-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wrp4fOTJ//KyXofNoQaS9wWQKlwkrUzseJImh4CR6DDBOjTg+ns5shyDXWtA2e+m ckiAaxkxZq7CXupYnegOGg== 0001047469-97-002888.txt : 19971107 0001047469-97-002888.hdr.sgml : 19971107 ACCESSION NUMBER: 0001047469-97-002888 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19971106 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRIENDLY ICE CREAM CORP CENTRAL INDEX KEY: 0000039135 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 042053130 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-34633 FILM NUMBER: 97708859 BUSINESS ADDRESS: STREET 1: 1855 BOSTON ROAD CITY: WILBRAHAM STATE: MA ZIP: 01095 BUSINESS PHONE: 4135432400 MAIL ADDRESS: STREET 1: 1855 BOSTON ROAD CITY: WILBRAHAM STATE: MA ZIP: 01095 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1997 REGISTRATION NO. 333-34633 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 3 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) MASSACHUSETTS 5812 04-2053130 (State of Incorporation) (Primary Standard Industrial (I.R.S. Employer Classification Code Number) Identification No.)
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: 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
-------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. -------------------------- If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462 (b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462 (c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED (1) UNIT(3) OFFERING PRICE (3) REGISTRATION FEE Common Stock, 5,750,000 shares $ 21.00 $ 120,750,000 $ 36,600 (4) $.01 par value (1)(2).............
(1) Includes 750,000 shares that may be purchased by the Underwriters to cover over-allotments, if any. (2) Includes associated rights (the "Rights") to purchase one one-thousandth of a share of Series A Junior Preferred Stock, par value $0.01 per share. Rights initially are attached to and trade with the Common Stock of the Registrant. The value attributable to such Rights, if any, is reflected in the offering price of the Common Stock. (3) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457. (4) 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. SUBJECT TO COMPLETION, DATED NOVEMBER 6, 1997 5,000,000 SHARES [LOGO] COMMON STOCK ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY (THE "COMMON STOCK OFFERING") ARE BEING SOLD BY FRIENDLY ICE CREAM CORPORATION (THE "COMPANY"). CONCURRENTLY WITH THE COMMON STOCK OFFERING, THE COMPANY IS OFFERING TO THE PUBLIC $175 MILLION AGGREGATE PRINCIPAL AMOUNT OF SENIOR NOTES DUE 2007 (THE "SENIOR NOTE OFFERING" AND, TOGETHER WITH THE COMMON STOCK OFFERING, THE "OFFERINGS") AND, CONTINGENT UPON THE OFFERINGS, WILL ENTER INTO THE NEW CREDIT FACILITY (AS DEFINED HEREIN). CONSUMMATION OF EACH OF THE COMMON STOCK OFFERING, THE SENIOR NOTE OFFERING AND THE NEW CREDIT FACILITY IS CONTINGENT UPON CONSUMMATION OF THE OTHER. PRIOR TO THE COMMON STOCK OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $19.00 AND $21.00 PER SHARE. SEE "UNDERWRITING" FOR A DISCUSSION OF FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE COMMON STOCK HAS BEEN APPROVED FOR QUOTATION, SUBJECT TO NOTICE OF ISSUANCE, ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "FRND." AT THE COMPANY'S REQUEST, UP TO 250,000 SHARES OF COMMON STOCK OFFERED HEREBY HAVE BEEN RESERVED FOR SALE TO CERTAIN INDIVIDUALS, INCLUDING DIRECTORS AND EMPLOYEES OF THE COMPANY AND THEIR FAMILIES. SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ----------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT (A) COMPANY (B) PER SHARE............................. $ $ $ TOTAL (C)............................. $ $ $
(A) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE UNDERWRITERS AND OTHER MATTERS. (B) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $427,000. (C) THE COMPANY, CERTAIN LENDERS UNDER THE COMPANY'S OLD CREDIT FACILITY (AS DEFINED HEREIN) THAT ARE STOCKHOLDERS AND CERTAIN OTHER STOCKHOLDERS OF THE COMPANY HAVE GRANTED TO THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO AN ADDITIONAL 750,000 SHARES OF COMMON STOCK, SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE PRICE TO PUBLIC WILL TOTAL $ , THE UNDERWRITING DISCOUNT WILL TOTAL $ , THE PROCEEDS TO COMPANY WILL TOTAL $ AND THE PROCEEDS TO SUCH LENDERS AND OTHER STOCKHOLDERS WILL TOTAL $ AND $ , RESPECTIVELY. SEE "OWNERSHIP OF COMMON STOCK" AND "UNDERWRITING." THE SHARES OF COMMON STOCK ARE OFFERED BY THE UNDERWRITERS NAMED HEREIN WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THE UNDERWRITERS AND SUBJECT TO THEIR RIGHT TO REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF CERTIFICATES REPRESENTING THE SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT THE OFFICE OF NATIONSBANC MONTGOMERY SECURITIES, INC. ON OR ABOUT , 1997. --------------------- NATIONSBANC MONTGOMERY SECURITIES, INC. PIPER JAFFRAY INC. TUCKER ANTHONY INCORPORATED , 1997 [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 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT INDICATES OTHERWISE, (I) REFERENCES TO "FRIENDLY'S" OR THE "COMPANY" REFER TO FRIENDLY ICE CREAM CORPORATION, ITS PREDECESSORS AND ITS CONSOLIDATED SUBSIDIARIES, (II) AS USED HEREIN, "NORTHEAST" REFERS TO THE COMPANY'S CORE MARKETS WHICH INCLUDE CONNECTICUT, MAINE, MASSACHUSETTS, NEW HAMPSHIRE, NEW JERSEY, NEW YORK, PENNSYLVANIA, RHODE ISLAND AND VERMONT, (III) THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION IN THE COMMON STOCK OFFERING AND (IV) THIS PROSPECTUS GIVES EFFECT TO THE 924-FOR-1 STOCK SPLIT WHICH WILL OCCUR PRIOR TO THE COMMON STOCK OFFERING. THE COMPANY'S FISCAL YEARS ENDED DECEMBER 27, 1992, JANUARY 2, 1994, JANUARY 1, 1995, DECEMBER 31, 1995 AND DECEMBER 29, 1996 ARE REFERRED TO HEREIN AS 1992, 1993, 1994, 1995 AND 1996, RESPECTIVELY. THE COMPANY Friendly's is the leading full-service restaurant operator and has a leading position in premium frozen dessert sales in the Northeast. The Company owns and operates 662 and franchises 34 full-service restaurants and manufactures a complete line of packaged frozen desserts distributed through more than 5,000 supermarkets and other retail locations in 15 states. Friendly's offers its customers a unique dining experience by serving a variety of high-quality, reasonably-priced breakfast, lunch and dinner items, as well as its signature frozen desserts, in a fun and casual neighborhood setting. For the twelve-month period ended September 28, 1997, Friendly's generated $667.0 million in total revenues and $74.9 million in EBITDA (as defined herein) and incurred $44.0 million of interest expense. During the same period, management estimates that over $230 million of total revenues were from the sale of approximately 21 million gallons of frozen desserts. Friendly's restaurants target families with children and adults who desire a reasonably-priced meal in a full-service setting. The Company's menu offers a broad selection of freshly-prepared foods which appeal to customers throughout all day-parts. Breakfast items include specialty omelettes and breakfast combinations featuring eggs, pancakes and bacon or sausage. Lunch and dinner items include a new line of wrap sandwiches, entree salads, soups, super-melts, specialty burgers and new stir-fry, chicken, pot pie, tenderloin steak and seafood entrees. Friendly's is also recognized for its extensive line of ice cream shoppe treats, including proprietary products such as the Fribble-Registered Trademark-, Candy Shoppe-Registered Trademark- Sundaes and the Wattamelon Roll-Registered Trademark-. The Company believes that one of its key strengths is the strong consumer awareness of the Friendly's brand name, particularly as it relates to the Company's signature frozen desserts. This strength and the Company's vertically-integrated operations provide several competitive advantages, including the ability to (i) utilize its broad, high-quality menu to attract customer traffic across multiple day-parts, particularly the afternoon and evening snack periods, (ii) generate incremental revenues through strong restaurant and retail market penetration, (iii) promote menu enhancements and extensions in combination with its unique frozen desserts and (iv) control quality and maintain operational flexibility through all stages of the production process. Friendly's, founded in 1935, was publicly held from 1968 until January 1979, at which time it was acquired by Hershey Foods Corporation ("Hershey"). While owned by Hershey, the Company increased the total number of restaurants from 601 to 849 yet devoted insufficient resources to product development and capital improvements. In 1988, The Restaurant Company ("TRC"), an investor group led by Donald Smith, the Company's current Chairman, Chief Executive Officer and President, acquired Friendly's from Hershey (the "TRC Acquisition"). The high leverage associated with the TRC Acquisition and the Old Credit Facility (as defined herein) severely impacted the liquidity and profitability of the Company and, therefore, limited the scope and implementation of certain of the Company's business and growth strategies. The Company has reported net losses and had earnings that were insufficient to cover fixed 3 charges for each fiscal year since the TRC Acquisition except for the nine months ended September 28, 1997. As a result of subsequent restructurings, and upon completion of the Recapitalization and the Related Transactions (both as defined herein), approximately 16.8% and 9.8% of the Common Stock will be owned by the Company's employees and lenders under the Old Credit Facility, respectively. See "Risk Factors," "Selected Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Ownership of Common Stock." Despite the Company's capital constraints, management implemented a number of initiatives to restore and improve operational and financial efficiencies. From the date of the TRC Acquisition through 1994, the Company (i) implemented a major revitalization of its restaurants, (ii) repositioned the Friendly's concept from a sandwich and ice cream shoppe to a full-service, family-oriented restaurant with broader menu and day-part appeal, (iii) elevated customer service levels by recruiting more qualified managers and expanding the Company's training program, (iv) disposed of 123 under-performing restaurants and (v) capitalized upon the Company's strong brand name recognition by initiating the sale of Friendly's unique line of packaged frozen desserts through retail locations. Beginning in 1994, the Company began implementing several growth initiatives including (i) testing and implementing a program to expand the Company's domestic distribution network by selling frozen desserts and other menu items through non-traditional locations, (ii) distributing frozen desserts internationally by introducing dipping stores in South Korea and the United Kingdom and (iii) implementing a franchising strategy to extend profitably the Friendly's brand without the substantial capital required to build new restaurants. As part of this strategy, on July 14, 1997 the Company entered into the DavCo Agreement. See "--Recent Developments." Implementation of these initiatives since the TRC Acquisition has resulted in substantial improvements in revenues and EBITDA. Despite the closing of 152 restaurants (net of restaurants opened) since the beginning of 1989 and periods of economic softness in the Northeast, the Company's restaurant revenues have increased 7.5% from $557.3 million in 1989 to $599.3 million in the twelve months ended September 28, 1997, while average revenue per restaurant has increased 29.8% from $665,000 to $863,000 during the same period. Retail, institutional and other revenues and franchise revenues have also increased from $1.4 million in 1989 to $67.7 million in the twelve months ended September 28, 1997. In addition, EBITDA has increased 58.0% from $47.4 million in 1989 to $74.9 million in the twelve-month period ended September 28, 1997, while operating income has increased from $4.1 million to $42.0 million over the same period. Friendly's intends to utilize the increased liquidity and operating and financial flexibility resulting from consummation of the Recapitalization, of which the Offerings are a part, in order to continue to grow the Company's revenues and earnings by implementing the following key business strategies: (i) continuously upgrade the menu and introduce new products, (ii) revitalize and re-image existing Friendly's restaurants, (iii) construct new restaurants, (iv) enhance the Friendly's dining experience, (v) expand the restaurant base through high-quality franchisees, (vi) increase market share through additional retail accounts and restaurant locations, (vii) introduce modified formats of the Friendly's concept into non-traditional locations and (viii) extend the Friendly's brand into international markets. The principal executive offices of the Company are located at 1855 Boston Road, Wilbraham, Massachusetts 01095, and the telephone number is (413) 543-2400. 4 RECENT DEVELOPMENTS On July 14, 1997, the Company entered into a long-term agreement granting DavCo Restaurants, Inc. ("DavCo"), a franchisor of more than 230 Wendy's restaurants, exclusive rights to operate, manage and develop Friendly's full-service restaurants in the franchising region of Maryland, Delaware, the District of Columbia and northern Virginia (the "DavCo Agreement"). Pursuant to the DavCo Agreement, DavCo has purchased certain assets and rights in 34 existing Friendly's restaurants in this franchising region, has committed to open an additional 74 restaurants over the next six years and, subject to the fulfillment of certain conditions, has further agreed to open 26 additional restaurants, for a total of 100 new restaurants in this franchising region over the next ten years. DavCo will also manage under contract 14 other Friendly's locations in this franchising region with an option to acquire these restaurants in the future. Friendly's received approximately $8.2 million in cash for the sale of certain non-real property assets and in payment of franchise and development fees, and receives (i) a royalty based on franchised restaurant revenues and (ii) revenues and earnings from the sale to DavCo of Friendly's frozen desserts and other products. DavCo is required to purchase from Friendly's all of the frozen desserts to be sold in these restaurants. See "Business--Restaurant Operations--Franchising Program." 5 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 maturity of the Company's outstanding indebtedness, reduce interest expense and increase liquidity and operating and financial flexibility. Concurrent with, and contingent upon, the consummation of the Offerings, the Company expects to enter into a new senior secured credit facility consisting of (i) a $105 million term loan facility (the "Term Loan Facility"), (ii) a $55 million revolving credit facility (the "Revolving Credit Facility") and (iii) a $15 million letter of credit facility (the "Letter of Credit Facility" and, together with the Term Loan Facility and the Revolving Credit Facility, the "New Credit Facility"). The Offerings, the New Credit Facility and the application of the estimated net proceeds therefrom are hereinafter referred to as the "Recapitalization." In addition, subsequent to September 28, 1997, the Company (i) has paid $9.6 million of interest on the Old Credit Facility, (ii) will record $1.9 million of net income related to deferred interest no longer payable under the Old Credit Facility, (iii) will record $5.8 million of non-cash stock compensation expense, net of taxes, arising out of the issuance of certain shares of Common Stock to management and the vesting of certain shares of restricted stock previously issued to management, (iv) will write-off $319,000 of deferred financing and debt restructuring costs, net of taxes, related to the Old Credit Facility and (v) will apply $10.0 million of previously restricted cash to be received from Restaurant Insurance Corporation, its insurance subsidiary ("RIC"), in exchange for a letter of credit, toward amounts outstanding under the Old Credit Facility (collectively, the "Related Transactions"). Upon completion of the Recapitalization, Friendly's total available borrowings under the New Credit Facility are expected to be $55.0 million, excluding $2.1 million of letter of credit availability (compared to $27.0 million as of September 28, 1997 under the Old Credit Facility, excluding $2.1 million of letter of credit availability), which borrowings may be used, with certain limitations, for capital spending and general corporate purposes. After giving effect to the Recapitalization and the Related Transactions, the aggregate pro forma net decrease in interest expense would have been $15.3 million for 1996 and $11.4 million for the nine-month period ended September 28, 1997. See "Selected Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Description of New Credit Facility." The following table sets forth the estimated sources and uses of funds in connection with the Recapitalization after giving effect to the Related Transactions:
AT CLOSING --------------------- (DOLLARS IN THOUSANDS) SOURCES OF FUNDS: Term Loan Facility (a)................................................ $ 105,000 Senior Note Offering (b).............................................. 175,000 Common Stock Offering (c)............................................. 100,000 -------- Total Sources..................................................... $ 380,000 -------- -------- USES OF FUNDS: Working capital....................................................... $ 4,732 Retirement of Old Credit Facility (d)................................. 348,042 Retirement of capital leases.......................................... 7,976 Estimated fees and expenses (e)....................................... 19,250 -------- Total Uses........................................................ $ 380,000 -------- --------
- ---------------------------------- (a) Represents borrowing in full under the Term Loan Facility. As part of the Recapitalization, the Company will have a $55,000 Revolving Credit Facility which is expected to be undrawn at closing and $2,093 available under the Letter of Credit Facility. These facilities are expected to be drawn in part, from time to time, to finance the Company's working capital and other general corporate requirements. (b) Represents gross proceeds from the Senior Note Offering. (c) Represents gross proceeds from the sale of 5,000,000 shares of Common Stock at an assumed initial public offering price of $20.00 per share. (d) Represents the balance of all amounts expected to be outstanding under the Old Credit Facility ($358,042 as of September 28, 1997) after giving effect to the application of $10,000 of previously restricted cash and investments of RIC which is expected to be released to the Company in exchange for a $12,907 letter of credit, with the $2,907 of additional released cash and investments increasing the Company's cash balance. (e) Includes estimated underwriting discounts and commissions and other fees and expenses relating to the Offerings and the New Credit Facility of which $8,427 relates to the Common Stock Offering and $10,823 relates to the Senior Note Offering and the New Credit Facility. See "Underwriting." 6 THE COMMON STOCK OFFERING Common Stock offered by the Company... 5,000,000 shares (a) Common Stock to be outstanding after the Common Stock Offering............. 7,125,000 shares (a) (b) Concurrent Senior Note Offering ...... Concurrently with the Common Stock Offering, the Company is offering to the public $175 million aggregate principal amount of Senior Notes due 2007. Consummation of each of the Common Stock Offering and the Senior Note Offering is contingent upon consummation of the other. See "Description of Senior Notes." Use of proceeds....................... The Company intends to use up to approximately $356.0 million of net proceeds from the Offerings and borrowings under the New Credit Facility to refinance indebtedness and thereby lengthen the average maturity of the Company's outstanding indebtedness, reduce interest expense and increase liquidity and operating and financial flexibility. See "Use of Proceeds." Proposed Nasdaq National Market symbol................................ FRND Risk factors.......................... Prospective purchasers of the Common Stock offered hereby should carefully consider the information set forth under the caption "Risk Factors" and all other information set forth in this Prospectus before making any investment in the Common Stock. As set forth more fully in "Risk Factors," the risk factors associated with such an investment include, among others, those relating to the Company's (i) substantial leverage and stockholders' deficit; (ii) history of losses; (iii) implementation of new business concepts and strategies; (iv) development of a franchising program; (v) expansion of its international operations; (vi) geographic concentration in the Northeast; and (vii) highly competitive business environment, as well as those relating to restrictions imposed under the New Credit Facility, factors affecting the food service industry generally and circumstances potentially impacting the trading markets for, or value of, the Common Stock offered hereby.
