [Illegible]
------------------------------------
Title: President
41
<PAGE>
SCHEDULE 1
OWNERSHIP SCHEDULE
The Ownership Schedule for Shoppes described in Paragraph 3.1 shall be as
follows:
Master Licensee shall cause the number of Shoppes listed below to be open and
operating by the corresponding deadline.
Total Number of Shoppes
Open as of Deadline Date Deadline
- ------------------------ --------
Year 1: 4 December 31, 1997
Year 2: 5 December 31, 1998
Year 3: 7 December 31, 1999
Year 4: 9 December 31, 2000
Year 5: 11 December 31, 2001
<PAGE>
SCHEDULE 2
LICENSING SCHEDULE
The Licensing Schedule for Shoppes described in Paragraph 3.1 shall be as
follows:
Master Licensee shall cause Licensees to open the number of licensed Shoppes
listed below to be open and operating by the corresponding deadline:
Total number of Shoppes
opened of deadline date Deadline
- ----------------------- --------
Year 1: 48 December 31, 1997
Year 2: 96 December 31, 1998
Year 3: 142 December 31, 1999
Year 4: 188 December 31, 2000
Year 5: 234 December 31, 2001
<PAGE>
SCHEDULE 3
DISTRIBUTION SCHEDULE
Calendar Year Sales Volume (US$)
- ------------- ------------------
Year 1: 1997 1,163,000
Year 2: 1998 1,575,000
Year 3: 1999 2,250,000
Year 4: 2000 2,340,000
Year 5: 2001 2,430,000
<PAGE>
EXHIBIT A-1
LIST OF PROPRIETARY PRODUCTS
Ice cream, frozen yogurt and other frozen desserts and related toppings, muffin
and other mixes and batters manufactured by Company from time to time.
<PAGE>
EXHIBIT A-2
LIST OF NON-PROPRIETARY PRODUCTS
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.
<PAGE>
EXHIBIT B
LIST OF MARKS
REPUBLIC OF KOREA
Registrations attached.
<PAGE>
[Registration of Friendly's (in Korean) omitted]
<PAGE>
[Registration of Friendly's (in Korean) omitted]
<PAGE>
EXHIBIT C
FORM OF LICENSE AGREEMENT
to be attached
<PAGE>
EXHIBIT 12.1
FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
1992 1993 1994 1995 1996 JUNE 30, 1996 JUNE 29, 1997
--------- --------- --------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
Income (loss) before (provision for)
benefit from income taxes and cumulative
effect of changes in accounting
principles.............................. $ (12,121) $ (30,670) $ (8,597) $ (25,234) $ (13,640) $ (14,180) $ (7,864)
Interest and amortization of deferred
finance costs........................... 37,630 38,786 45,467 41,904 44,141 22,138 22,238
Implicit rental interest expense.......... 4,986 5,171 5,590 5,729 5,990 2,924 2,937
--------- --------- --------- --------- --------- ------------- -------------
Total earnings.......................... 30,495 13,287 42,460 22,399 36,491 10,882 17,311
--------- --------- --------- --------- --------- ------------- -------------
Fixed Charges
Interest and amortization of deferred
finance costs........................... 37,630 38,786 45,467 41,904 44,141 22,138 22,238
Capitalized interest...................... 128 156 176 62 49 35 17
Implicit rental interest expense.......... 4,986 5,171 5,590 5,729 5,990 2,924 2,937
--------- --------- --------- --------- --------- ------------- -------------
Total fixed charges..................... 42,744 44,113 51,233 47,695 50,180 25,097 25,192
--------- --------- --------- --------- --------- ------------- -------------
Earnings insufficient to cover fixed
charges................................... $ 12,249 $ 30,826 $ 8,773 $ 25,296 $ 13,689 $ 14,215 $ 7,881
--------- --------- --------- --------- --------- ------------- -------------
--------- --------- --------- --------- --------- ------------- -------------
Pro forma data (a):
Earnings
Income (loss) before (provision for)
benefit from income taxes and cumulative
effect of changes in accounting
principles.............................. $ 3,284 $ 218
Interest and amortization of deferred
finance costs........................... 28,163 14,156
Implicit rental interest expense.......... 5,990 2,937
--------- -------------
Total earnings.......................... 37,437 17,311
--------- -------------
Fixed Charges
Interest and amortization of deferred
finance costs........................... 28,163 14,156
Capitalized interest...................... 49 17
Implicit rental interest expense.......... 5,990 2,937
--------- -------------
Total fixed charges..................... 34,202 17,110
--------- -------------
Earnings sufficient to cover fixed
charges................................... $ 3,235 $ 201
--------- -------------
--------- -------------
Ratio of earnings to fixed charges.......... 1.1x 1.0x
--------- -------------
--------- -------------
<CAPTION>
TWELVE MONTHS
ENDED
JUNE 29, 1997
---------------
<S> <C>
Earnings
Income (loss) before (provision for)
benefit from income taxes and cumulative
effect of changes in accounting
principles.............................. $ (7,324)
Interest and amortization of deferred
finance costs........................... 44,241
Implicit rental interest expense.......... 6,003
-------
Total earnings.......................... 42,490
-------
Fixed Charges
Interest and amortization of deferred
finance costs........................... 44,241
Capitalized interest...................... 31
Implicit rental interest expense.......... 6,003
-------
Total fixed charges..................... 50,275
-------
Earnings insufficient to cover fixed
charges................................... $ 7,355
-------
-------
Pro forma data (a):
Earnings
Income (loss) before (provision for)
benefit from income taxes and cumulative
effect of changes in accounting
principles.............................. $ 9,164
Interest and amortization of deferred
finance costs........................... 28,226
Implicit rental interest expense.......... 6,003
-------
Total earnings.......................... 43,393
-------
Fixed Charges
Interest and amortization of deferred
finance costs........................... 28,226
Capitalized interest...................... 31
Implicit rental interest expense.......... 6,003
-------
Total fixed charges..................... 34,260
-------
Earnings sufficient to cover fixed
charges................................... $ 9,133
-------
-------
Ratio of earnings to fixed charges.......... 1.3x
-------
-------
</TABLE>
- ------------------------------
(a) As adjusted to give effect to the Recapitalization and the change in
accounting principle for pensions. See Note 10 of Notes to Consolidated
Financial Statements.
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF COMPANY PLACE OF INCORPORATION
- --------------------------------------------------------------------------------------- -------------------------
<S> <C>
Restaurant Insurance Corporation Vermont
Friendly's Restaurants Franchise, Inc. Delaware
Friendly's International, Inc. Delaware
Friendly Holding (UK) Limited United Kingdom
Friendly Ice Cream (UK) Limited United Kingdom
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all reference to our Firm) included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
October 3, 1997
<PAGE>
EXHIBIT 99.1
CONSENT TO BE NAMED IN THE REGISTRATION STATEMENTS
To: Friendly Ice Cream Corporation
The undersigned hereby consents to be named as a Director in the
Registration Statements on Form S-1 (the "Registration Statements"), as first
filed by Friendly Ice Cream Corporation (the "Company") on August 29, 1997, and
to the statements in such Registration Statements concerning the undersigned's
intended nomination to the Board of Directors of the Company.
Dated: Sept. 29, 1997
By: Michael J. Daly
Name: Michael J. Daly