- ------------------------ (a) Excludes up to an aggregate of 125,158 shares of Common Stock that the Underwriters have the option to purchase from the Company to cover over-allotments, if any. See "Underwriting." (b) Excludes an aggregate of approximately 400,000 shares and 375,000 shares of Common Stock reserved for issuance under the Stock Option Plan and the Restricted Stock Plan, respectively. See "Management--Executive Compensation--Stock Option Plan" and "--Restricted Stock Plan." 7 SUMMARY CONSOLIDATED FINANCIAL INFORMATION
NINE MONTHS ENDED FISCAL YEAR (A) ---------------------------- ------------------------------------------------ SEPTEMBER 29, SEPTEMBER 28, 1992 1993 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF RESTAURANTS) STATEMENT OF OPERATIONS DATA: Revenues: Restaurant................................. $542,859 $580,161 $589,383 $593,570 $596,675 $ 452,373 $ 455,026 Retail, institutional and other............ 20,346 30,472 41,631 55,579 54,132 39,446 49,173 Franchise.................................. -- -- -- -- -- -- 3,834 -------- -------- -------- -------- -------- ------------- ------------- Total revenues............................... 563,205 610,633 631,014 649,149 650,807 491,819 508,033 -------- -------- -------- -------- -------- ------------- ------------- Non-cash write-downs (b)..................... -- 25,552 -- 7,352 227 -- 607 Depreciation and amortization................ 35,734 35,535 32,069 33,343 32,979 25,127 24,226 Operating income............................. 25,509 8,116 36,870 16,670 30,501 22,848 34,299 Interest expense, net (c).................... 37,630 38,786 45,467 41,904 44,141 33,084 32,972 Cumulative effect of changes in accounting principles, net of income taxes (d)........ -- (42,248) -- -- -- -- 2,236 Net income (loss)............................ $(13,321) $(61,448) $ (3,936) $(58,653) $ (7,772) $ (5,794 ) $ 2,363 -------- -------- -------- -------- -------- ------------- ------------- -------- -------- -------- -------- -------- ------------- ------------- OTHER DATA: EBITDA (e)................................... $ 61,243 $ 69,203 $ 68,939 $ 57,365 $ 63,707 $ 47,975 $ 59,132 Net cash provided by operating activities.... 34,047 42,877 38,381 27,790 26,163 23,637 29,224 Capital expenditures: Cash....................................... 33,577 37,361 29,507 19,092 24,217 18,547 14,656 Non-cash (f)............................... 3,121 7,129 7,767 3,305 5,951 3,570 2,227 -------- -------- -------- -------- -------- ------------- ------------- Total capital expenditures................. $ 36,698 $ 44,490 $ 37,274 $ 22,397 $ 30,168 $ 22,117 $ 16,883 Ratio of earnings to fixed charges (g)....... -- -- -- -- -- -- 1.0 x PRO FORMA DATA: EBITDA (e)(h)................................ $ 64,653 $ 48,685 $ 59,132 Interest expense, net (c)(i)................. 28,804 21,580 21,617 Net income (j)............................... 1,835 1,412 9,062 Net income per share......................... $ 0.26 $ 0.20 $ 1.27 Weighted average shares outstanding (k)...... 7,125 7,125 7,125 Ratio of EBITDA to interest expense, net..... 2.2x 2.3 x 2.7 x Ratio of earnings to fixed charges (g)....... 1.1x 1.1 x 1.4 x Ratio of total long-term debt to EBITDA (e)........................................ 3.8 x(l) RESTAURANT OPERATING DATA: Number of restaurants (end of period) (m).... 764 757 750 735 707 710 662 Average revenue per restaurant (n)........... $ 708 $ 750 $ 783 $ 797 $ 828 -- $ 863 Increase in comparable restaurant revenues (o)........................................ 6.0% 5.4% 3.4% 0.9% 1.8% 0.3% 3.1%
AS OF SEPTEMBER 28, 1997 -------------- ACTUAL -------------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital (deficit)...................................................................................... $ (17,895) Total assets................................................................................................... 362,914 Total long-term debt and capital lease obligations, excluding current maturities............................... 371,296 Total stockholders' equity (deficit)........................................................................... $ (170,684) AS ADJUSTED -------------- BALANCE SHEET DATA: Working capital (deficit)...................................................................................... $ (10,949)(p) Total assets................................................................................................... 358,348(q) Total long-term debt and capital lease obligations, excluding current maturities............................... 288,585(r) Total stockholders' equity (deficit)........................................................................... $ (73,471)(s)
- ------------------------------ (a) All fiscal years presented include 52 weeks of operations except 1993 which includes 53 weeks of operations. (b) Includes non-cash write-downs of approximately $16,337 in 1993 related to a trademark license agreement as a result of new product development and the replacement of certain trademarked menu items and $3,346 in 1995 related to a postponed debt restructuring. All other non-cash write-downs relate to property and equipment disposed of in the normal course of the Company's operations. See Notes 3, 5 and 6 of Notes to Consolidated Financial Statements. (c) Interest expense, net is net of capitalized interest of $128, $156, $176, $62, $49, $44 and $27 and interest income of $222, $240, $187, $390, $318, $273 and $239 for 1992, 1993, 1994, 1995, 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively. 8 (d) Includes non-cash items, net of related income taxes, as a result of adoption of accounting pronouncements related to income taxes of $30,968, post-retirement benefits other than pensions of $4,140 and post-employment benefits of $7,140 in 1993 and pensions of $2,236 in 1997. (e) EBITDA represents consolidated Net income (loss) before (i) Cumulative effect of changes in accounting principles, net of income taxes, (ii) (Provision for) benefit from income taxes, (iii) Equity in net loss of joint venture, (iv) Interest expense, net, (v) Depreciation and amortization and (vi) Non-cash write-downs and all other non-cash items, plus cash distributions from unconsolidated subsidiaries, each determined in accordance with generally accepted accounting principles ("GAAP"). The Company has included information concerning EBITDA in this Prospectus because it believes that such information is used by certain investors as one measure of an issuer's historical ability to service debt. EBITDA should not be considered as an alternative to, or more meaningful than, earnings from operations or other traditional indications of an issuer's operating performance. (f) Non-cash capital expenditures represent the cost of assets acquired through the incurrence of capital lease obligations. (g) The Ratio of earnings to fixed charges is computed by dividing (i) income before interest expense, income taxes and other fixed charges by (ii) fixed charges, including interest expense, amortization of debt issuance costs and the portion of rent expense which represents interest (assumed to be one-third). For 1992, 1993, 1994, 1995, 1996 and the nine months ended September 29, 1996 earnings were insufficient to cover fixed charges by $12,249, $30,826, $8,773, $25,296, $13,689 and $10,280, respectively. (h) Represents historical EBITDA adjusted to give effect to the benefit from the change in accounting for pensions related to determining the return-on-asset component of annual pension expense of $946 in 1996 and $710 for the nine months ended September 29, 1996. See Note 10 of Notes to Consolidated Financial Statements. (i) Represents historical interest expense adjusted to give effect to the Recapitalization. Borrowings under the New Credit Facility will bear interest at a floating rate equal to LIBOR plus 2.25% or the Alternative Base Rate (as defined in the New Credit Facility) plus 0.75% per annum for drawings under the Revolving Credit Facility and the Letter of Credit Facility, 0.50% per annum for amounts undrawn under the Revolving Credit Facility, 2.25% per annum for amounts issued but undrawn under the Letter of Credit Facility and a weighted average floating rate equal to LIBOR plus 2.46% or the Alternative Base Rate plus 0.96% for the Term Loan Facility. The following table represents changes to Interest expense, net on a pro forma basis, resulting from the Recapitalization and the Related Transactions:
NINE MONTHS ENDED FISCAL YEAR ------------------ 1996 SEPTEMBER 29, 1996 ------------------ ------------------ (IN THOUSANDS) Elimination of interest on Old Credit Facility............................ $ (41,827) $ (31,337) Reduction of interest on capital lease obligations........................ (774) (580) Interest on Revolving Credit Facility..................................... 779 624 Interest on Letter of Credit Facility..................................... 268 134 Interest on Term Loan Facility............................................ 8,279 6,202 Interest on Senior Notes.................................................. 17,938 13,453 -------- -------- Decrease in Interest expense, net....................................... $ (15,337) $ (11,504) -------- -------- -------- -------- SEPTEMBER 28, 1997 ------------------ Elimination of interest on Old Credit Facility............................ $ (31,434) Reduction of interest on capital lease obligations........................ (580) Interest on Revolving Credit Facility..................................... 732 Interest on Letter of Credit Facility..................................... 134 Interest on Term Loan Facility............................................ 6,340 Interest on Senior Notes.................................................. 13,453 -------- Decrease in Interest expense, net....................................... $ (11,355) -------- --------
In calculating pro forma Interest expense, net, the assumed rates on the Revolving Credit Facility, Letter of Credit Facility, Term Loan Facility and Senior Notes were 7.67%, 2.25%, 7.88%, and 10.25% for 1996, respectively, 7.66%, 2.25%, 7.87% and 10.25% for the nine months ended September 29, 1996, respectively and 7.84%, 2.25%, 8.09% and 10.25% for the nine months ended September 28, 1997, respectively. (j) Represents historical net income adjusted to give effect to (i) the reduction in interest expense, net of income taxes, of $9,049, $6,788 and $6,699 for 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively, as a result of the Recapitalization and the Related Transactions and (ii) the benefit, net of income taxes, related to the change in accounting for pensions described in (h) above of $558, $418 and $0 for 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively. (k) Represents historical weighted average shares outstanding adjusted to give effect to the issuance of 27 shares upon consummation of the Recapitalization under the Management Stock Plan (as defined herein), and the return of 375 net shares to the Company in connection with the Recapitalization. Actual weighted average shares outstanding were 2,414, 2,394 and 2,473 for 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively. See "Ownership of Common Stock" and Note 17 of Notes to Consolidated Financial Statements. (l) For purposes of this ratio, EBITDA represents historical EBITDA for the twelve months ended September 28, 1997 adjusted by $236 to give effect to the benefit related to the change in accounting for pensions described in (h) above. (m) The number at September 28, 1997 reflects the acquisition by DavCo of 34 restaurants pursuant to the DavCo Agreement. See "Recent Developments." (n) Represents restaurant revenues divided by the weighted average number of restaurants open during such period. Fiscal 1993 has been adjusted to conform to a 52-week year. The number at September 28, 1997 represents data for the twelve months then ended. (o) When computing comparable restaurant revenues, restaurants open for at least twelve months are compared from period to period. (p) As adjusted for (i) $3,307 reduction in current portion of capital lease obligations in connection with the Recapitalization, (ii) $4,732 of working capital provided in the Recapitalization, (iii) $2,907 cash provided in connection with the letter of credit issued to RIC and (iv) the use of $4,000 of current restricted cash to reduce the amount outstanding on the Old Credit Facility. (q) As adjusted for (i) $10,000 of previously restricted cash applied to the Old Credit Facility, (ii) payment of $9,581 of interest on the Old Credit Facility, (iii) write-off of $540 of deferred financing costs related to the Old Credit Facility, (iv) $10,823 of estimated expenses related to the Senior Note Offering and (v) $4,732 of working capital provided in the Recapitalization. (r) As adjusted for (i) repayment of the $358,042 outstanding on the Old Credit Facility and $4,669 of long-term portion of capital lease obligations and (ii) proceeds of $280,000 from the Senior Note Offering and the New Credit Facility. (s) As adjusted for (i) estimated net proceeds of $91,573 from the Common Stock Offering, (ii) $1,948 of net income related to deferred interest expense no longer payable under the Old Credit Facility, (iii) write-off of $319 of deferred financing costs, net of taxes, related to the Old Credit Facility and (iv) the tax benefit of $4,011 related to the non-cash stock compensation expense arising out of the issuance of certain shares of Common Stock to management and the vesting of certain shares of restricted stock previously issued to management. 9 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SECURITIES OFFERED HEREBY. SUBSTANTIAL LEVERAGE; STOCKHOLDERS' DEFICIT The Company is highly leveraged. At September 28, 1997, on a pro forma basis after giving effect to the Recapitalization and the Related Transactions, the Company's total consolidated long-term debt and capital lease obligations (including current maturities) would have been $293.0 million and the Company's total consolidated stockholders' deficit would have been $73.5 million. Upon completion of the Recapitalization, the Company's total available borrowings under the New Credit Facility are estimated to be $55.0 million, excluding $2.1 million of availability under the Letter of Credit Facility (compared to $27.0 million as of September 28, 1997 under the Old Credit Facility, excluding $2.1 million of letter of credit availability). Additional borrowings may, subject to certain limitations, be used for capital expenditures and general corporate purposes, thereby increasing the Company's leverage. The Company's ability to pay principal on the Senior Notes when due or to repurchase the Senior Notes upon a Change of Control will be dependent upon the Company's ability to generate cash from operations sufficient for such purposes or its ability to refinance the Senior Notes. In addition, under the New Credit Facility, in the event of circumstances which are similar to a Change of Control, repayment of borrowings under the New Credit Facility will be subject to acceleration. See "Description of New Credit Facility." The degree to which the Company is leveraged could have important consequences, including the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired, (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of the principal of and interest on its indebtedness and, because borrowings under the New Credit Facility in part will bear interest at floating rates, the Company could be adversely affected by any increase in prevailing rates, (iii) the New Credit Facility and the Indenture relating to the Senior Notes will impose significant financial and operating restrictions on the Company and its subsidiaries which, if violated, could permit the Company's creditors to accelerate payments thereunder or foreclose upon the collateral securing the New Credit Facility, (iv) the Company is more leveraged than certain of its principal competitors, which may place the Company at a competitive disadvantage and (v) the Company's substantial leverage may limit its ability to respond to changing business and economic conditions and make it more vulnerable to a downturn in general economic conditions. See "Use of Proceeds," "Business--Competition," "Description of New Credit Facility" and "Description of Senior Notes." HISTORY OF LOSSES The Company has reported net losses of $13.3 million, $61.4 million, $3.9 million, $58.7 million and $7.8 million for 1992, 1993, 1994, 1995 and 1996, respectively, and earnings of $2.4 million for the nine months ended September 28, 1997. There can be no assurance that the Company's profitability will be sustained. The Company's earnings were insufficient to cover fixed charges by $12.2 million, $30.8 million, $8.8 million, $25.3 million and $13.7 million for 1992, 1993, 1994, 1995 and 1996, respectively, and there can be no assurance that the Company's earnings will be sufficient to cover fixed charges in the future. See "Selected Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related Notes thereto. 10 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 the Friendly's International, 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 RISKS ARISING OUT OF THE EXPANSION OF INTERNATIONAL OPERATIONS The Company has operations in South Korea, the United Kingdom and the People's Republic of China ("China"). These international operations are subject to various risks, including changing political and economic conditions, currency fluctuations, trade barriers, trademark rights, adverse tax consequences, import tariffs, customs and duties and government regulations. Government regulations, relating to, among other things, the preparation and sale of food, building and zoning requirements, wages, working conditions and the Company's relationship with its employees, may vary widely from those in the United States. There can be no assurance that the Company will be successful in maintaining or expanding its international operations. GEOGRAPHIC CONCENTRATION Approximately 85% of the Company-owned restaurants are located, and substantially all of its retail sales are generated, in the Northeast. As a result, a severe or prolonged economic recession or changes in demographic mix, employment levels, population density, weather, real estate market conditions or other factors specific to this geographic region may adversely affect the Company more than certain of its competitors which are more geographically diverse. RELATIONSHIPS WITH PERKINS; POTENTIAL CONFLICTS OF INTEREST After giving effect to the Recapitalization and the Related Transactions, approximately 10.3% and 2.1% of the Company's Common Stock would have been owned, as of October 15, 1997, by Donald N. Smith and The Equitable Life Assurance Society of the United States (the "Equitable"), respectively. These stockholders indirectly own 33.2% and 28.1%, respectively, of the general partner of Perkins Family Restaurants, L.P. ("PFR"), which, through Perkins Restaurants Operating Company, L.P. ("Perkins"), owns and franchises family-style restaurants. Mr. Smith, the Company's Chairman, Chief Executive Officer and President, is an officer of the general partner of PFR. In addition, three of the directors of the general partner of PFR serve as directors of the Company. In the ordinary course of business, the Company enters into transactions with Perkins. See "Certain Transactions." After giving effect to the Recapitalization and the Related Transactions, the directors and executive officers of the Company would have owned approximately 13.1% of the Common Stock as of October 15, 1997. Circumstances could arise in which the interests of such stockholders could be in conflict with the interests of the other stockholders of the Company and the holders of the Senior Notes. In addition, Mr. Smith serves as Chairman, Chief Executive Officer and President of the Company and as Chairman and Chief Executive Officer of Perkins and, consequently, devotes a portion of his time to the affairs of each Company and may be required to limit his involvement in those areas, if any, where the interests of the Company conflict with those of Perkins. Mr. Smith does not have an employment agreement with the Company nor is he contractually prohibited from engaging in other business ventures in the future, any of which could compete with the Company or its subsidiaries. See "Ownership of Common Stock." DEPENDENCE ON SENIOR MANAGEMENT The Company's business is managed, and its business strategies formulated, by a relatively small number of key executive officers and other personnel, certain of whom have joined the Company since Mr. Smith's arrival. The loss of these key management persons, including Mr. Smith, could have a material adverse effect on the Company. See "Management." HIGHLY COMPETITIVE BUSINESS ENVIRONMENT The restaurant business is highly competitive and is affected by changes in the public's eating habits and preferences, population trends and traffic patterns, as well as by local and national economic conditions affecting consumer spending habits, many of which are beyond the Company's control. Key 12 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 such court, subject to applicable statutes of limitations, could determine to invalidate, in whole or in part, such indebtedness and obligations as fraudulent conveyances or subordinate such indebtedness and obligations to existing or future creditors of the Company. The definition or measure of such matters as fair consideration, reasonably equivalent value, insolvency or unreasonably small capital for purposes of the foregoing will vary depending on the law of the jurisdiction which is being applied. Generally, however, the Company would be considered insolvent if, at the time it incurred indebtedness, either the fair market value (or fair saleable value) of its assets was less than the amount required to pay its total debts and liabilities (including contingent liabilities) as they became absolute and matured or it had incurred debt beyond its ability to repay such debt as it matures. The proceeds of the Recapitalization will be used primarily to repay debt of the Company. There can be no assurance as to what standard a court would apply in making determinations under bankruptcy or fraudulent transfer laws or whether a court would agree with any Company assessment that the Company is receiving fair consideration or reasonably equivalent value in return for incurring the indebtedness and other obligations in connection with the Recapitalization or that, after giving effect to indebtedness incurred in connection with the Recapitalization and the use of the proceeds of such indebtedness, it will have sufficient capital for the businesses in which it is engaged. In addition, as of September 28, 1997 on a pro forma basis giving effect to the Recapitalization and the Related Transactions as if they had occurred on such date, the Company would have had a negative net worth as determined pursuant to generally accepted accounting principles. ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Common Stock Offering, there has been no public market for the Common Stock. There can be no assurance that an active trading market will develop for the Common Stock after the Common Stock Offering or, if developed, that such market will be sustained. The initial public offering price of the Common Stock will be based on negotiations between the Company and the Underwriters and may bear no relationship to the price at which the Common Stock will trade after the completion of the Common Stock Offering. See "Underwriting" for factors to be considered in determining the initial public offering price. In addition, quarterly operating results of the Company or other restaurant companies, changes in general conditions in the economy, the financial markets or the restaurant industry, natural disasters, changes in earnings estimates or recommendations by research analysts, or other developments affecting the Company or its competitors could cause the market price of the Common Stock to fluctuate substantially. In recent years, the stock market and the restaurant industry in particular have experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Common Stock Offering, the Company will have 7,125,000 shares of Common Stock outstanding. Of these shares, 5,000,000 shares sold in the Common Stock Offering will be freely tradeable without restriction under the Securities Act of 1933, as amended (the "Securities Act"), except any shares purchased by persons deemed to be "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. The remaining 2,125,000 shares of Common Stock are deemed "restricted securities" (the "Restricted Shares") under Rule 144 because they were originally issued and sold by the Company in private transactions in reliance upon exemptions from the Securities Act. Under Rule 144, substantially all of these remaining Restricted Shares may become eligible for resale 90 days after the date the Company becomes subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended (the "Exchange Act") (i.e., 90 days after the consummation of the Common Stock Offering), and may be resold prior to such date only in compliance with the registration requirements of the Securities Act or pursuant to a valid exemption therefrom. Sales of substantial amounts of shares of 14 Common Stock in the public market after the Common Stock Offering or the perception that such sales could occur may adversely affect the market price of the Common Stock. All executive officers and directors and the existing shareholders of the Company who, after the Common Stock Offering, will hold in the aggregate approximately 2,125,000 shares of Common Stock (1,500,158 shares if the Underwriters' over-allotment option is exercised in full), have agreed, pursuant to lock-up agreements, that they will not, without the prior written consent of NationsBanc Montgomery Securities, Inc., offer, sell, contract to sell or otherwise dispose of any shares of Common Stock beneficially owned by them for a period of 360 days after the date of this Prospectus, except that the lenders under the Old Credit Facility may sell (i) shares of Common Stock to other stockholders of the Company existing prior to the Common Stock Offering and (ii) any shares of Common Stock acquired by them in or after the Common Stock Offering, which shares are not "restricted securities" pursuant to Rule 144 under the Securities Act. The Company intends to file registration statements under the Securities Act to register (i) all shares of Common Stock issuable pursuant to the Company's Stock Option Plan and Restricted Stock Plan and (ii) certain shares of Common Stock to be issued under the Company's Management Stock Plan and Limited Stock Compensation Program (as defined herein). Subject to the completion of the 360-day period described above, shares of Common Stock issued under, or issued upon the exercise of awards issued under, such plans and after the effective date of such registration statements, generally will be eligible for sale in the public market. See "Management--Executive Compensation" and "Ownership of Common Stock." The Company, its shareholders holding Class A and Class B common shares prior to the Recapitalization and certain warrant holders have entered into an amendment to an existing registration rights agreement providing that such shareholders may demand registration under the Securities Act, at any time within 18 months (the "Registration Period") after the end of the 360-day lock-up period commencing with the date of this Prospectus, of shares of the Company's Common Stock into which such Class A and Class B common shares are converted in connection with the Recapitalization or for which such warrants are exercised. The Company may postpone such a demand under certain circumstances. In addition, such shareholders may request the Company to include such shares of Common Stock in any registration by the Company of its capital stock under the Securities Act during the Registration Period. In addition, prior to the consummation of the Common Stock Offering, the Company and Mr. Smith intend to enter into a registration rights agreement providing Mr. Smith with a demand registration right covering his shares of Common Stock. See "Ownership of Common Stock" and "Shares Eligible for Future Sale." EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS The Company's Restated Articles of Organization (the "Restated Articles") and Restated By-Laws (the "Restated By-Laws") contain provisions that may make it more difficult for a third party to acquire, or discourage acquisition bids for, the Company. The Restated By-Laws provide that a stockholder seeking to have business conducted at a meeting of stockholders must give advance notice to the Company prior to the scheduled meeting. The Restated By-Laws further provide that a special stockholders meeting may be called only by the Board of Directors, Chairman of the Board of Directors, or President of the Company. Massachusetts law, the Restated Articles and the Restated By-Laws provide for a classified Board of Directors and for the removal of directors only for cause upon the affirmative vote of (i) the holders of at least a majority of the shares entitled to vote or (ii) a majority of the directors then in office. Moreover, upon completion of the Common Stock Offering, the Company expects to be subject to an anti-takeover provision of the Massachusetts General Laws which prohibits, subject to certain exceptions, a holder of 5% or more of the outstanding voting stock of a corporation from engaging in certain transactions with the corporation, including a merger or stock or asset sale. While the Company's Restated By-Laws exclude the applicability of another Massachusetts anti-takeover statute which provides that any stockholder who acquires 20% or more of the outstanding voting stock of a corporation subject to the statute may not vote 15 such stock unless the stockholders of the corporation so authorize, the Board of Directors of the Company may amend the Restated By-Laws at any time to subject the Company to this statute prospectively. These provisions could limit the price that certain investors might be willing to pay in the future for shares of the Common Stock and may have the effect of preventing changes in the management of the Company. In addition, shares of the Company's Preferred Stock may be issued in the future without further stockholder approval and upon such terms and conditions, and have such rights, privileges and preferences, as the Board of Directors may determine. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of any holders of Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. The Company has no present plans to issue any shares of Preferred Stock. See "Description of Capital Stock--Preferred Stock." EFFECT OF ADOPTION OF STOCKHOLDER RIGHTS PLAN The Company's Board of Directors intends to enact a stockholder rights plan (the "Rights Plan") designed to protect the interests of the Company's stockholders in the event of a potential takeover in a manner or on terms not approved by the Board of Directors as being in the best interests of the Company and its stockholders. Pursuant to the Rights Plan, upon the filing of the Restated Articles prior to the consummation of the Common Stock Offering, the Board will declare a dividend distribution of one purchase right (a "Right") for each outstanding share of Common Stock. The Rights Plan provides, in substance, that should any person or group (other than Mr. Smith, Equitable, senior management and their respective affiliates) acquire 15% or more of the Company's Common Stock, each Right, other than Rights held by the acquiring person or group, would entitle its holder to purchase a specified number of shares of Common Stock for 50% of their then current market value. Unless a 15% acquisition has occurred, the Rights may be redeemed by the Company at any time prior to the termination date of the Rights Plan. The Rights Plan has certain anti-takeover effects, in that it will cause substantial dilution to a person or group that attempts to acquire a significant interest in the Company on terms not approved by the Board of Directors. See "Description of Capital Stock--Stockholder Rights Plan." SUBSTANTIAL AND IMMEDIATE DILUTION Purchasers of the Common Stock offered hereby will experience immediate and significant dilution in net tangible book value per share of approximately $33.93 per share of Common Stock (at an assumed initial public offering price of $20.00 per share). See "Dilution." 16 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 maturity of the Company's outstanding indebtedness, reduce interest expense and increase liquidity and operating and financial flexibility. Concurrent with, and contingent upon, the consummation of the Offerings, the Company will enter into the New Credit Facility. As of September 28, 1997, borrowings under the Old Credit Facility accrued interest at a rate of 11.0% per annum, and such borrowings will become due in May 1998, unless repaid or previously extended for an additional year pursuant to the terms of the Old Credit Facility. Borrowings under the New Credit Facility will bear interest at a floating rate equal to LIBOR plus 2.25% or the Alternative Base Rate (as defined in the New Credit Facility) plus 0.75% per annum for drawings under the Revolving Credit Facility and the Letter of Credit Facility, 0.50% per annum for amounts undrawn under the Revolving Credit Facility, 2.25% per annum for amounts issued but undrawn under the Letter of Credit Facility and a weighted average floating rate equal to LIBOR plus 2.46% or the Alternative Base Rate plus 0.96% for the Term Loan Facility. See "Description of New Credit Facility." The following table sets forth the estimated sources and uses of funds in connection with the Recapitalization after giving effect to the Related Transactions:
AT CLOSING -------------------- (DOLLARS IN THOUSANDS) SOURCES OF FUNDS: Term Loan Facility (a)................................................ $ 105,000 Senior Note Offering (b).............................................. 175,000 Common Stock Offering (c)............................................. 100,000 -------- Total Sources..................................................... $ 380,000 -------- -------- USES OF FUNDS: Working capital....................................................... $ 4,732 Retirement of Old Credit Facility (d)................................. 348,042 Retirement of capital leases.......................................... 7,976 Estimated fees and expenses (e)....................................... 19,250 -------- Total Uses........................................................ $ 380,000 -------- --------
- ------------------------ (a) Represents borrowing in full under the Term Loan Facility. As part of the Recapitalization, the Company will have a $55,000 Revolving Credit Facility which is expected to be undrawn at closing and $2,093 available under the Letter of Credit Facility. These facilities are expected to be drawn in part, from time to time, to finance the Company's working capital and other general corporate requirements. (b) Represents gross proceeds from the Senior Note Offering. (c) Represents gross proceeds from the sale of 5,000,000 shares of Common Stock at an assumed initial public offering price of $20.00 per share. (d) Represents the balance of all amounts expected to be outstanding under the Old Credit Facility ($358,042 as of September 28, 1997) after giving effect to the application of $10,000 of previously restricted cash and investments of RIC which is expected to be released to the Company in exchange for a $12,907 letter of credit, with the $2,907 of additional released cash and investments increasing the Company's cash balance. (e) Includes estimated underwriting discounts and commissions and other fees and expenses relating to the Offerings and the New Credit Facility of which $8,427 relates to the Common Stock Offering and $10,823 relates to the Senior Note Offering and the New Credit Facility. See "Underwriting." 17 DIVIDEND POLICY The Company currently intends to retain its earnings to finance future growth and, therefore, does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. Any determination as to the payment of dividends will depend upon the future results of operations, capital requirements and financial condition of the Company and its subsidiaries and such other facts as the Board of Directors of the Company may consider, including any contractual or statutory restrictions on the Company's ability to pay dividends. The New Credit Facility and the Indenture relating to the Senior Notes will each limit the Company's ability to pay dividends on its Common Stock. See "Description of New Credit Facility" and "Description of Senior Notes." DILUTION The net tangible book value of the Company as of September 28, 1997 was $(186,203,000), or $(75.30) per share. "Net tangible book value" per share is determined by dividing the number of shares of Common Stock outstanding into the net tangible book value of the Company (total tangible assets less total liabilities). After giving effect to the Recapitalization and the Related Transactions, the Company's pro forma net tangible book value as of September 28, 1997 would have been $(99,273,000), or $(13.93) per share. This represents an immediate increase in net tangible book value of $61.37 per share to existing stockholders and an immediate dilution of $33.93 per share to new investors purchasing Common Stock in the Common Stock Offering. The following table illustrates this dilution: Assumed initial public offering price.............................. $ 20.00 Net tangible book value per share at September 28, 1997.......... $ (75.30) Increase per share attributable to new investors in the Common Stock Offering.......................................... 61.37 --------- Pro forma net tangible book value per share after the Common Stock Offering................................................. (13.93) --------- Dilution per share to new investors................................ $ 33.93 --------- ---------
The following table summarizes as of September 28, 1997, on a pro forma as adjusted basis after giving effect to the Recapitalization and the Related Transactions, the difference between existing stockholders and new investors with respect to the number of shares of Common Stock purchased from the Company, the total cash consideration paid to the Company, and the average price per share paid by existing stockholders and by the purchasers of the shares offered by the Company hereby (at an assumed initial public offering price of $20.00 per share):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------------- --------------------------- PRICE NUMBER (A) PERCENT AMOUNT PERCENT PER SHARE -------------- ----------- -------------- ----------- ----------- 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% -------------- ----- -------------- ----- -------------- ----- -------------- -----
- ------------------------ (a) Excludes an aggregate of approximately 400,000 shares and 375,000 shares of Common Stock reserved for issuance under the Stock Option Plan and the Restricted Stock Plan, respectively. See "Management--Executive Compensation--Stock Option Plan" and "--Restricted Stock Plan". (b) Represents actual shares outstanding as of September 28, 1997, plus 27,113 shares to be issued upon consummation of the Common Stock Offering under the Management Stock Plan, less 375,000 net shares to be returned to the Company in connection with the Recapitalization. See "Ownership of Common Stock" and Note 17 of Notes to Consolidated Financial Statements. 18 CAPITALIZATION The following table sets forth the balance of Cash and cash equivalents, Current maturities of long-term debt and capital lease obligations and capitalization of the Company (i) as of September 28, 1997 and (ii) as of September 28, 1997, as adjusted to give effect to the Recapitalization and the Related Transactions. This table should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
AS OF SEPTEMBER 28, 1997 ------------------------ ACTUAL AS ADJUSTED ----------- ----------- (IN THOUSANDS) Cash and cash equivalents.............................................................. $ 12,044 $ 10,102(a) ----------- ----------- ----------- ----------- Current maturities of long-term debt and capital lease obligations..................... $ 7,739 $ 4,432 ----------- ----------- ----------- ----------- Long-term debt Old Credit Facility.................................................................. $ 358,042 $ --(b) Revolving Credit Facility............................................................ -- --(c) Term Loan Facility................................................................... -- 105,000 Senior Notes......................................................................... -- 175,000 Capital lease obligations and other.................................................. 13,254 8,585 ----------- ----------- Total long-term debt................................................................... 371,296 288,585 ----------- ----------- Stockholders' equity (d) Preferred Stock, $0.01 par value, 1,000 shares authorized and none outstanding, as adjusted........................................................................... -- -- Common Stock, $0.01 par value, 7,389 shares authorized and 2,473 shares outstanding; 50,000 shares authorized and 7,125 shares outstanding, as adjusted................. 25 71(e) Paid-in capital...................................................................... 46,905 148,214(e) Unrealized gain on investment securities............................................. 130 130 Accumulated deficit.................................................................. (217,796) (221,938)(f) Cumulative translation adjustment.................................................... 52 52 ----------- ----------- Total stockholders' equity (deficit)................................................... (170,684) (73,471) ----------- ----------- Total capitalization................................................................... $ 200,612 $ 215,114 ----------- ----------- ----------- -----------
- ------------------------ (a) Gives effect to (i) the $9,581 interest payment made in October 1997 under the Old Credit Facility, (ii) the receipt of $12,907 of previously restricted cash from RIC released in exchange for a letter of credit, net of $10,000 applied to the Old Credit Facility and (iii) $4,732 of working capital provided in the Recapitalization. (b) Gives effect to the application of (i) $348,042 of the gross proceeds from the Recapitalization and (ii) $10,000 of restricted cash released from RIC. See "Use of Proceeds." (c) As part of the Recapitalization, the Company will have a $55,000 Revolving Credit Facility which is expected to be undrawn at closing and $2,093 available under the Letter of Credit Facility. These facilities are expected to be drawn in part, from time to time, to finance the Company's working capital and other general corporate requirements. (d) Historical share information includes Class A common shares and Class B common shares. In connection with the Recapitalization, the Class A common shares and Class B common shares will be converted into Common Stock. (e) Gives effect to (i) an assumed $100,000 of gross proceeds from the Common Stock Offering, (ii) $8,427 of expenses associated with the Common Stock Offering, (iii) the 924-for-1 stock split which will occur prior to the Common Stock Offering and (iv) $9,782 of non-cash stock compensation expense arising out of the issuance of certain shares of Common Stock to management and the vesting of certain shares of restricted stock previously issued to management. See Note 17 of Notes to Consolidated Financial Statements. (f) Gives effect to (i) $1,948 of net income related to deferred interest no longer payable under the Old Credit Facility, (ii) $5,771 of non-cash stock compensation expense, net of taxes, arising out of the issuance of certain shares of Common Stock to management and the vesting of certain shares of restricted stock previously issued to management discussed in (e) above and (iii) the write-off of $319 of deferred financing and debt restructuring costs, net of taxes, related to the Old Credit Facility. 19 SELECTED CONSOLIDATED FINANCIAL INFORMATION The following table sets forth selected consolidated historical financial information of the Company and its consolidated subsidiaries for each of the periods presented below. This information should be read in conjunction with the Consolidated Financial Statements and related Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere herein. The selected consolidated historical financial information for each of 1994, 1995 and 1996, and as of December 31, 1995 and December 29, 1996, has been derived from the Company's audited Consolidated Financial Statements which are included elsewhere herein. The selected consolidated historical financial information as of and for the nine months ended September 29, 1996 and September 28, 1997 has been derived from the Company's unaudited consolidated financial statements which, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary to present fairly, in accordance with GAAP, the information contained therein. See Note 3 of Notes to Consolidated Financial Statements for a discussion of the basis of the presentation and significant accounting policies of the consolidated historical financial information set forth below. Results for interim periods are not necessarily indicative of full fiscal year results. No stock dividends were declared or paid for any period presented.
NINE MONTHS ENDED FISCAL YEAR (A) ------------- ----------------------------------------------------- SEPTEMBER 29, 1992 1993 1994 1995 1996 1996 --------- --------- --------- --------- --------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Restaurant........................................ $ 542,859 $ 580,161 $ 589,383 $ 593,570 $ 596,675 $ 452,373 Retail, institutional and other................... 20,346 30,472 41,631 55,579 54,132 39,446 Franchise......................................... -- -- -- -- -- -- --------- --------- --------- --------- --------- ------------- Total revenues...................................... 563,205 610,633 631,014 649,149 650,807 491,819 --------- --------- --------- --------- --------- ------------- Costs and expenses: Cost of sales..................................... 154,796 170,431 179,793 192,600 191,956 143,388 Labor and benefits................................ 201,431 209,522 211,838 214,625 209,260 159,502 Operating expenses................................ 108,363 120,626 132,010 143,854 143,163 109,006 General and administrative expenses............... 37,372 40,851 38,434 40,705 42,721 31,948 Non-cash write-downs (b).......................... -- 25,552 -- 7,352 227 -- Depreciation and amortization..................... 35,734 35,535 32,069 33,343 32,979 25,127 Gain on sale of restaurant operations............... -- -- -- -- -- -- --------- --------- --------- --------- --------- ------------- Operating income.................................... 25,509 8,116 36,870 16,670 30,501 22,848 Interest expense, net (c)........................... 37,630 38,786 45,467 41,904 44,141 33,084 Equity in net loss of joint venture................. -- -- -- -- -- -- --------- --------- --------- --------- --------- ------------- Income (loss) before (provision for) benefit from income taxes and cumulative effect of changes in accounting principles............................. (12,121) (30,670) (8,597) (25,234) (13,640) (10,236) (Provision for) benefit from income taxes........... (1,200) 11,470 4,661 (33,419) 5,868 4,442 Cumulative effect of changes in accounting principles, net of income taxes (d)............... -- (42,248) -- -- -- -- --------- --------- --------- --------- --------- ------------- Net income (loss)................................... $ (13,321) $ (61,448) $ (3,936) $ (58,653) $ (7,772) $ (5,794) --------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- --------- ------------- OTHER DATA: EBITDA (e).......................................... $ 61,243 $ 69,203 $ 68,939 $ 57,365 $ 63,707 47,975 Net cash provided by operating activities........... 34,047 42,877 38,381 27,790 26,163 23,637 Capital expenditures: Cash.............................................. 33,577 37,361 29,507 19,092 24,217 18,547 Non-cash (f)...................................... 3,121 7,129 7,767 3,305 5,951 3,570 --------- --------- --------- --------- --------- ------------- Total capital expenditures.......................... $ 36,698 $ 44,490 $ 37,274 $ 22,397 $ 30,168 $ 22,117 Ratio of earnings to fixed charges (g).............. -- -- -- -- -- -- PRO FORMA DATA: EBITDA (e)(h)....................................... $ 64,653 $ 48,685 Interest expense, net (c)(i)........................ 28,804 21,580 Net income(j)....................................... 1,835 1,412 Net income per share................................ $ 0.26 $ 0.20 Weighted average shares outstanding (k)............. 7,125 7,125 Ratio of EBITDA to interest expense, net............ 2.2x 2.3x Ratio of earnings to fixed charges (g).............. 1.1x 1.1x Ratio of total long-term debt to EBITDA (e)......... SEPTEMBER 28, 1997 ------------- STATEMENT OF OPERATIONS DATA: Revenues: Restaurant........................................ $ 455,026 Retail, institutional and other................... 49,173 Franchise......................................... 3,834 ------------- Total revenues...................................... 508,033 ------------- Costs and expenses: Cost of sales..................................... 147,105 Labor and benefits................................ 159,315 Operating expenses................................ 112,009 General and administrative expenses............... 32,775 Non-cash write-downs (b).......................... 607 Depreciation and amortization..................... 24,226 Gain on sale of restaurant operations............... 2,303 ------------- Operating income.................................... 34,299 Interest expense, net (c)........................... 32,972 Equity in net loss of joint venture................. 1,112 ------------- Income (loss) before (provision for) benefit from income taxes and cumulative effect of changes in accounting principles............................. 215 (Provision for) benefit from income taxes........... (88) Cumulative effect of changes in accounting principles, net of income taxes (d)............... 2,236 ------------- Net income (loss)................................... $ 2,363 ------------- ------------- OTHER DATA: EBITDA (e).......................................... $ 59,132 Net cash provided by operating activities........... 29,224 Capital expenditures: Cash.............................................. 14,656 Non-cash (f)...................................... 2,227 ------------- Total capital expenditures.......................... $ 16,883 Ratio of earnings to fixed charges (g).............. 1.0x PRO FORMA DATA: EBITDA (e)(h)....................................... $ 59,132 Interest expense, net (c)(i)........................ 21,617 Net income(j)....................................... 9,062 Net income per share................................ $ 1.27 Weighted average shares outstanding (k)............. 7,125 Ratio of EBITDA to interest expense, net............ 2.7x Ratio of earnings to fixed charges (g).............. 1.4x Ratio of total long-term debt to EBITDA (e)......... 3.8x(l)
20
FISCAL YEAR (A) AS OF AS OF ----------------------------------------------------- SEPTEMBER 29, SEPTEMBER 28, 1992 1993 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- ------------- ------------- BALANCE SHEET DATA: Working capital (deficit)........ $ (28,451) $ (27,919) $ (35,856) $ (14,678) $ (20,700) $ (28,333) $ (17,895) Total assets..................... 380,087 365,330 374,669 370,292 360,126 359,080 362,914 Total long-term debt and capital lease obligations, excluding current maturities............. 358,102 363,028 369,549 389,144 385,977 379,241 371,296 Total stockholders' equity (deficit)...................... $ (43,993) $(102,965) $(106,901) $(165,534) $(173,156) $(171,306) $(170,684) AS ADJUSTED SEPTEMBER 28, 1997 ------------- BALANCE SHEET DATA: Working capital (deficit)........ $ (10,949)(m) Total assets..................... 358,348(n) Total long-term debt and capital lease obligations, excluding current maturities............. 288,585(o) Total stockholders' equity (deficit)...................... $ (73,471)(p)
- ------------------------ (a) All fiscal years presented include 52 weeks of operations except 1993 which includes 53 weeks of operations. (b) Includes non-cash write-downs of approximately $16,337 in 1993 related to a trademark license agreement as a result of new product development and the replacement of certain trademarked menu items and $3,346 in 1995 related to a postponed debt restructuring. All other non-cash write-downs relate to property and equipment disposed of in the normal course of the Company's operations. See Notes 3, 5 and 6 of Notes to Consolidated Financial Statements. (c) Interest expense, net is net of capitalized interest of $128, $156, $176, $62, $49, $44 and $27 and interest income of $222, $240, $187, $390, $318, $273 and $239 for 1992, 1993, 1994, 1995, 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively. (d) Includes non-cash items, net of related income taxes, as a result of adoption of accounting pronouncements related to income taxes of $30,968, post-retirement benefits other than pensions of $4,140 and post-employment benefits of $7,140 in 1993 and pensions of $2,236 in 1997. (e) EBITDA represents consolidated Net income (loss) before (i) Cumulative effect of changes in accounting principles, net of income taxes, (ii) (Provision for) benefit from income taxes, (iii) Equity in net loss of joint venture, (iv) Interest expense, net, (v) Depreciation and amortization and (vi) Non-cash write-downs and all other non-cash items, plus cash distributions from unconsolidated subsidiaries, each determined in accordance with GAAP. The Company has included information concerning EBITDA in this Prospectus because it believes that such information is used by certain investors as one measure of an issuer's historical ability to service debt. EBITDA should not be considered as an alternative to, or more meaningful than, earnings from operations or other traditional indications of an issuer's operating performance. (f) Non-cash capital expenditures represent the cost of assets acquired through the incurrence of capital lease obligations. (g) The Ratio of earnings to fixed charges is computed by dividing (i) income before interest expense, income taxes and other fixed charges by (ii) fixed charges, including interest expense, amortization of debt issuance costs and the portion of rent expense which represents interest (assumed to be one-third). For 1992, 1993, 1994, 1995, 1996 and the nine months ended September 29, 1996, earnings were insufficient to cover fixed charges by $12,249, $30,826, $8,773, $25,296, $13,689 and $10,280, respectively. (h) Represents historical EBITDA adjusted to give effect to the benefit from the change in accounting for pensions related to determining the return-on-asset component of annual pension expense of $946 in 1996 and $710 for the nine months ended September 29, 1996. See Note 10 of Notes to Consolidated Financial Statements. (i) Represents historical interest expense adjusted to give effect to the Recapitalization. Borrowings under the New Credit Facility will bear interest at a floating rate equal to LIBOR plus 2.25% or the Alternative Base Rate (as defined in the New Credit Facility) plus 0.75% per annum for drawings under the Revolving Credit Facility and the Letter of Credit Facility, 0.50% per annum for amounts undrawn under the Revolving Credit Facility, 2.25% per annum for amounts issued but undrawn under the Letter of Credit Facility and a weighted average floating rate equal to LIBOR plus 2.46% or the Alternative Base Rate plus 0.96% for the Term Loan Facility. (j) Represents historical net income adjusted to give effect to (i) the reduction in interest expense, net of income taxes of $9,049, $6,788 and $6,699 for 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively, as a result of the Recapitalization and the Related Transactions and (ii) the benefit, net of income taxes, related to the change in accounting for pensions described in (h) above of $558, $418 and $0 for 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively. (k) Represents historical weighted average shares outstanding adjusted to give effect to the issuance of 27 shares upon consummation of the Recapitalization under the Management Stock Plan (as defined herein), and the return of 375 net shares to the Company in connection with the Recapitalization. Actual weighted average shares outstanding were 2,414, 2,394 and 2,473 for 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively. See "Ownership of Common Stock" and Note 17 of Notes to Consolidated Financial Statements. (l) For purposes of this ratio, EBITDA represents historical EBITDA for the twelve months ended September 28, 1997 adjusted by $236 to give effect to the benefit related to the change in accounting for pensions described in (h) above. (m) As adjusted for (i) $3,307 reduction in current portion of capital lease obligations in connection with the Recapitalization, (ii) $4,732 of working capital provided in the Recapitalization, (iii) $2,907 cash provided in connection with the letter of credit issued to RIC and (iv) the use of $4,000 of current restricted cash to reduce the amount outstanding on the Old Credit Facility. (n) As adjusted for (i) $10,000 of previously restricted cash applied to the Old Credit Facility, (ii) payment of $9,581 of interest on the Old Credit Facility, (iii) write-off of $540 of deferred financing costs related to the Old Credit Facility, (iv) $10,823 of expenses related to the Senior Note Offering and (v) $4,732 of working capital provided in the Recapitalization. (o) As adjusted for (i) repayment of the $358,042 outstanding on the Old Credit Facility and $4,669 of long-term portion of capital lease obligations and (ii) proceeds of $280,000 from the Senior Note Offering and the New Credit Facility. (p) As adjusted for (i) estimated net proceeds of $91,573 from the Common Stock Offering, (ii) $1,948 of net income related to deferred interest expense no longer payable under the Old Credit Facility, (iii) write-off of $319 of deferred financing costs, net of taxes, related to the Old Credit Facility and (iv) the tax benefit of $4,011 related to the non-cash stock compensation expense arising out of the issuance of certain shares of Common Stock to management and the vesting of certain shares of restricted stock previously issued to management. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. OVERVIEW Friendly's owns and operates 662 restaurants, franchises 34 restaurants and distributes a full line of frozen desserts through more than 5,000 supermarkets and other retail locations in 15 states. The Company was publicly held from 1968 until January 1979 at which time it was acquired by Hershey. Under Hershey's ownership, the number of Company restaurants increased from 601 to 849. Hershey subsequently sold the Company in September 1988 to TRC in a highly-leveraged transaction. Beginning in 1989, the new management focused on improving operating performance through revitalizing and renovating restaurants, upgrading and expanding the menu and improving management hiring, training, development and retention. Also in 1989, the Company introduced its signature frozen desserts into retail locations in the Northeast. Since the beginning of 1989, 24 new restaurants have been opened while 176 under-performing restaurants have been closed. The high leverage associated with the TRC Acquisition has severely impacted the liquidity and profitability of the Company. As of September 28, 1997, the Company had a stockholders' deficit of $170.7 million. Cumulative interest expense of $384.0 million since the TRC Acquisition has significantly contributed to the deficit. The Company's net loss in 1996 of $7.8 million included $44.1 million of interest expense. The Company's revenue, EBITDA and operating income have improved significantly since the TRC Acquisition. Despite the closing of 152 restaurants (net of restaurants opened) since the beginning of 1989, Restaurant revenues have increased 7.5% from $557.3 million in 1989 to $599.3 million in the twelve- months ended September 28, 1997, while average revenue per restaurant has increased 29.8% from $665,000 to $863,000 during the same period. Retail, institutional and other revenues and Franchise revenues have also increased from $1.4 million in 1989 to $67.7 million in the twelve months ended September 28, 1997. In addition, EBITDA has increased 58.0% from $47.4 million in 1989 to $74.9 million in the twelve-month period ended September 28, 1997, while operating income has increased from $4.1 million to $42.0 million over the same period. As a result of the positive impact of the Company's revitalization program, the closing of under-performing restaurants, the growth of the retail, institutional and other businesses and the commencement in July 1997 of the Company's franchising program, period to period comparisons may not be meaningful. The Company's revenues are derived primarily from the operation of full-service restaurants and from the distribution and sale of frozen desserts through retail locations. In addition, the Company derives a small amount of revenue from the sale of frozen desserts in South Korea and the United Kingdom under various distribution and licensing arrangements. Furthermore, the Company is a 50% partner in a joint venture in Shanghai, China which has manufactured and distributed frozen desserts on a limited basis. The joint venture is currently seeking to establish additional distribution for its products in China. On July 14, 1997, the Company entered into the DavCo Agreement pursuant to which the Company received $8.2 million in cash for the sale of certain non-real property assets and in payment of franchise and development fees, and receives (i) a royalty based on franchised restaurant revenues and (ii) revenues and earnings from the sale to DavCo of Friendly's frozen desserts and other products. The Company anticipates receiving similar fees and royalty streams in connection with future franchising arrangements. See "Prospectus Summary--Recent Developments." Cost of sales includes direct food costs, the Company's costs to manufacture frozen desserts and the Company's costs to distribute frozen desserts and other food products to its restaurants, franchisees and its 22 retail, institutional and other customers. Retail, institutional and other revenues have higher food costs as a percentage of sales than Restaurant revenues. Labor and benefits include labor and related payroll expenses for restaurant employees. Operating expenses include all other restaurant-level expenses including supplies, utilities, maintenance, insurance and occupancy-related expenses, the costs associated with Retail, institutional and other revenues and Franchise revenues including salaries for sales personnel and other selling expenses and advertising costs. General and administrative expenses include costs associated with restaurant field supervision and the Company's headquarters personnel. Non-cash write-downs include the write-downs of long-lived assets and certain intangible assets when circumstances indicate that the carrying amount of an asset may not be recoverable. See Notes 3 and 6 of Notes to Consolidated Financial Statements. Interest expense, net is net of capitalized interest and interest income. RESULTS OF OPERATIONS The operating results of the Company expressed as a percentage of Total revenues are set forth below.
NINE MONTHS ENDED FISCAL YEAR ---------------------------------- -------------------------------- SEPTEMBER 29, SEPTEMBER 28, 1994 1995 1996 1996 1997 -------- -------- -------- --------------- --------------- Revenues: Restaurant............................ 93.4% 91.4% 91.7% 92.0% 89.6% Retail, institutional and other....... 6.6 8.6 8.3 8.0 9.7 Franchise............................. 0.0 0.0 0.0 0.0 0.7 -------- -------- -------- ----- ----- Total revenues.......................... 100.0 100.0 100.0 100.0 100.0 -------- -------- -------- ----- ----- Costs and expenses: Cost of sales......................... 28.5 29.7 29.5 29.2 29.0 Labor and benefits.................... 33.6 33.1 32.2 32.4 31.4 Operating expenses.................... 20.9 22.2 22.0 22.2 22.0 General and administrative expenses... 6.1 6.2 6.5 6.5 6.4 Non-cash write-downs.................. 0.0 1.1 0.0 0.0 0.1 Depreciation and amortization......... 5.1 5.1 5.1 5.1 4.8 Gain on sale of restaurant operations... 0.0 0.0 0.0 0.0 0.4 -------- -------- -------- ----- ----- Operating income........................ 5.8 2.6 4.7 4.6 6.7 Interest expense, net................... 7.2 6.5 6.8 6.7 6.5 Equity in net loss of joint venture..... 0.0 0.0 0.0 0.0 0.2 -------- -------- -------- ----- ----- Income (loss) before benefit from (provision for) income taxes and cumulative effect of change in accounting principle.................. (1.4) (3.9) (2.1) (2.1) 0.0 Benefit from (provision for) income taxes................................. 0.8 (5.1) 0.9 0.9 0.0 Cumulative effect of change in accounting principle, net of income tax expense........................... 0.0 0.0 0.0 0.0 0.5 -------- -------- -------- ----- ----- Net income (loss)....................... (0.6)% (9.0)% (1.2)% (1.2)% 0.5% -------- -------- -------- ----- ----- -------- -------- -------- ----- -----
NINE MONTHS ENDED SEPTEMBER 28, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 29, 1996 REVENUES--Total revenues increased $16.2 million, or 3.3%, to $508.0 million for the nine months ended September 28, 1997 from $491.8 million for the nine months ended September 29, 1996. Restaurant revenues increased $2.6 million, or 0.6%, to $455.0 million for the nine months ended September 28, 1997 from $452.4 million for the nine months ended September 29, 1996. Comparable restaurant revenues increased 3.1%. The increase in Restaurant revenues and comparable restaurant revenues was due to the introduction of higher-priced lunch and dinner entrees, selected menu price increases, a shift in sales mix to higher-priced items, the opening of three new restaurants, the re-imaging of four restaurants under the Company's FOCUS 2000 program, the revitalization of 14 restaurants, building expansions at five restaurants 23 and a milder winter in the 1997 period, which allowed for favorable traffic comparisons. The increase was partially offset by the sale of 34 restaurants to DavCo which resulted in a $7.2 million reduction in Restaurant revenues and the closing of 17 under-performing restaurants. Retail, institutional and other revenues increased by $9.8 million, or 24.9%, to $49.2 million for the nine months ended September 28, 1997 from $39.4 million for the nine months ended September 29, 1996. The increase was primarily due to a more effective sales promotion program. Franchise revenue was $3.8 million for the nine months ended September 28, 1997 compared to none for the nine months ended September 29, 1996. The increase is a result of the consummation of the DavCo Agreement on July 14, 1997. See Note 16 of Notes to Consolidated Financial Statements. COST OF SALES--Cost of sales increased $3.7 million, or 2.6%, to $147.1 million for the nine months ended September 28, 1997 from $143.4 million for the nine months ended September 29, 1996. Cost of sales as a percentage of Total revenues decreased to 29.0% in the 1997 period from 29.2% in the 1996 period. The decrease was due to a 0.6% reduction in food costs at the restaurant level despite higher guest check averages because of reduced promotional discounts. The decrease was offset by a 0.4% increase in food costs at the retail and institutional level. LABOR AND BENEFITS--Labor and benefits decreased $0.2 million, or 0.1%, to $159.3 million for the nine months ended September 28, 1997 from $159.5 million for the nine months ended September 29, 1996. Labor and benefits as a percentage of Total revenues decreased to 31.4% in the 1997 period from 32.4% in the 1996 period. The decrease was due to an increase in Retail, institutional and other revenues as a percent of Total revenues as these revenues have no associated labor and benefits cost and lower workers' compensation insurance and pension costs. OPERATING EXPENSES--Operating expenses increased $3.0 million, or 2.8%, to $112.0 million for the nine months ended September 28, 1997 from $109.0 million for the nine months ended September 29, 1996. Operating expenses as a percentage of Total revenues decreased to 22.0% in the 1997 period from 22.2% in the 1996 period. The decrease was due to reduced costs for snow removal and the allocation of fixed costs over higher Total revenues in the 1997 period partially offset by higher advertising expenditures in the 1997 period. GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses increased $0.9 million, or 2.8%, to $32.8 million for the nine months ended September 28, 1997 from $31.9 million for the nine months ended September 29, 1996. General and administrative expenses as a percentage of Total revenues decreased to 6.4% in the 1997 period from 6.5% in the 1996 period. This decrease was due to reductions in pension costs and the elimination of field management positions associated with the closing of 17 restaurants since the end of the 1996 period. GAIN ON SALE OF RESTAURANT OPERATIONS--Gain on sale of restaurant operations represents the income related to the sale of the equipment and operating rights for the 34 existing locations franchised to DavCo. See Note 16 of Notes to Consolidated Financial Statements. EBITDA--As a result of the above, EBITDA increased $11.1 million, or 23.1%, to $59.1 million for the nine months ended September 28, 1997 from $48.0 million for the nine months ended September 29, 1996. EBITDA as a percentage of Total revenues increased to 11.6% in the 1997 period from 9.8% in the 1996 period. NON-CASH WRITE-DOWNS--Non-cash write-downs were $0.6 million for the nine months ended September 28, 1997; there were no such write-downs during the nine months ended September 29, 1996. DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased $0.9 million, or 3.6%, to $24.2 million for the nine months ended September 28, 1997 from $25.1 million for the nine months ended September 29, 1996. Depreciation and amortization as a percentage of Total revenues decreased to 4.8% in the 1997 period from 5.1% in the 1996 period. The decrease was due to the closing of 17 units since the 24 end of the 1996 period, partially offset by higher amortization of debt restructuring costs incurred as a result of a debt restructuring which was effective January 1, 1996. INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and interest income, decreased by $0.1 million, or 0.3%, to $33.0 million for the nine months ended September 28, 1997 from $33.1 million for the nine months ended September 29, 1996. The decrease in interest expense was due to a reduction in interest expense on capital lease obligations as a result of lower amounts outstanding in the 1997 period. EQUITY IN NET LOSS OF JOINT VENTURE--The equity in net loss of the China joint venture of $1.1 million for the nine month period ended September 28, 1997 reflected the Company's 50% share of the China joint venture's net loss for such period. Sales for the joint venture were minimal during the 1997 period. BENEFIT FROM (PROVISION FOR) INCOME TAXES--The provision for income taxes was $0.1 million for the nine months ended September 28, 1997 compared to a benefit of $4.4 million for the nine months ended September 29, 1996 due to the improved operating results in the 1997 period. In 1997, the Company revised the method used in determining the return-on-asset component of annual pension expense as described in Note 10 of Notes to Consolidated Financial Statements. The cumulative effect of this change was $2.2 million, net of income tax expense of $1.6 million. NET INCOME (LOSS)--Net income was $2.4 million for the nine months ended September 28, 1997 compared to a net loss of $5.8 million for the nine months ended September 29, 1996 for the reasons discussed above. 1996 COMPARED TO 1995 REVENUES--Total revenues increased $1.7 million, or 0.3%, to $650.8 million in 1996 from $649.1 million in 1995. Restaurant revenues increased $3.1 million, or 0.5%, to $596.7 million in 1996 from $593.6 million in 1995. Comparable restaurant revenues increased by 1.8%. The increase in Restaurant revenues and comparable restaurant revenues was due to the introduction of higher-priced lunch and dinner entrees in the fourth quarter of 1996, selected menu price increases, a shift in sales mix to higher priced items, the opening of three new restaurants, the revitalization of 16 restaurants and building expansions at four existing locations. The increase was partially offset by the closing of 31 restaurants in 1996. Retail, institutional and other revenues declined by $1.5 million, or 2.7%, to $54.1 million in 1996 from $55.6 million in 1995. The decrease was primarily attributable to the effects of a reduction in promotional activities. COST OF SALES--Cost of sales decreased $0.6 million, or 0.3%, to $192.0 million in 1996 from $192.6 million in 1995. Cost of sales as a percentage of Total revenues decreased to 29.5% in 1996 from 29.7% in 1995. The decrease was due to a 0.2% reduction in food costs at the restaurant level as a result of reduced waste in food preparation. LABOR AND BENEFITS--Labor and benefits decreased $5.3 million, or 2.5%, to $209.3 million in 1996 from $214.6 million in 1995. Labor and benefits as a percentage of Total revenues decreased to 32.2% in 1996 from 33.1% in 1995. The decrease was due to a 1.1% reduction in labor and benefits as a percentage of Restaurant revenues as a result of an improvement in labor utilization and lower group and workers' compensation insurance costs. The decrease was offset by a 0.3% reduction in Retail, institutional and other revenues as a percentage of Total revenues as these revenues have no associated labor and benefits. OPERATING EXPENSES--Operating expenses decreased $0.7 million, or 0.5%, to $143.2 million in 1996 from $143.9 million in 1995. Operating expenses as a percentage of Total revenues decreased in 1996 to 22.0% from 22.2% in 1995. The decrease was due to the allocation of fixed costs over higher total revenues. 25 GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses increased $2.0 million, or 4.9%, to $42.7 million in 1996 from $40.7 million in 1995. General and administrative expenses as a percentage of Total revenues increased to 6.5% in 1996 from 6.2% in 1995. This increase was due to an increase in management bonuses and the annual merit-based salary increases, partially offset by reductions in group medical insurance claims and the elimination of field management positions associated with the closing of 31 restaurants in 1996. General and administrative expenses, exclusive of management bonuses, increased $0.3 million in 1996. EBITDA--As a result of the above, EBITDA increased by $6.3 million, or 11.0%, to $63.7 million in 1996 from $57.4 million in 1995. EBITDA as a percentage of Total revenues increased to 9.8% in 1996 from 8.8% in 1995. NON-CASH WRITE-DOWNS--Non-cash write-downs decreased $7.2 million to $0.2 million in 1996 from $7.4 million in 1995. The decrease was due to a reduction in the carrying value of properties held for disposition of $0.2 million in 1996 and $4.0 million in 1995. In 1995, the Company also incurred a non-cash write-down of $3.3 million relating to costs resulting from a postponed debt refinancing. For further explanation of the non-cash write-downs, see Notes 3, 5 and 6 of Notes to Consolidated Financial Statements. DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased $0.3 million, or 0.9%, to $33.0 million in 1996 from $33.3 million in 1995. The decrease was due to lower amortization of debt restructuring costs, partially offset by an increase in depreciation due to the addition of three restaurants and the ongoing implementation of the Company's revitalization program. Depreciation and amortization as a percentage of Total revenues was 5.1% for both periods. INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and interest income, increased by $2.2 million, or 5.3%, to $44.1 million in 1996 from $41.9 million in 1995. The increase was due to an increase in the interest rate on the Company's bank debt as a result of the debt restructuring effective January 1, 1996. BENEFIT FROM (PROVISION FOR) INCOME TAXES--The benefit from income taxes was $5.9 million in 1996 as compared to a provision for income taxes of $33.4 million in 1995. The benefit from income taxes of $5.9 million in 1996 represented the statutory federal and state tax benefit of the Company's loss partially offset by the impact of the federal and state tax valuation allowances. The income tax provision of $33.4 million in 1995 resulted primarily from the anticipated deconsolidation from TRC. As a result, the deferred tax asset of approximately $19 million related to the NOLs utilized by TRC as of December 31, 1995 was written off in 1995. Additionally, as a result of the anticipated change in ownership and Section 382 limitation, a valuation allowance in 1995 was placed on all Federal NOL carryforwards generated through December 31, 1995. See Note 9 of Notes to Consolidated Financial Statements. and "Net Operating Loss Carryforwards." NET INCOME (LOSS)--As a result of the above, net loss decreased by $50.9 million, or 86.7%, to a net loss of $7.8 million in 1996 from a net loss of $58.7 million in 1995. 1995 COMPARED TO 1994 REVENUES--Total revenues increased $18.1 million, or 2.9%, to $649.1 million in 1995 from $631.0 million in 1994. Restaurant revenues increased $4.2 million, or 0.7%, to $593.6 million in 1995 from $589.4 million in 1994. Comparable restaurant revenues increased by 0.9%. The increase in Restaurant revenues and comparable restaurant revenues was due to the introduction of frozen yogurt, selected menu price increases, a shift in sales mix to higher-priced items, the opening of one new restaurant, the revitalization of 14 restaurants and building expansions at five existing restaurants. The increase was partially offset by the closing of 16 restaurants in 1995. Retail, institutional and other revenues increased $14.0 million, or 26 33.7%, to $55.6 million in 1995 from $41.6 million in 1994. This increase was due to a successful promotional campaign in existing markets and the introduction of frozen yogurt into these markets. COST OF SALES--Cost of sales increased $12.8 million, or 7.1%, to $192.6 million in 1995 from $179.8 million in 1994. Cost of sales as a percentage of Total revenues increased to 29.7% in 1995 from 28.5% in 1994. The increase was due to a 0.8% rise in food costs at the restaurant level as a result of a sales mix shift to higher quality items and increased waste in food preparation and to a 0.4% rise in food costs at the retail and institutional level. LABOR AND BENEFITS--Labor and benefits increased $2.8 million, or 1.3%, to $214.6 million in 1995 from $211.8 million in 1994. Labor and benefits as a percentage of Total revenues decreased in 1995 to 33.1% from 33.6% in 1994. Approximately 0.7% of the decrease was due to an increase in Retail, institutional and other revenues as a percent of Total revenues as these revenues have no associated labor and benefits. This decrease was partially offset by a 0.2% rise in labor and benefits as a percentage of Restaurant revenue due to several large group medical claims and the introduction of a restaurant leadership team concept which placed more focus on customer service by increasing the hours of supervisory restaurant employees. OPERATING EXPENSES--Operating expenses increased $11.9 million, or 9.0%, to $143.9 million in 1995 from $132.0 million in 1994. Operating expenses as a percentage of Total revenues increased to 22.2% in 1995 from 20.9% in 1994. The increase was due to the cost of sponsoring a Ladies Professional Golf Association golf tournament ("The Friendly's Classic") for the first time, an increase in restaurant advertising expenses, higher restaurant renovation expenses, an increase in credit card fees as a result of greater use of credit cards by consumers and an increase in selling expenses associated with the growth in the retail and institutional business. GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses increased $2.3 million, or 6.0%, to $40.7 million in 1995 from $38.4 million in 1994. General and administrative expenses as a percentage of Total revenues increased to 6.2% in 1995 from 6.1% in 1994. The increase was due to several large group insurance claims in 1995, the annual merit-based salary increases and the benefit in 1994 from eliminating a long-term bonus plan. EBITDA--As a result of the above, EBITDA decreased by $11.5 million, or 16.7%, to $57.4 million in 1995 from $68.9 million in 1994. EBITDA as a percentage of Total revenues decreased to 8.8% in 1995 from 10.9% in 1994. NON-CASH WRITE-DOWNS--During 1995, the Company incurred a $3.3 million non-cash write-down relating to costs resulting from a postponed debt refinancing and a $4.0 million write-down of the carrying value of 51 restaurant properties. For a further explanation of the write-downs, see Notes 3, 5 and 6 of Notes to Consolidated Financial Statements. DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased $1.2 million, or 3.7%, to $33.3 million in 1995 from $32.1 million in 1994. The increase was due to the addition of one new restaurant and the ongoing implementation of the Company's revitalization program, partially offset by a decrease in amortization as a result of TRC Acquisition financing costs being fully amortized. Depreciation and amortization as a percentage of Total revenues was 5.1% for both periods. INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and interest income, decreased by $3.6 million, or 7.9%, to $41.9 million in 1995 from $45.5 million in 1994. The decrease was due to the payment of a $3.6 million fee to the Company's lenders in 1994 to facilitate a refinancing of the Company's debt which was never consummated. BENEFIT FROM (PROVISION FOR) INCOME TAXES--The provision for income taxes was $33.4 million as compared to the benefit from income taxes of $4.7 million in 1994. The provision for income taxes of $33.4 million in 1995 was due to the anticipated deconsolidation from TRC. As a result, the deferred tax asset of 27 approximately $19 million related to the NOLs utilized by TRC as of December 31, 1995 was written off in 1995. Additionally, as a result of the anticipated change in ownership and Section 382 limitation, a valuation allowance in 1995 was placed on all Federal NOL carryforwards generated through December 31, 1995. See Note 9 of Notes to Consolidated Financial Statements. The benefit from income taxes of $4.7 million in 1994 represented the statutory federal and state tax benefit of the Company's loss partially offset by the impact of the state tax valuation allowance. NET INCOME (LOSS)--As a result of the above, net loss increased by $54.8 million to a net loss of $58.7 million in 1995 from a net loss of $3.9 million in 1994. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity and capital resources have been cash generated from operations and borrowings under the Old Credit Facility. Net cash provided by operating activities was $29.2 million for the nine months ended September 28, 1997, $26.2 million in 1996, $27.8 million in 1995 and $38.4 million in 1994. Available borrowings under the Old Credit Facility were $27.0 million as of September 28, 1997, excluding $2.1 million of letter of credit availability. Additional sources of liquidity consist of capital and operating leases for financing leased restaurant locations (in malls and shopping centers and land or building leases), restaurant equipment, manufacturing equipment, distribution vehicles and computer equipment. Additionally, sales of under-performing existing restaurant properties and other assets (to the extent the Company's and its subsidiaries' debt instruments, if any, permit) are sources of cash. The amounts of debt financing that the Company will be able to incur under capital leases and for property and casualty insurance financing and the amount of asset sales by the Company will be limited by the terms of the New Credit Facility and the Indenture relating to the Senior Notes. See "Description of New Credit Facility" and "Description of Senior Notes." The Company requires capital principally to maintain existing restaurant and plant facilities, to continue to renovate and re-image existing restaurants, to convert restaurants, to construct new restaurants and for general corporate purposes. Since the TRC Acquisition and through September 28, 1997, the Company has spent $270.3 million on capital expenditures, including $74.1 million on the renovation of restaurants under its revitalization program. The following table, which includes the 34 restaurants franchised to DavCo, presents for the periods indicated (i) the number of restaurants opened and closed during, and the number of restaurants open at the end of, each period, (ii) the number of restaurants in which (a) seating capacity was expanded, (b) certain exterior and interior renovation was completed under the original revitalization program and (c) certain re-imaging was completed under the FOCUS 2000 program and (iii) the aggregate number of restaurants expanded, revitalized and re-imaged since the TRC Acquisition and through the end of each period.
NINE MONTHS FISCAL YEAR ENDED ------------------------------------------------- SEPTEMBER 28, 1994 1995 1996 1997 --------------- --------------- --------------- ----------------- Restaurants opened.......................................... 8 1 3 2 Restaurants closed.......................................... 15 16 31 13 Restaurants open (end of period)............................ 750 735 707 696 Restaurants expanded........................................ 7 5 4 5 Aggregate restaurants expanded.............................. 12 17 21 26 Restaurants revitalized..................................... 67 14 16 9 Aggregate restaurants revitalized........................... 594 608 624 633 Aggregate restaurants re-imaged............................. -- -- -- 4
28 Net cash used in investing activities was $19.1 million for the nine months ended September 28, 1997, $20.3 million in 1996, $18.2 million in 1995 and $28.0 million in 1994. Capital expenditures for restaurant operations, including capitalized leases, were approximately $12.8 million in the nine months ended September 28, 1997, $22.6 million in 1996, $14.5 million in 1995 and $32.6 million in 1994. Capital expenditures were offset by proceeds from the sale of property and equipment of $4.8 million, $8.4 million, $0.9 million and $1.5 million in the nine months ended September 28, 1997, and in 1996, 1995 and 1994, respectively. The Company also uses capital to repay borrowings when cash is sufficient to allow for net repayments. Net cash used in financing activities to repay borrowings was $16.7 million for the nine months ended September 28, 1997, $11.0 million in 1996 and $7.9 million in 1994 as compared to net cash provided by financing activities of $0.2 million in 1995. The Company had a working capital deficit of $17.9 million as of September 28, 1997. The Company is able to operate with a substantial working capital deficit because (i) restaurant operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable, (ii) rapid turnover allows a limited investment in inventories and (iii) cash from sales is usually received before related accounts for food, supplies and payroll become due. The full amount of the Term Loan Facility will be drawn at the closing of the Offerings. Amounts repaid or prepaid under the Term Loan Facility may not be reborrowed. The Company's primary sources of liquidity and capital resources in the future will be cash generated from operations and borrowings under the Revolving Credit Facility and the Letter of Credit Facility. The Revolving Credit Facility will be a five-year facility providing for revolving loans to the Company in a principal amount not to exceed $55 million, including a $5 million sublimit for each of trade and standby letters of credit. The Letter of Credit Facility will mature contemporaneously with the Revolving Credit Facility and will provide for up to $15 million of standby letters of credit. It is expected that no amounts will initially be drawn under the Revolving Credit Facility and $2.1 million will be available under the Letter of Credit Facility at the consummation of the Recapitalization. These facilities are expected to be drawn in part, from time to time, to finance the Company's working capital and other general corporate requirements. See "Description of New Credit Facility." It is expected that the Term Loan Facility will require quarterly amortization payments beginning on April 15, 1999. Annual amortization amounts will total $4.7 million, $10.7 million, $12.7 million, $14.7 million, $18.7 million, $20.3 million and $23.5 million in 1999 through 2005, respectively. In addition to the scheduled amortization, it is expected that the Term Loan Facility will be permanently reduced by (i) specified percentages of each year's Excess Cash Flow (as defined in the New Credit Facility), (ii) specified percentages of the aggregate net cash proceeds from certain issuances of indebtedness and (iii) 100% of the aggregate net cash proceeds from asset sales not in the ordinary course of business and certain insurance claim proceeds, in each case in this clause (iii), not re-employed or committed to be re-employed within a specified period in the Company's business, exclusive of up to $7.5 million of aggregate net proceeds received from asset sales subsequent to the closing relating to the New Credit Facility. Such applicable proceeds and Excess Cash Flow shall be applied to the Term Loan Facility in inverse order of maturity. It is also expected that after the Term Loan Facility has been prepaid, applicable proceeds of debt issuances, asset sales and insurance claims shall be applied to permanently reduce the Revolving Credit Facility. At the Company's option, loans may be prepaid at any time with certain notice and breakage cost provisions. The obligations of the Company under the New Credit Facility will (i) be secured by a first priority security interest in substantially all material assets of the Company and certain of its domestic subsidiaries and all other assets owned or hereafter acquired and (ii) be guaranteed, on a senior secured basis, by the 29 Company's Friendly's Restaurants Franchise, Inc. subsidiary and the Friendly's International, Inc. subsidiary and may also be so guaranteed by certain subsidiaries created or acquired after consummation of the Recapitalization. At the Company's option, the interest rates per annum applicable to the New Credit Facility will be either the Eurodollar Rate (as defined in the New Credit Facility), plus a margin ranging from 2.25% to 2.75%, or the ABR (as defined in the New Credit Facility), plus a margin ranging from 0.75% to 1.25%. The ABR 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 fourth quarter of 1997 and for 1998 are anticipated to be $64.3 million in the aggregate, of which $56.3 million will be spent on restaurant operations. See "Business--Restaurant Operations--Capital Investment Program" for a further description of the Company's estimated 1997 and 1998 capital expenditures. The Company's actual 1997 and 1998 capital expenditures may vary from the estimated amounts set forth herein. See "Risk Factors--Substantial Leverage; Stockholders' Deficit" for a discussion of certain factors, many of which are beyond the Company's control, that could affect the Company's ability to make its planned capital expenditures. In addition, the Company may need capital in connection with (i) commitments as of September 28, 1997 to purchase $51.2 million of raw materials, food products and supplies used in the normal course of business and (ii) its self-insurance through retentions or deductibles of the majority of its workers' compensation, automobile, general liability and group health insurance programs. The Company's self-insurance obligations may exceed its reserves. See Notes 12 and 15 of Notes to Consolidated Financial Statements. The Company believes that the combination of the funds anticipated to be generated from operating activities and borrowing availability under the New Credit Facility will be sufficient to meet the Company's anticipated operating and capital requirements for the foreseeable future. See "Risk Factors--Substantial Leverage; Stockholders' Deficit," "--History of Losses" and "--Restrictions Imposed Under New Credit Facility; Security Interest." OLD CREDIT FACILITY In January 1995, the Company and its lenders amended the Old Credit Facility as a result of certain covenant violations and, in connection therewith, the lenders were granted the right to receive a contingent payment in certain circumstances. In January 1996, the Old Credit Facility was amended and restated pursuant to which revolving credit and term loans totaling $373.6 million were converted to revolving credit loans of $38.5 million and term loans of $335.1 million. In connection therewith, the lenders received Class B common shares which increased their interests in the Company to an aggregate of 50% of the then-issued and outstanding common shares. As a result of the issuance of certain common shares to management and the exercise of certain warrants, additional common shares were issued to the lenders in 1996 to maintain their minimum equity interest at 47.5%. As a result of their ownership of Class B common shares, the lenders obtained the right to elect two of the five members of the Company's Board of Directors. The lenders were given the right to increased board representation and voting rights and the right to receive additional common shares upon certain events. As part of the Recapitalization, the Old Credit Facility will be repaid, the outstanding Class B common shares will be converted into shares of Common Stock, the ownership of such lenders will decrease to approximately 9.8% of the outstanding Common Stock (4.5% if the Underwriters' over-allotment option is exercised in full) and such lenders' nominees on the Board of Directors will be replaced. See "Management," "Ownership of Common 30 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 (5.3% for October 1997). While the limitation on the use of the New NOLs will delay when the New NOLs are utilized, the Company expects all of the New NOLs to be utilized before they expire. Accordingly, no valuation allowance is required related to any New NOLs. The NOLs expire, if unused, between 2001 and 2012. In addition, the NOL carryforwards are subject to adjustment upon review by the Internal Revenue Service. See Note 9 of Notes to Consolidated Financial Statements. INFLATION The inflationary factors which have historically affected the Company's results of operations include increases in cost of milk, sweeteners, purchased food, labor and other operating expenses. Approximately 17% of wages paid in the Company's restaurants are impacted by changes in the federal or state minimum hourly wage rate. Accordingly, changes in the federal or states minimum hourly wage rate directly affect the Company's labor cost. The Company is able to minimize the impact of inflation on occupancy costs by owning the underlying real estate for approximately 42% of its restaurants. The Company and the restaurant industry typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that the Company will be able to offset such inflationary cost increases in the future. See "Risk Factors-- Regulation." SEASONALITY Due to the seasonality of frozen dessert consumption, and the effect from time to time of weather on patronage in its restaurants, the Company's revenues and EBITDA are typically higher in its second and third quarters. 31 BUSINESS GENERAL Friendly's is the leading full-service restaurant operator and has a leading position in premium frozen dessert sales in the Northeast. The Company owns and operates 662 and franchises 34 full-service restaurants and manufactures a complete line of packaged frozen desserts distributed through more than 5,000 supermarkets and other retail locations in 15 states. Friendly's offers its customers a unique dining experience by serving a variety of high-quality, reasonably-priced breakfast, lunch and dinner items, as well as its signature frozen desserts, in a fun and casual neighborhood setting. For the twelve-month period ended September 28, 1997, Friendly's generated $667.0 million in total revenues and $74.9 million in EBITDA (as defined herein) and incurred $44.0 million of interest expense. During the same period, management estimates that over $230 million of total revenues were from the sale of approximately 21 million gallons of frozen desserts. Friendly's restaurants target families with children and adults who desire a reasonably-priced meal in a full-service setting. The Company's menu offers a broad selection of freshly-prepared foods which appeal to customers throughout all day-parts. Breakfast items include specialty omelettes and breakfast combinations featuring eggs, pancakes and bacon or sausage. Lunch and dinner items include a new line of wrap sandwiches, entree salads, soups, super-melts, specialty burgers and new stir-fry, chicken, pot pie, tenderloin steak and seafood entrees. Friendly's is also recognized for its extensive line of ice cream shoppe treats, including proprietary products such as the Fribble-Registered Trademark-, Candy Shoppe-Registered Trademark- Sundaes and the Wattamelon Roll-Registered Trademark-. The Company believes that one of its key strengths is the strong consumer awareness of the Friendly's brand name, particularly as it relates to the Company's signature frozen desserts. This strength and the Company's vertically-integrated operations provide several competitive advantages, including the ability to (i) utilize its broad, high-quality menu to attract customer traffic across multiple day-parts, particularly the afternoon and evening snack periods, (ii) generate incremental revenues through strong restaurant and retail market penetration, (iii) promote menu enhancements and extensions in combination with its unique frozen desserts and (iv) control quality and maintain operational flexibility through all stages of the production process. Friendly's, founded in 1935, was publicly held from 1968 until January 1979, at which time it was acquired by Hershey Foods Corporation ("Hershey"). While owned by Hershey, the Company increased the total number of restaurants from 601 to 849 yet devoted insufficient resources to product development and capital improvements. In 1988, The Restaurant Company ("TRC"), an investor group led by Donald Smith, the Company's current Chairman, Chief Executive Officer and President, acquired Friendly's from Hershey (the "TRC Acquisition"). The high leverage associated with the TRC Acquisition and the Old Credit Facility severely impacted the liquidity and profitability of the Company and, therefore, limited the scope and implementation of certain of the Company's business and growth strategies. The Company has reported net losses and had earnings that were insufficient to cover fixed charges for each fiscal year since the TRC Acquisition except for the nine months ended September 28, 1997. As a result of subsequent restructurings, and upon completion of the Recapitalization and the Related Transactions, approximately 16.8% and 9.8% of the Common Stock will be owned by Company's employees and lenders under the Old Credit Facility, respectively. See "Risk Factors," "Selected Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Ownership of Common Stock." Despite the Company's capital constraints, management implemented a number of initiatives to restore and improve operational and financial efficiencies. From the date of the TRC Acquisition through 1994, the Company (i) implemented a major revitalization of its restaurants, (ii) repositioned the Friendly's concept from a sandwich and ice cream shoppe to a full-service, family-oriented restaurant with broader menu and day-part appeal, (iii) elevated customer service levels by recruiting more qualified managers and expanding the Company's training program, (iv) disposed of 123 under-performing restaurants and (v) 32 capitalized upon the Company's strong brand name recognition by initiating the sale of Friendly's unique line of packaged frozen desserts through retail locations. Beginning in 1994, the Company began implementing several growth initiatives including (i) testing and implementing a program to expand the Company's domestic distribution network by selling frozen desserts and other menu items through non-traditional locations, (ii) distributing frozen desserts internationally by introducing dipping stores in South Korea and the United Kingdom and (iii) implementing a franchising strategy to extend profitably the Friendly's brand without the substantial capital required to build new restaurants. As part of this strategy, on July 14, 1997 the Company entered into the DavCo Agreement. See "Prospectus Summary--Recent Developments." Implementation of these initiatives since the TRC Acquisition has resulted in substantial improvements in revenues and EBITDA. Despite the closing of 152 restaurants (net of restaurants opened) since the beginning of 1989 and periods of economic softness in the Northeast, the Company's restaurant revenues have increased 7.5% from $557.3 million in 1989 to $599.3 million in the twelve months ended September 28, 1997, while average revenue per restaurant has increased 29.8% from $665,000 to $863,000 during the same period. Retail, institutional and other revenues and franchise revenues have also increased from $1.4 million in 1989 to $67.7 million in the twelve months ended September 28, 1997. In addition, EBITDA has increased 58.0% from $47.4 million in 1989 to $74.9 million in the twelve-month period ended September 28, 1997, while operating income has increased from $4.1 million to $42.0 million over the same period. Friendly's intends to utilize the increased liquidity and operating and financial flexibility resulting from consummation of the Recapitalization in order to continue to grow the Company's revenues and earnings by implementing the following key business strategies: (i) continuously upgrade the menu and introduce new products, (ii) revitalize and re-image existing Friendly's restaurants, (iii) construct new restaurants, (iv) enhance the Friendly's dining experience, (v) expand the restaurant base through high-quality franchisees, (vi) increase market share through additional retail accounts and restaurant locations, (vii) introduce modified formats of the Friendly's concept into non-traditional locations and (viii) extend the Friendly's brand into international markets. COMPETITIVE STRENGTHS THE COMPANY BELIEVES THAT, IN THE NORTHEAST, ITS LEADING POSITION IN FULL-SERVICE RESTAURANT AND PREMIUM FROZEN DESSERT SALES IS ATTRIBUTABLE TO THE FOLLOWING COMPETITIVE STRENGTHS: STRONG BRAND NAME RECOGNITION. During the past 60 years, management believes the Friendly's brand name has become synonymous with high-quality food and innovative frozen desserts. The Company believes that the brand name awareness created by its premium frozen dessert heritage drives customer traffic, particularly during the afternoon and evening snack periods, promotes menu enhancement and extension and generates incremental revenues from the Company's retail and non-traditional distribution channels. The Company's independent surveys indicate that, in the Northeast, over 90% of all households recognize the Friendly's brand and that over 30% of these households visit a Friendly's restaurant every three months. SIGNATURE FROZEN DESSERTS. Friendly's produces an innovative line of high-quality freshly-scooped and packaged frozen desserts, which have been cited by customers as a key reason for choosing Friendly's. Accordingly, approximately 50% of all visits to a Friendly's restaurant include a frozen dessert purchase. Freshly-scooped specialties served in Friendly's restaurants include the Jim Dandy and Oreo-Registered Trademark- Brownie sundaes, and the Fribble-Registered Trademark-, the Company's signature thick shake. Packaged goods available for purchase in both restaurant and retail locations include traditional and low-fat ice cream, yogurt and sorbets in half gallons, pints and cups and a wide variety of ice cream cakes, pies and rolls such as the Jubilee Roll-Registered Trademark- and Wattamelon Roll-Registered Trademark-. In addition, the Company licenses from Hershey the rights to feature in its signature desserts certain candy brands such as Almond Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-, Reeses Pieces-Registered Trademark-, Reeses-Registered Trademark- Peanut Butter Cups and York-Registered Trademark- Peppermint Patties. 33 BROAD, HIGH-QUALITY MENU. The Company has successfully capitalized on Friendly's reputation for high-quality, wholesome foods including the well-known $2.22 Breakfast, Big Beef-Registered Trademark- Hamburger, Fishamajig-Registered Trademark- Sandwich and Clamboat-Registered Trademark- Platter by extending these offerings into a broader product line including freshly-prepared omelettes, SuperMelt-TM- Sandwiches, Colossal Sirloin Burgers-TM-, tenderloin steaks and stir-fry entrees. Reflecting this increased menu variety, food products now account for over 70% of restaurant revenues, and guest check averages have increased significantly over the last five years. Friendly's also has an extensive Kid's Menu which encourages family dining due to the significant appeal to children of the Friendly's concept. MULTIPLE DAY-PART APPEAL. Due to the appeal of Friendly's frozen desserts, the Company generates approximately 35% of its restaurant revenues during the afternoon and evening snack periods (2:00 p.m. to 5:00 p.m. and 8:00 p.m. to closing), providing Friendly's with the highest share of snack day-part sales in the Northeast. Accordingly, the Company endeavors to maximize revenue across multiple day-parts by linking sales of its high-margin frozen desserts with its lunch and dinner entrees. The Company generates approximately 12%, 24% and 29% of restaurant revenues from breakfast, lunch and dinner, respectively. STRONG RESTAURANT AND RETAIL MARKET PENETRATION. The Company has the highest market share among full-service restaurants and a leading position in premium frozen dessert sales in the Northeast. The Company's strong restaurant and retail market penetration provides incremental revenues and cash flow, as multiple levels of visibility and availability provide cross promotion opportunities and enhance consumer awareness and trial of the Company's unique products while effectively targeting consumers for both planned and impulse purchases. For example, the new Colossal Sirloin Burger-TM- was introduced with a new 79 CENTS Caramel Fudge Blast-TM- Sundae during the spring of 1997. In addition to promoting sales of this new entree, this strategy increased consumer awareness and trial of the new sundae combination, which in turn supported the introduction of Caramel Fudge Nut Blast-TM- Sundae half gallons into restaurants and retail locations. VERTICALLY-INTEGRATED OPERATIONS. Friendly's vertically-integrated operations are designed to deliver the highest quality food and frozen desserts to its customers and to allow the Company to adapt to evolving customer tastes and preferences. The Company formulates new products and upgrades existing food and frozen desserts through its research and development group and controls all stages in the production of its frozen desserts through its two manufacturing facilities. In addition, the Company controls cost and product quality and efficiently manages inventory levels from point of purchase through restaurant delivery utilizing its three distribution facilities and fleet of 56 tractors and 81 trailers. Furthermore, Friendly's maximizes its purchasing power when sourcing materials and services for its restaurant and retail operations through its integrated purchasing department. MANAGEMENT EXPERIENCE AND EMPLOYEE RETENTION. The Company has a talented senior management team with extensive restaurant industry experience and an average tenure with the Company of 17 years. In addition, the Company minimizes turnover of both managers and line personnel through extensive employee training and retention programs. In 1996, the Company's turnover among its restaurant salaried management was approximately 24%, which was significantly lower than the industry average. BUSINESS STRATEGIES FRIENDLY'S OBJECTIVE IS TO CAPITALIZE ON ITS COMPETITIVE STRENGTHS TO GROW ITS RESTAURANT AND RETAIL OPERATIONS BY IMPLEMENTING THE FOLLOWING KEY BUSINESS STRATEGIES: UPGRADE MENU AND SELECTIVELY INTRODUCE NEW PRODUCTS. Friendly's strategy is to increase consumer awareness and restaurant patronage by continuously upgrading its menu and introducing new products. As part of this strategy, Friendly's dedicated research and development group regularly formulates proprietary new menu items and frozen desserts to capitalize on the evolving tastes and preferences of its customers. In the fall of 1996, the Company introduced a new dinner line which includes a high-quality steak entree, home-style chicken dinners, pot pies and stir-frys, as well as several premium frozen desserts including the 34 new Oreo-Registered Trademark- Brownie Sundae. Largely as a result of new premium items, guest check averages have increased 7.4% during the first nine months of 1997 as compared to the same period of 1996. REVITALIZE AND RE-IMAGE RESTAURANTS. Friendly's seeks to continue to grow restaurant revenues and cash flow through the ongoing revitalization and re-imaging of existing restaurants and to increase total restaurant revenues through the addition of new restaurants. The Company has revitalized approximately 633 restaurants since the beginning of 1989, increasing average restaurant revenues from $665,000 in 1989 to $863,000 in the twelve months ended September 28, 1997. Further, the Company has initiated its FOCUS 2000 program which includes an advanced re-imaging of restaurants and the installation of custom designed restaurant automation systems in a majority of its restaurants. In addition, as part of its ongoing capital spending program, the Company plans to refurbish substantially all of its restaurants every five to six years to further enhance customer appeal. The Company also expects to increase market share through the opening of four new Company-owned restaurants in 1997 (two of which have opened to date) and 10 new restaurants in 1998. ENHANCE THE FRIENDLY'S DINING EXPERIENCE. In addition to menu upgrades and restaurant re-imaging, the FOCUS 2000 program includes initiatives to improve food presentation and customer service. The Company believes that implementation of this program will create a consistent, enhanced Friendly's restaurant brand image. This strategy recognizes that food quality, dining atmosphere and attentive service all contribute to customer satisfaction. The Company maintains a consistently high standard of food preparation and customer service through stringent operational controls and intensive employee training. To help guarantee that employees perform in this manner, Friendly's maintains a dedicated training and development center where managers are thoroughly trained in customer service. EXPAND RESTAURANT BASE AND MARKET PENETRATION THROUGH HIGH-QUALITY FRANCHISEES. Friendly's is implementing a franchising strategy to further develop the Friendly's brand and grow both revenue and cash flow without the substantial capital required to build new restaurants. This strategy seeks to (i) expand its restaurant presence in under-penetrated markets, (ii) accelerate restaurant growth in new markets, (iii) increase marketing and distribution efficiencies and (iv) preempt the Company's competition from acquiring certain prime real estate sites. Friendly's will receive a royalty based on total franchisee revenues and revenues and earnings from the sale of its frozen desserts and other products to franchisees. INCREASE MARKET SHARE OF PREMIUM FROZEN DESSERTS. Capitalizing on its position as a recognized leader in premium frozen desserts, Friendly's seeks to increase its market share. The Company expects to build market share by expanding distribution beyond its 696 Company-owned and franchised restaurants and its more than 5,000 retail locations by (i) adding new locations, (ii) increasing shelf space in current locations through new product introductions and more prominent freezer displays and (iii) increasing consumer and trade merchandising. INTRODUCE MODIFIED FORMATS INTO NON-TRADITIONAL LOCATIONS. In order to capitalize on both planned and impulse purchases, the Company is leveraging the Friendly's brand name and enhancing consumer awareness by introducing modified formats of the Friendly's concept into non-traditional locations. These modified formats include (i) Friendly's Cafe, a quick service concept offering frozen desserts and a limited menu, (ii) Friendly's branded ice cream shoppes offering freshly-scooped and packaged frozen desserts and (iii) Friendly's branded display cases and novelty carts with packaged single-serve frozen desserts. The first Friendly's Cafe opened in October 1997. The Company supplies frozen desserts to non-traditional locations such as colleges and universities, sports facilities, amusement parks, secondary school systems and business cafeterias directly or through selected vendors pursuant to multi-year license agreements. EXTEND THE FRIENDLY'S BRAND INTERNATIONALLY. The Company's long-term international growth strategy is to utilize local partners and establish master franchise or licensee agreements to extend the brand internationally and to achieve profitable growth while minimizing capital investment. Currently, the Company's Friendly's International, Inc. subsidiary ("FII") participates in a licensing agreement with a South Korean enterprise to develop Friendly's "Great American" ice cream shoppes in that country. As of 35 September 28, 1997, the licensee and its sublicensees were operating 18 ice cream shoppes, and the Company expects such parties to operate 28 ice cream shoppes by the end of 1997. FII also sells the Company's frozen desserts in several chain restaurants, theaters and food courts in the United Kingdom. The Company selects its international markets based on the high quality of the Company's frozen desserts relative to locally-produced frozen desserts and the propensity of consumers in these regions to purchase American-branded products. RESTAURANT OPERATIONS MENU Friendly's believes it provides significant value to consumers by offering a wide variety of freshly-prepared, wholesome foods and frozen desserts at a reasonable price. The menu currently features over 100 items comprised of a broad selection of breakfast, lunch, dinner and afternoon and evening snack items. Breakfast items include specialty omelettes and breakfast combinations featuring eggs, pancakes and bacon or sausage. Breakfasts generally range from $2.00 to $6.00 and account for approximately 12% of average restaurant revenues. Lunch and dinner items include a new line of wrap sandwiches, entree salads, soups, super-melts, specialty burgers, appetizers including quesadillas, mozzarella cheese sticks and "Fronions," and stir-fry, chicken, pot pie, tenderloin steak and seafood entrees. These lunch and dinner items generally range from $4.00 to $9.00, and these day-parts account for approximately 53% of average restaurant revenues. Entree selections are complemented by Friendly's premium frozen desserts, including the Fribble-Registered Trademark-, the Company's signature thick shake, Happy Ending-Registered Trademark- Sundaes and fat-free Sorbet Smoothies. The Company's frozen desserts are an important component of the success of the Company's snack day-part which accounts for 35% of average restaurant revenues. RESTAURANT LOCATIONS AND PROPERTIES The table below identifies the location of the 696 restaurants operating as of September 28, 1997.
COMPANY-OWNED/LEASED ------------------------------------ FREESTANDING OTHER FRANCHISED TOTAL STATE RESTAURANTS RESTAURANTS (A) RESTAURANTS (B) RESTAURANTS - ----------------------------------------------------- --------------- ------------------- ------------------- --------------- Connecticut.......................................... 49 20 -- 69 Delaware............................................. -- 1 6 7 Florida.............................................. 13 2 -- 15 Maine................................................ 10 -- -- 10 Maryland............................................. 3 7 22 32 Massachusetts........................................ 116 37 -- 153 Michigan............................................. 1 -- -- 1 New Hampshire........................................ 14 6 -- 20 New Jersey........................................... 47 18 -- 65 New York............................................. 130 34 -- 164 Ohio................................................. 57 3 -- 60 Pennsylvania......................................... 51 13 -- 64 Rhode Island......................................... 8 -- -- 8 Vermont.............................................. 7 3 -- 10 Virginia............................................. 10 2 6 18 --- --- --- --- Total............................................ 516 146 34 696
- ------------------------ (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." 36 The 546 freestanding restaurants, including 30 franchised to DavCo, range in size from approximately 2,600 square feet to approximately 5,000 square feet. The 150 mall and strip center restaurants, including four franchised to DavCo, average approximately 3,000 square feet. Of the 662 restaurants operated by the Company at September 28, 1997, the Company owned the buildings and the land for 279 restaurants, owned the buildings and leased the land for 145 restaurants, and leased both the buildings and the land for 238 restaurants. The Company's leases generally provide for the payment of fixed monthly rentals and related occupancy costs (e.g. property taxes, common area maintenance and insurance). Additionally, most mall and strip center leases require the payment of common area maintenance charges and incremental rent of between 3.0% and 6.0% of the restaurant's sales. RESTAURANT ECONOMICS During the twelve-month period ended September 28, 1997, average revenue per restaurant was $863,000, average restaurant cash flow was $153,000 (after rent expense of $20,000) and average restaurant operating income was $121,000. Average restaurant cash flow represents restaurant operating income before depreciation and amortization. Average revenue per restaurant for the 232 freestanding restaurants with more than 100 seats was $1,099,000, average revenue per restaurant for the 285 freestanding restaurants with less than 100 seats was $694,000 and average revenue per restaurant for the 145 other restaurants was $818,000. The Company has opened 12 new restaurants since the beginning of 1994, nine of which had been operating for at least 12 months as of September 28, 1997. Such nine restaurants, which had an average of 136 seats, generated average revenue per restaurant of $1,201,000, average restaurant cash flow of $186,000 (after rent expense of $91,000) and average restaurant operating income of $130,000. The average cash investment to open such nine restaurants (all of which were conversions) was approximately $460,000, excluding pre-opening expenses, or $1,394,000 including rent expense capitalized at 9.0%. Pre-opening expenses were approximately $85,000 per restaurant. The Company plans to continue to convert restaurants and estimates that conversions will cost $500,000 to $600,000 per restaurant, excluding land and pre-opening expenses. The Company converted a 178-seat restaurant in Burlington, Vermont in December 1996 at a cost of $540,000, or $1,568,000 including rent expense capitalized at 9.0%. This restaurant has achieved average weekly revenues of $36,000 through September 28, 1997. The Company also converted a 136-seat restaurant in Berlin, Vermont in September 1997 at a cost of approximately $500,000, or approximately $972,000 including rent expense capitalized at 9.0%. While conversions generally cost less than new construction, the Company plans to selectively construct new restaurants when the anticipated return is sufficient to warrant the increased cost of new construction. The Company has developed two new freestanding restaurant prototypes for construction, including 108-seat and 156-seat prototypes, which are anticipated to cost approximately $730,000 and $780,000 per restaurant, respectively, excluding land and pre-opening expenses. Pre-opening expenses are estimated to be $85,000 per restaurant. The Company opened its first 156-seat prototype restaurant in Waterville, Maine in July 1997 at a cost of $800,000, or $1,080,000 including rent expense capitalized at 9.0%. CAPITAL INVESTMENT PROGRAM A significant component of the Company's capital investment program is the FOCUS 2000 initiative which is designed to establish a consistent, enhanced Friendly's brand image across the Company's entire restaurant operations. The Company's capital spending strategy seeks to increase comparable restaurant revenues and restaurant cash flow through the on-going revitalizing and re-imaging of existing restaurants and to increase total restaurant revenues through the addition of new restaurants. The following illustrates the key components of the Company's capital spending program. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Description of New Credit Facility." 37 RESTAURANT RE-IMAGING. The Company expects to complete the re-imaging of 70 restaurants in 1997 (23 of which have been completed to date) at an estimated cost of $120,000 per restaurant (not including $850,000 of one time costs related to development of the prototype). This cost typically includes interior and exterior redecoration and a new exterior lighting package. The Company expects to complete the re-imaging of approximately 110 restaurants during 1998. NEW RESTAURANT CONVERSION AND CONSTRUCTION. The Company has converted one restaurant in 1997 at a cost of approximately $500,000. The Company expects to construct three new restaurants in 1997 (one of which has been completed to date) at an estimated cost of approximately $800,000 per restaurant, excluding land and pre-opening expenses. The Company expects to complete the conversion or construction of approximately ten restaurants during 1998. SEATING CAPACITY EXPANSION PROGRAM. Since the TRC Acquisition and through September 28, 1997, the Company has expanded seating capacity by an average of 50 seats at 26 restaurants at an average cost of $292,000 per restaurant. Revenue per restaurant increased approximately 24% in the full year following completion of this expansion compared to the comparable prior period. The Company expects to complete the expansion of seven restaurants in 1997 (five of which have been completed to date) at an estimated cost of $244,000 per restaurant. This cost typically includes adding 50 seats per restaurant, relocating certain equipment and increasing parking capacity where necessary. The Company expects to complete the expansion of approximately four restaurants during 1998. INSTALLATION OF RESTAURANT AUTOMATION SYSTEMS. Since the TRC Acquisition and through September 28, 1997, the Company has installed touch-screen point of sale ("POS") register systems in approximately 340 restaurants at an average cost of $34,000 per restaurant. These POS register systems are designed to improve revenue realization, food cost management and labor scheduling while increasing the speed and accuracy of processing customer orders. The Company expects to install POS register systems in approximately 40 restaurants during 1998. FRANCHISING PROGRAM The Company recently initiated a franchising strategy to expand its restaurant presence in under-penetrated markets, accelerate restaurant growth in new markets, increase marketing and distribution efficiencies and preempt competition by acquiring restaurant locations in the Company's targeted markets. With the substantial completion of the Company's restaurant revitalization program, the development and initial deployment of its two new freestanding restaurant prototypes and the successful introduction of its new dinner line, the Company believes it is in a position to maximize the value of its brand appeal to prospective franchisees. The Company's wholly owned subsidiary, Friendly's Restaurants Franchise, Inc. ("FRFI") commenced operations in 1996 for the purpose of franchising various restaurant concepts. Since it began operations, FRFI has developed and now offers a franchise program for both Friendly's restaurants and Friendly's Cafes. The Company seeks franchisees who have related business experience, capital adequacy to build-out the Friendly's concept and no operations which have directly competitive restaurant or food concepts. On July 14, 1997, the Company entered into the DavCo Agreement pursuant to which DavCo purchased certain assets and rights in 34 existing Friendly's restaurants in Maryland, Delaware, the District of Columbia and northern Virginia, committed to open an additional 74 restaurants over the next six years and, subject to the fulfillment of certain conditions, further agreed to open 26 additional restaurants, for a total of 100 new restaurants in this franchising region over the next ten years. QUALITY CONTROL PROGRAMS The Company's high quality standards are promoted through strict product specifications, guest service programs and defined daily operating systems and procedures for maintenance, cleanliness and safety. Policy and operating manuals and video support materials for employee training are maintained in all Friendly's restaurants. The Company uses a variety of guest feedback systems to measure, monitor and 38 react to service performance including comment cards, "800" telephone call-in lines, guest commentary follow-up systems, focus groups and an independent quarterly consumer tracking study conducted by National Purchase Diary, Inc. The Company's customer service center is implementing a chainwide program to receive and log customer feedback by restaurant and to report monthly to field management. All levels of field management are directly responsible for and evaluated according to guest satisfaction levels. CARRYOUT OPERATIONS Through dedicated carryout areas, Friendly's restaurants offer the Company's full line of frozen desserts and certain of its food menu items. Reserved parking is available at many of the Company's free-standing restaurants to facilitate quick carryout service. Approximately 15% of the Company's average freestanding restaurant revenues are derived from its carryout business with a significant portion of these sales occurring during the afternoon and evening snack periods. Of this 15%, approximately 5% comes from sales of packaged frozen desserts in display cases within its restaurants. RETAIL AND RELATED OPERATIONS RETAIL OPERATIONS In 1989, the Company extended its premium packaged frozen dessert line from its restaurants into retail locations. The Company has profitably grown its revenue from the sale of such products to retail outlets from $1.4 million in 1989 to $60.1 million in the twelve months ended September 28, 1997. The Company offers a branded product line that includes approximately 60 half gallon varieties featuring premium ice cream shoppe flavors and unique sundae combinations, low and no fat frozen yogurt, low fat ice cream and sherbet. Specialty flavors include Royal Banana Split, Cappuccino Dream-TM- and Caramel Fudge Nut Blast-TM-, and proprietary products include the Jubilee Roll-Registered Trademark-, Wattamelon Roll-Registered Trademark- and Friendly's branded ice cream cakes and pies. The Company also licenses from Hershey the right to feature certain candy brands including Almond Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-, Reese's Pieces-Registered Trademark-, Reese's-Registered Trademark- Peanut Butter Cups and York-Registered Trademark- Peppermint Patties on packaged sundae cups and pints. See "Licenses and Trademarks." The Company focuses its marketing and distribution efforts in areas where it has higher restaurant penetration and consumer awareness. During the initial expansion of its retail business in 1989 and 1990, Albany, Boston and Hartford/Springfield were primary markets of opportunity, currently with 35, 118 and 95 restaurant locations, respectively. Targeting other markets with high growth potential and strong Friendly's brand awareness, the Company added the New York and Philadelphia markets, currently with 135 and 64 restaurants, respectively, to its retail distribution efforts in 1992 and 1993. According to recent A.C. Nielsen reports, the Company currently maintains a weighted average market share of approximately 11% in the Albany, Boston and Hartford/Springfield markets and 4% in the New York and Philadelphia markets. The Company expects to continue building its retail distribution business by increasing market share in its current retail markets. In these markets, the Company intends to increase shelf space with existing accounts and add new accounts by (i) capitalizing on its integrated restaurant and retail consumer advertising and promotion programs, (ii) continuing new product introductions and (iii) improving trade merchandising initiatives. Additionally, the Company expects to continue to selectively enter new markets where its brand awareness is high according to market surveys. In Pittsburgh, where the Company currently has no restaurants, the Company has a packaged frozen dessert market share of approximately 4%, according to A.C. Nielsen. The Company has developed a broker/distributor network designed to protect product quality through proper product handling and to enhance the merchandising of the Company's frozen desserts. The Company's experienced sales force manages this network to serve specific retailer needs on a market-by- 39 market basis. In addition, the Company's retail marketing and sales departments coordinate market development plans and key account management programs. NON-TRADITIONAL LOCATIONS In order to capitalize on both planned and impulse purchases, the Company is leveraging the Friendly's brand name and enhancing consumer awareness by introducing modified formats of the Friendly's concept into non-traditional locations. These modified formats include (i) Friendly's Cafe, a quick service concept offering frozen desserts and a limited menu, (ii) Friendly's branded ice cream shoppes offering freshly-scooped and packaged frozen desserts and (iii) Friendly's branded display cases and novelty carts with packaged single-serve frozen desserts. The first Friendly's Cafe opened in October 1997. The Company supplies frozen desserts to non-traditional locations such as colleges and universities, sports facilities, amusement parks, secondary school systems and business cafeterias directly or through selected vendors pursuant to multi-year license agreements. INTERNATIONAL OPERATIONS The Company, through its FII subsidiary, has a master license agreement with a South Korean enterprise to develop Friendly's "Great American" ice cream shoppes offering freshly-scooped and packaged frozen desserts. As of September 28, 1997, the licensee and its sublicensees were operating 18 ice cream shoppes, and the Company expects such parties to operate 28 ice cream shoppes by the end of 1997. FII also has various licensing arrangements with several companies in the United Kingdom under which certain of the Company's frozen desserts are distributed in the United Kingdom. The Company's strategy in the United Kingdom is to sell Friendly's branded frozen deserts in full and quick-service restaurants, movie theaters, railway and bus stations, shopping malls and airport locations pursuant to license agreements. Non-restaurant locations will vary from full dipping stations to sundae station kiosks or sundae carts. In addition, the Company's products will be distributed to selected retailers for resale. In addition, the Company is a 50% partner in a joint venture in Shanghai, China which has manufactured and distributed frozen desserts on a limited basis. The joint venture is currently seeking additional distribution for its products in China. In markets where a capital investment by the Company is required to introduce its brand, the Company seeks to monetize such investment by entering into franchising or licensing arrangements, and subsequently to redeploy its capital, if necessary, into new international markets. The Company believes that there are significant growth opportunities within South Korea, the United Kingdom and China, as well as in other countries, in particular those within the Pacific Rim. MARKETING The Company's marketing strategy is to continue to strengthen Friendly's brand equity and further capitalize on its strong customer awareness to profitably build revenues across all businesses. The primary advertising message, built around its "Leave room for the ice cream-TM-" slogan, focuses on introducing new lunch and dinner products or line extensions in combination with unique frozen desserts. For example, in 1996, Friendly's introduced a new line of steak dinners and promoted trial of the line with a free Happy Ending-Registered Trademark- Sundae. Management utilizes this strategy to encourage consumer trial of new products and increase the average guest check while reinforcing Friendly's unique food-with-ice-cream experience. The Company's food-with-ice-cream promotions also build sales of packaged frozen desserts in its restaurants and in retail locations. The Company's media plan is designed to build awareness and increase trial among key target audiences while optimizing spending by market based on media cost efficiencies. The Company classifies markets based upon restaurant penetration and the resulting advertising and promotion costs per restaurant. The Company's 19 most highly-penetrated markets are supported with regular spot television advertisements from March through December. The Company augments its marketing efforts in these markets with radio advertising to target the breakfast day-part or to increase the frequency of the 40 promotional message. In addition, the Company supports certain of these highly-penetrated markets (Albany, Boston, Hartford-Springfield and Providence) during the peak summer season with additional television media focusing on freshly-scooped and packaged frozen desserts. In its secondary markets, the Company utilizes more cost-effective local store marketing initiatives such as radio, direct mail and newspaper advertising. All of the Company's markets are supported with an extensive promotional coupon program. The Company believes that its integrated restaurant and retail marketing efforts provide a significant competitive advantage supporting development of its retail business. Specifically, the retail business benefits from the awareness and trial of Friendly's product offerings generated by 32 weeks of food-with-ice-cream advertising and couponing efforts. The Company believes that this approach delivers a significantly higher level of consumer exposure and usage compared to the Company's packaged frozen dessert competitors which have only retail distribution. In turn, sales of the Company's products through more than 5,000 retail locations, supported by trade merchandising efforts, build incremental awareness and usage of Friendly's which management believes benefits the restaurants. The Company estimates that advertising and promotion expenditures will be approximately $20 million for 1997. MANUFACTURING The Company produces substantially all of its frozen desserts in two Company-owned manufacturing plants which employ a total of approximately 300 people. The Wilbraham, Massachusetts plant occupies approximately 41,000 square feet of manufacturing space while the Troy, Ohio plant utilizes approximately 18,000 square feet. During 1996, the combined plants operated at an average capacity of 68.0% and produced (i) over 17.0 million gallons of ice cream, sherbets and yogurt in bulk, half-gallons and pints, (ii) nine million sundae cups, (iii) 2.5 million frozen dessert rolls, pies and cakes and (iv) more than 1.4 million gallons of fountain syrups and toppings. The Company, through its Shanghai, China joint venture, also owns a 13,000 square foot ice cream manufacturing facility. The quality of the Company's products is important, both to sustain Friendly's image and to enable the Company to satisfy customer expectations. Wherever possible, the Company "engineers in" quality by installing modern processes such as computerized mix-making equipment and monitoring devices to ensure all storage tanks and rooms are kept at proper temperatures for maximum quality. PURCHASING AND DISTRIBUTION In conjunction with the Company's product development department, the Company's purchasing department evaluates the cost and quality of all major food items on a quarterly basis and purchases these items through numerous vendors with which it has long-term relationships. The Company contracts with vendors on an annual, semiannual, or monthly basis depending on the item and the opportunities within the marketplace. In order to promote competitive pricing and uniform vendor specifications, the Company contracts directly for such products as produce, milk and bread and other commodities and services. The Company also minimizes the cost of all restaurant capital equipment by purchasing directly from manufacturers or pooling volumes with master distributors. The Company owns two distribution centers and leases a third which allow the Company to control quality, costs and inventory from the point of purchase through restaurant delivery. The Company distributes most product lines to its restaurants, and its packaged frozen desserts to its retail customers, from warehouses in Chicopee and Wilbraham, Massachusetts and Troy, Ohio with a combined non-union workforce of approximately 250 employees. The Company's truck fleet delivers all but locally-sourced produce, milk and selected bakery products to its restaurants at least weekly, and during the highest-sales periods, delivers to over 50% of Friendly's restaurants twice-per-week. The Chicopee, Wilbraham and Troy warehouses encompass 54,000 square feet, 109,000 square feet and 42,000 square feet, respectively. The Company believes that these distribution facilities operate at or above industry standards with respect to timeliness and accuracy of deliveries. 41 The Company has distributed its products since its inception to protect the product integrity of its frozen desserts. The Company delivers products to its restaurants on its own fleet of 56 tractors and 81 trailers which display large-scale images of the Company's featured products. The entire fleet is specially built to be compatible with storage access doors, thus protecting frozen desserts from "temperature shock." Recently acquired trailers have an innovative design which provides individual temperature control for three distinct compartments. To provide additional economies to the Company, the truck fleet backhauls on over 50% of its delivery trips, bringing the Company's purchased raw materials and finished products back to the distribution centers. HUMAN RESOURCES AND TRAINING The average Friendly's restaurant employs between two and four salaried team members, which may include one General Manager, one Assistant Manager, one Guest Service Supervisor and one Manager-in-Training. The General Manager is directly responsible for day-to-day operations. General Managers report to a District Manager who typically has responsibility for an average of seven restaurants. District Managers report to a Division Manager who typically has responsibility for approximately 50 restaurants. Division Managers report to a Regional Vice President who typically has responsibility for six or seven Division Managers covering approximately 350 restaurants. The average Friendly's restaurant is staffed with four to ten employees per shift, including the salaried restaurant management. Shift staffing levels vary by sales volume level, building configuration and time of day. The average restaurant typically utilized approximately 37,500 hourly-wage labor hours in 1996 in addition to salaried management. To maintain its high service and quality standards, Friendly's has developed its Restaurant Leadership Team ("RLT"). The RLT is comprised of highly-qualified management employees, each of whom has received extensive training in Company policies and procedures, as well as applicable federal, state and local regulations. This team approach helps to ensure that the Company has the strong leadership and management staff required to efficiently operate Friendly's restaurants, provide quality service to customers and develop a pool of well-qualified management candidates. These management candidates undergo extensive training at the Company's dedicated training and development center. Moreover, the Company has significantly improved its human resources training to include sexual harassment, racial discrimination, diversity, employment practices, government regulations, selection and assessment and other programs. The Company also requires its District and Division Managers to participate in training and development programs, provides courses to improve management skills and offers development support for its headquarters employees. EMPLOYEES The total number of employees at the Company varies between 24,000 and 28,000 depending on the season of the year. As of September 28, 1997, the Company employed approximately 24,000 employees, of which approximately 23,000 were employed in Friendly's restaurants (including approximately 120 in field management), approximately 550 were employed at the Company's two manufacturing and three distribution facilities and approximately 450 were employed at the Company's corporate headquarters and other offices. None of the Company's employees is a party to a collective bargaining agreement. HEADQUARTERS AND OTHER NON-RESTAURANT PROPERTIES In addition to the Company's restaurants, the Company owns (i) an approximately 260,000 square foot facility on 46 acres in Wilbraham, Massachusetts which houses the corporate headquarters, a manufacturing facility and a warehouse, (ii) an approximately 77,000 square foot office, manufacturing and warehouse facility on 13 acres in Troy, Ohio and (iii) an approximately 18,000 square foot restaurant construction and 42 maintenance service facility located in Wilbraham, Massachusetts. The Company leases (i) an approximately 60,000 square foot distribution facility in Chicopee, Masschusetts, (ii) an approximately 38,000 square foot restaurant construction and maintenance support facility in Ludlow, Massachusetts and (iii) on a short-term basis, space for its division and regional offices, its training and development center and other support facilities. LICENSES AND TRADEMARKS The Company is the owner or licensee of the trademarks and service marks (the "Marks") used in its business. The Marks "Friendly-Registered Trademark-" and "Friendly's-Registered Trademark-" are owned by the Company pursuant to registrations with the U.S. Patent and Trademark office. Upon the sale of the Company by Hershey in 1988, all of the Marks used in the Company's business at that time which did not contain the word "Friendly" as a component of such Marks (the "1988 Non-Friendly Marks"), such as Fribble-Registered Trademark-, Fishamajig-Registered Trademark- and Clamboat-Registered Trademark- were licensed by Hershey to the Company. The 1988 Non-Friendly Marks license has a term of 40 years expiring on September 2, 2028. Such license included a prepaid license fee for the term of the license which is renewable at the Company's option for an additional term of 40 years and has a license renewal fee of $20.0 million. Hershey also entered into non-exclusive licenses with the Company for certain candy trademarks used by the Company in its frozen dessert sundae cups (the "Cup License") and pints (the "Pint License"). The Cup License and Pint License automatically renew for unlimited one-year terms subject to certain nonrenewal rights held by both parties. Hershey is subject to a noncompete provision in the sundae cup business for a period of two years if the Cup License is terminated by Hershey without cause, provided that the Company maintains its current level of market penetration in the sundae cup business. However, Hershey is not subject to a noncompete provision if it terminates the Pint License without cause. The Company also has a non-exclusive license agreement with Leaf, Inc. ("Leaf") for use of the Heath-Registered Trademark- Bar candy trademark. The term of the royalty-free Leaf license continues indefinitely subject to termination by Leaf upon 60 days notice. Excluding the Marks subject to the licenses with Hershey and Leaf, the Company is the owner of its Marks. COMPETITION The restaurant business is highly competitive and is affected by changes in the public's eating habits and preferences, population trends and traffic patterns, as well as by local and national economic conditions affecting consumer spending habits, many of which are beyond the Company's control. Key competitive factors in the industry are the quality and value of the food products offered, quality and speed of service, attractiveness of facilities, advertising, name brand awareness and image and restaurant location. Each of the Company's restaurants competes directly or indirectly with locally-owned restaurants as well as restaurants with national or regional images, and to a limited extent, restaurants operated by its franchisees. A number of the Company's significant competitors are larger or more diversified and have substantially greater resources than the Company. The Company's retail operations compete with national and regional manufacturers of frozen desserts, many of which have greater financial resources and more established channels of distribution than the Company. Key competitive factors in the retail food business include brand awareness, access to retail locations, price and quality. GOVERNMENT REGULATION The Company is subject to various Federal, state and local laws affecting its business. Each Friendly's restaurant is subject to licensing and regulation by a number of governmental authorities, which include health, safety, sanitation, building and fire agencies in the state or municipality in which the restaurant is located. Difficulties in obtaining or failures to obtain required licenses or approvals, or the loss of such licences and approvals once obtained, can delay, prevent the opening of, or close, a restaurant in a 43 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. 44 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY The executive officers and directors of the Company and their respective ages and positions with the Company are as follows:
NAME AGE POSITION WITH COMPANY - ------------------------------ --- --------------------------------------------------------------------------- Donald N. Smith 57 Chairman, Chief Executive Officer and President Paul J. McDonald 53 Senior Executive Vice President, Chief Administrative Officer and Assistant Secretary Joseph A. O'Shaughnessy 62 Senior Executive Vice President Larry W. Browne 52 Executive Vice President, Corporate Finance, General Counsel and Secretary Gerald E. Sinsigalli 59 President, Food Service Division Dennis J. Roberts 48 Senior Vice President, Restaurant Operations Scott D. Colwell 40 Vice President, Marketing Henry V. Pettis III 52 Vice President, Franchising and Operations Services George G. Roller 49 Vice President, Finance, Chief Financial Officer and Treasurer Garrett J. Ulrich 46 Vice President, Human Resources Michael J. Daly* 55 Director Steven L. Ezzes 50 Director Barry Krantz* 53 Director Charles A. Ledsinger, Jr. 47 Director Burton J. Manning* 66 Director Gregory L. Segall* 34 Director
* Messrs. Krantz and Segall, currently on the Board of Directors as the nominees of the lenders under the Old Credit Facility, will be replaced as directors by Messrs. Daly and Manning upon consummation of the Recapitalization. DONALD N. SMITH has been Chairman, Chief Executive Officer and President of the Company since September 1988. Mr. Smith has also been Chairman of the Board and Chief Executive Officer of TRC and Perkins since November 1985. Prior to joining TRC, Mr. Smith was President and Chief Executive Officer for Diversifoods, Inc. from 1983 to October 1985. From 1980 to 1983, Mr. Smith was Senior Vice President, PepsiCo., Inc. and was President of its Food Service Division. He was responsible for the operations of Pizza Hut Inc. and Taco Bell Corp., as well as North American Van Lines, Lee Way Motor Freight, Inc., PepsiCo. Foods International and La Petite Boulangerie. Prior to 1980, Mr. Smith was President and Chief Executive Officer of Burger King Corporation and Senior Executive Vice President and Chief Operations Officer for McDonald's Corporation. PAUL J. MCDONALD has been Senior Executive Vice President, Chief Administrative Officer and Assistant Secretary since January 1996. Mr. McDonald has been employed in various capacities with the Company since 1976. Mr. McDonald has held the positions of Director of Management Information Systems, Vice President/Controller, Vice President Corporate Development and Vice President, Finance and Chief Financial Officer. Mr. McDonald is a certified public accountant. 45 JOSEPH A. O'SHAUGHNESSY has been Senior Executive Vice President since October 1988. Mr. O'Shaughnessy has been employed in various capacities with the Company since 1957. Mr. O'Shaughnessy's duties have included District and Division Manager, Director and Vice President of Operations and Executive Vice President. LARRY W. BROWNE has been Executive Vice President, Corporate Finance, General Counsel and Secretary of the Company since September 1988. Mr. Browne has also been President and Managing Director of Friendly's International, Inc. since 1996. Mr. Browne has been the Executive Vice President, Corporate Finance, General Counsel and Secretary of TRC since November 1985 and was with Perkins from 1985 until 1996, most recently holding the position of Senior Vice President, Corporate Finance. GERALD E. SINSIGALLI has been President, Food Service Division of the Company since January 1989. Mr. Sinsigalli has been employed in various capacities with the Company since 1965. Mr. Sinsigalli's duties have included District and Division Manager, Director and Vice President of Operations and Senior Vice President. DENNIS J. ROBERTS has been Senior Vice President, Restaurant Operations of the Company since January 1996. Mr. Roberts has been employed in various capacities with the Company since 1969. Mr. Roberts' duties have included Restaurant, District and Division Manager, Regional Training Manager, Director and Vice President of Restaurant Operations. SCOTT D. COLWELL has been Vice President, Marketing of the Company since January 1996. Mr. Colwell has been employed in various capacities with the Company since 1982 including Director, New Business Development; Senior Director, Marketing and Sales and Senior Director, Retail Business. HENRY V. PETTIS III has been employed by the Company since 1990 and became Vice President, Franchising and Operations Services in 1996. Mr. Pettis was President and Chief Executive Officer of Florida Food Industries from 1988 to 1990. GEORGE G. ROLLER has been Vice President, Finance and Chief Financial Officer and Treasurer of the Company since January 1996. Mr. Roller was Vice President and Treasurer of the Company from 1989 until January 1996. Mr. Roller is a certified public accountant. GARRETT J. ULRICH has been Vice President, Human Resources since September 1991. Mr. Ulrich held the position of Vice President, Human Resources for Dun & Bradstreet Information Services, North America from 1988 to 1991. From 1978 to 1988, Mr. Ulrich held various Human Resource executive and managerial positions at Pepsi Cola Company, a division of PepsiCo. MICHAEL J. DALY will become a Director of the Company upon consummation of the Recapitalization. Mr. Daly has been President and CEO of Baystate Health System since December 1981. STEVEN L. EZZES was reelected as a Director of the Company in December 1995. Mr. Ezzes previously served as a Director of the Company from January 1991 to May 1992. Mr. Ezzes has been a Managing Director of Scotia Capital Markets (USA), an investment banking firm, since November 1996. Prior to that he was a partner of the Airlie Group, a private investment firm, since 1988. Mr. Ezzes has also been a Managing Director of Lehman Brothers, an investment banking firm. Mr. Ezzes is a Director of the general partner of PFR. 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. Mr. Krantz is a Director of Sizzler International, Inc. CHARLES A. LEDSINGER, JR. became a Director of the Company in October 1997 and had previously served as a Director of the Company from August 1992 to July 1997. Mr. Ledsinger is the Senior Vice President 46 and Chief Financial Officer of St. Joe Corporation where he has been employed since May 1997. Prior to joining St. Joe Corporation, he served as the Senior Vice President and Chief Financial Officer of Harrah's Entertainment, Inc. where he was employed since 1978. Mr. Ledsinger is a director of the general partner of PFR. BURTON J. MANNING will become a Director of the Company upon consummation of the Recapitalization. Mr. Manning has been the Chairman and Chief Executive Officer of J. Walter Thompson, Inc. since 1987. Mr. Manning is a Director of International Specialty Products, Inc. GREGORY L. SEGALL has been a Director of the Company since April 1996. Mr. Segall has served as Chairman, Chief Executive Officer and President of Consolidated Vision Group, Inc. since April 1997. Since October 1992, Mr. Segall has also been Managing Director and Principal of Chrysalis Management Group, LLC. Prior to 1992, Mr. Segall was a Managing Director of Sigoloff & Associates, Inc. Mr. Segall has also served as Chief Executive Officer of a number of retail, real estate and technology companies. In connection with his management consulting practice, Mr. Segall has, over the past ten years, served as an officer and/or director of a variety of companies which have either filed petitions or had petitions filed against them under the U.S. Bankruptcy Code. Mr. Segall's involvement in these companies was required by his employment by Chrysalis Management Group, LLC and Sigoloff & Associates, Inc., both of which are management consulting groups which specialize in restructuring and reorganizing businesses. In each case, Mr. Segall became an officer and/or director only after his employer had been retained for the purpose of taking a company through the reorganization process. The Executive Officers of the Company serve at the discretion of the Board of Directors. INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES CLASSES OF DIRECTORS Following the closing of the Common Stock Offering, the Board of Directors will be divided into three classes, each of whose members will serve for a staggered three-year term. At this time, Messrs. Daly and Manning will join the Board of Directors, replacing Messrs. Krantz and Segall who currently serve as Directors as the nominees of the lenders under the Old Credit Facility. Messrs. Daly and Manning will serve in the class whose term expires in 1998; Messrs. Ezzes and Ledsinger will serve in the class whose term expires in 1999; and Mr. Smith will serve in the class whose term expires in 2000. Upon the expiration of the term of a class of Directors, Directors within such class will be elected for a three-year term at the annual meeting of stockholders in the year in which such term expires. BOARD COMMITTEES The Company's Board of Directors has established an Audit Committee, a Compensation Committee and a Nominating Committee. The Audit Committee is responsible for nominating the Company's independent accountants for approval by the Board of Directors, reviewing the scope, results and costs of the audit by the Company's independent accountants and reviewing the financial statements of the Company. Upon consummation of the Recapitalization, Messrs. Ledsinger and Ezzes will be the members of the Audit Committee. The Compensation Committee is responsible for recommending compensation and benefits for the executive officers of the Company to the Board of Directors and for administering the Company's stock plans. Upon the consummation of the Recapitalization, a Compensation Committee will be installed whose members will be Messrs. Ledsinger and Manning. The Nominating Committee is responsible for nominating individuals to stand for election to the Board of Directors. Upon consummation of the Recapitalization, Messrs. Daly, Ezzes and Smith will be the members of the Nominating Committee. The Company's Restated Articles empower the Board of Directors to fix the number of Directors and to fill any vacancies on the Board of Directors. 47 Each Director of the Company who is not an employee of the Company will receive a fee of $2,500 per month and $1,500 per Board of Directors and special Board of Directors meeting attended, plus expenses. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION After consideration of the recommendations of Mr. Smith, compensation matters of the Company are currently determined by Messrs. Ezzes, Segall, Krantz and Ledsinger, members of the Company's Board of Directors. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The Summary Compensation Table below sets forth the annual base salary and other annual compensation paid during the last three fiscal years to the Company's chief executive officer and each of the other four most highly compensated executive officers whose cash compensation exceeded $100,000 in a combination of salary and bonus (the "named executive officers"). During 1994, 1995 and 1996, no long-term compensation was paid to the named executive officers.
ANNUAL COMPENSATION ------------------------------------------------------ RESTRICTED STOCK OTHER ALL OTHER NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS AWARDS(A) COMPENSATION COMPENSATION - ---------------------------------- ------------- ---------- ---------- ----------- ----------------- ----------------- Donald N. Smith (b)............... 1996 $ 495,355 $ 150,000 $ 0 $ 0 $ 0 Chairman, Chief Executive 1995 472,640 Officer and President 1994 450,736 Larry W. Browne................... 1996 265,822 30,000 201 0 0 Executive Vice President, 1995 257,788 Corporate Finance, General 1994 249,619 Counsel and Secretary Joseph A. O'Shaughnessy........... 1996 255,974 37,000 201 0 0 Senior Executive Vice President 1995 253,348 1994 245,720 Gerald E. Sinsigalli.............. 1996 249,552 40,000 201 0 0 President, Food Service Division 1995 239,646 1994 229,582 Paul J. McDonald.................. 1996 246,145 47,000 201 0 0 Senior Executive Vice President, 1995 236,780 Chief Administrative Officer and 1994 213,076 Assistant Secretary
- ------------------------ (a) Represents the value of restricted stock awarded on March 25, 1996 under the Company's management stock plan (the "Management Stock Plan"), which was issued in substitution of stock rights awarded under a subsequently terminated stock rights plan. As of December 29, 1996, Messrs. Browne, O'Shaughnessy, Sinsigalli and McDonald each had 3,765 shares with a value of $151 as of such date. Twenty-five percent of the shares of restricted stock vested on December 29, 1996 upon the attainment of a minimum operating cash flow target. The remaining shares of restricted stock will vest upon consummation of the Recapitalization. No dividends were payable on the restricted shares. (b) The Company paid a management fee to TRC in the amount of $800,000, $785,000 and $773,000 in 1996, 1995 and 1994, respectively. From these fees, TRC paid Mr. Smith the salary and bonus amounts listed above. Mr. Smith serves as Chairman, Chief Executive Officer and President of the Company and as Chairman and Chief Executive Officer of Perkins and, consequently, devotes a portion of his time to the affairs of each of the Company and Perkins. 48 PENSION PLAN TABLE The following table sets forth the estimated annual benefits payable, based on the indicated credited years of service and the indicated average annual remuneration used in calculating benefits, under the Pension Plan (as defined below).
ESTIMATED BENEFIT BASED ON YEARS OF SERVICE (A) ---------------------------------------------------------- REMUNERATION 15 20 25 30 35 - ------------- ---------- ---------- ---------- ---------- ---------- $ 125,000 $ 11,171 $ 17,544 $ 24,444 $ 31,475 $ 39,031 150,000 13,405 21,053 29,333 37,770 46,837 175,000 15,639 24,562 34,222 44,065 54,643 200,000 17,873 28,071 39,111 50,360 62,451 300,000 26,809 42,106 58,664 75,539 93,675 400,000 35,746 56,142 78,221 100,720 124,901 500,000 44,682 70,177 97,775 125,899 156,123 600,000 53,619 84,214 117,330 151,078 187,350 700,000 62,555 98,249 136,885 176,259 218,573
- ------------------------------ (a) Benefits under the Friendly Ice Cream Corporation Cash Balance Pension Plan (the "Pension Plan") are generally determined based on the value of a participant's cash balance account under the plan. Each year, a percentage of compensation (limited to $150,000 for 1996 in accordance with rules promulgated under the Internal Revenue Code of 1986 (the "Code")) is contributed to an individual's cash balance account under the Pension Plan based on his years of credited service. Interest credits are also contributed to each cash balance account annually. The cash balance formula was implemented effective January 1, 1992, at which time the accrued benefits of participants were converted to the opening balance in the cash balance account. The above amounts are annual straight life annuity amounts (which are not reduced for social security benefits) payable upon retirement at age 65 and assume salary increases of 5.0% per year, interest credits of 5.0% per year and that the cash balance formula under the Pension Plan has always been in effect. The foregoing amounts also reflect amounts attributable to benefits payable under the Friendly Ice Cream Corporation Supplemental Executive Retirement Plan, (the "SERP"), which provides benefits to the covered individuals which cannot be provided under the Pension Plan due to the certain limitations of the Internal Revenue Code, including the limitation on compensation. The SERP was implemented effective as of January 1, 1995. Mr. Smith did not become a participant in the SERP until January 1, 1996. As of January 1, 1997, Messrs. Smith, Browne and McDonald had 8, 8 and 21 years of credited service, respectively, under the Pension Plan. Benefits under the Pension Plan for Messrs. O'Shaughnessy and Sinsigalli are determined primarily on final compensation and years of credited service although such individuals would be entitled to a benefit under the formula described above if such formula resulted in a larger benefit. As of January 1, 1996, the estimated annual benefit payable upon retirement at age 65 (expressed in the form of a straight life annuity) for Messrs. O'Shaughnessy and Sinsigalli is $63,825 and $89,773, respectively, taking into account benefits provided to such individuals under the SERP. As of January 1, 1997, Messrs. O'Shaughnessy and Sinsigalli had 40 and 32 years of credited service, respectively, under the Pension Plan. LIMITED STOCK COMPENSATION PROGRAM In connection with the Common Stock Offering, the Company established a program pursuant to which a one-time award of Common Stock will be made to approximately 70 employees of the Company in recognition of their services to the Company (the "Limited Stock Compensation Program"). Approximately 300,000 shares of Common Stock will be awarded under the program (after giving effect to the Recapitalization). The Common Stock awards will vest upon consummation of the Common Stock Offering, however, the shares will be subject to transfer restrictions for a period of four years. The shares will become transferable on a pro rata basis on the first through fourth anniversaries of the Common Stock Offering. Messrs. O'Shaughnessy, Sinsigalli and McDonald will be awarded 5,000, 17,284 and 17,284 shares respectively under the program. In addition, 114,532 shares of Common Stock will be awarded to all Directors and Executive Officers as a group. Under a separate component of the Limited Stock Compensation Program, Mr. Smith will be awarded approximately 100,742 shares of Common Stock which will vest upon consummation of the Common Stock Offering. This one-time award was made in recognition of his services to the Company. See "Shares Eligible for Future Sale." 49 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. It is anticipated that approximately 30,000 shares of Common Stock will be issued to all Directors and Executive Officers as a group under the Restricted Stock Plan shortly after consummation of the Recapitalization. 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 50 Company. All awards under the Stock Option Plan will become fully vested and exercisable upon a change in control of the Company. Approximately 120 employees of the Company who are classified as salary grade 107 or 108 will initially be eligible for participation in the Stock Option Plan. The Board of Directors, in its sole discretion, may designate other employees and persons providing material services to the Company as eligible for participation in the Stock Option Plan. Generally, a participant who is granted a stock option or stock appreciation right will not be subject to federal income tax at the time of the grant, and the Company will not be entitled to a corresponding tax deduction. Upon the exercise of a nonqualified stock option, generally the difference between the option price and the fair market value of the Common Stock will be considered ordinary income to the participant, and generally the Company will be entitled to a tax deduction. Upon exercise of an incentive stock option, no taxable income will be recognized by the participant, and the Company will not be entitled to a tax deduction. However, if the Common Stock purchased upon exercise of the incentive stock option is sold within two years of the option's grant date or within one year after the exercise, then the difference, with certain adjustments, between the fair market value of the Common Stock at the date of exercise and the option price will be considered ordinary income to the participant, and generally the Company will be entitled to a tax deduction. If the participant disposes of the Common Stock after such holding periods, any gain or loss upon such disposition will be treated as a capital gain or loss and the Company will not be entitled to a deduction. Upon exercise of a stock appreciation right, the participant will recognize ordinary income in an amount equal to the payment received, and generally the Company will be entitled to a corresponding tax deduction. 51 OWNERSHIP OF COMMON STOCK The following table sets forth certain information regarding beneficial ownership of (i) the Class A and Class B common shares of the Company prior to the Recapitalization, and (ii) the Common Stock, after giving effect to the Common Stock Offering, by (a) each person who is known by the Company to own beneficially more than 5% of the outstanding (1) Class A and Class B common shares as of October 15, 1997 or (2) shares of the Common Stock after consummation of the Recapitalization, (b) each director of the Company, (c) each of the named Executive Officers and (d) all Directors and Executive Officers of the Company as a group.
COMMON SHARES BENEFICIALLY OWNED COMMON STOCK BENEFICIALLY PRIOR TO THE RECAPITALIZATION --------------------------------------- OWNED AFTER THE RECAPITALIZATION (A) NUMBER -------------------------- ------------------------ PERCENTAGE PERCENTAGE NAME CLASS A (B) CLASS B (B) OF TOTAL NUMBER OF TOTAL - ---------------------------------------------------- ----------- ----------- ------------- ----------- ------------- Donald N. Smith..................................... 759,680 -- 30.7% 736,164 10.3% Equitable........................................... 256,375 -- 10.4 151,349 2.1 Larry W. Browne..................................... 28,702 -- 1.2 21,130 * Paul J. McDonald.................................... 7,726 -- * 26,031 * Joseph A. O'Shaughnessy............................. 7,726 -- * 13,747 * Gerald E. Sinsigalli................................ 7,726 -- * 26,031 * Michael J. Daly (c)................................. -- -- * -- * Steven L. Ezzes..................................... -- -- * -- * Barry Krantz (c).................................... -- -- * 924 * Charles A. Ledsinger, Jr............................ -- -- * -- * Burton J. Manning (c)............................... -- -- * -- * Gregory L. Segall (c)............................... -- -- * 924 * All Directors and Executive Officers as a group (14 persons).......................................... 843,012 -- 34.1 934,544 13.1 Lenders under Old Credit Facility (d)(e)............ -- 1,187,503 48.0 701,036 9.8
- ------------------------ * Represents less than 1% of the outstanding (i) Class A and Class B common shares prior to the Recapitalization and (ii) Common Stock after the Recapitalization. (a) Gives effect to the Common Stock Offering, and the following, which will occur in connection with the Recapitalization: (i) the return of 124,258, 105,026, 8,593, 486,467 and 51,398 shares of Common Stock to the Company by Mr. Smith, Equitable, Mr. Browne, the lenders under the Old Credit Facility and the other existing non-management shareholders, respectively, (ii) the issuance of 100,742 and 300,000 of such shares to Mr. Smith and certain members of management under the Company's Limited Stock Compensation Program, respectively and (iii) the issuance of 27,113 shares of Common Stock under the Management Stock Plan. Of the 300,000 shares issued under the Limited Stock Compensation Program, 17,284, 5,000, 17,284 and 114,532 shares have been allocated to Messrs. McDonald, O'Shaughnessy, Sinsigalli and to all Directors and Executive Officers as a group, respectively. Of the 27,113 shares of Common Stock to be issued under the Management Stock Plan, each of Messrs. Browne, McDonald, O'Shaughnessy and Sinsigalli is to receive 1,021 shares. Does not reflect 400,000 shares and 375,000 shares reserved for issuance under the Stock Option Plan and Restricted Stock Plan, respectively. It is anticipated that approximately 30,000 shares of Common Stock will be issued to Directors and Executive Officers as a group under the Restricted Stock Plan shortly after the consummation of the Recapitalization. See "Shares Eligible for Future Sale" and Note 17 of Notes to Consolidated Financial Statements. (b) In connection with the Recapitalization, each outstanding Class A common share and Class B common share of the Company will be converted into one share of Common Stock. (c) Messrs. Krantz and Segall, currently on the Board of Directors as nominees of the lenders under the Old Credit Facility, will be replaced as Directors by Messrs. Daly and Manning upon consummation of the Recapitalization. See "Management." (d) Prior to the Recapitalization, the Bank of Boston, as agent for the lenders under the Old Credit Facility, held the Class B common shares for the benefit of the lenders under the Old Credit Facility, having received Class B common shares of the Company in 1996 in connection with the restructuring of the Old Credit Facility. In connection with the Recapitalization, these shares will automatically convert into shares of Common Stock and will be distributed to the then existing lenders under the Old Credit Facility pro rata according to the respective amounts of indebtedness thereunder held by them. See Note 7 of Notes to Consolidated Financial Statements. (e) Foothill Capital Corporation, Baker Nye Special Credits, Inc., D K Acquisition Partners, L.P., Contrarian Capital Advisors, L.L.C., CoMac Partners L.P., CoMac International N.V., Tribeca Investments L.L.C., Carl Marks Management Company, L.P., Sanwa Business Credit Corporation, Halcyon Distressed Securities L.P., Bedrock Asset Trust I and Morgan Stanley & Co. International Limited, each of which is a lender under the Old Credit Facility, and Equitable, Quidnet Partners, BMA Limited Partnership, Mr. Browne and Peter Joost, other stockholders of the Company, have granted to the Underwriters a 30-day option to purchase 86,790, 11,680, 65,367, 8,970, 23,316, 8,970, 24,919, 57,286, 15,246, 48,409, 12,274, 15,066, 151,349, 46,893, 19,085, 21,130 and 8,092 shares of Common Stock beneficially owned by such lenders and other stockholders, respectively, as part of the Underwriters' over-allotment option. If such over-allotment option is exercised in full, the lenders under the Old Credit Facility would beneficially own 4.5%, and such other stockholders would no longer beneficially own any, of the outstanding Common Stock. See "Underwriting." 52 CERTAIN TRANSACTIONS The Company's policy is to only enter into a transaction with an affiliate in the ordinary course of, and pursuant to the reasonable requirements of, its business and upon terms that are no less favorable to the Company than could be obtained if the transaction was entered into with an unaffiliated third party. Set forth below is a description of certain transactions between the Company and its affiliates during 1994, 1995 and 1996 and ongoing transactions between the Company and its affiliates. The Company believes that the terms of such transactions were or are no less favorable to the Company than could have been obtained if the transaction was entered into with an unaffiliated third party. In March 1996, the Company's pension plan acquired three restaurant properties from the Company. The land, buildings and improvements were purchased by the plan at their appraised value of $2.0 million and are located in Connecticut, Vermont and Virginia. Simultaneously with the purchase, the pension plan leased back the three properties to the Company at an aggregate annual base rent of $214,000 for the first five years and $236,000 for the following five years. The pension plan was represented by independent legal and financial advisors. In 1993, the Company subleased certain land, buildings and equipment from Perkins. During 1996, 1995 and 1994, rent expense related to the subleases was approximately $278,000, $266,000 and $245,000, respectively. During 1996 and 1995, an insurance subsidiary of TRC, Restaurant Insurance Corporation ("RIC"), assumed from a third party insurance company reinsurance premiums related to insurance liabilities of the Company of approximately $4.2 million and $6.4 million, respectively. In addition, RIC had reserves of approximately $13.0 million and $12.8 million related to Company claims at December 29, 1996 and December 31, 1995, respectively. On March 19, 1997, the Company acquired all of the outstanding shares of common stock of RIC from TRC for $1.3 million in cash and a $1.0 million promissory note payable to TRC bearing interest at an annual rate of 8.25%. The promissory note and accrued interest aggregating approximately $1.0 million was paid on June 30, 1997. RIC, which was formed in 1993, reinsures certain of the Company's risks (i.e. workers' compensation, employer's liability, general liability and product liability) from a third party insurer. In fiscal 1994, TRC Realty Co. (a subsidiary of TRC) entered into a 10-year operating lease for an aircraft, for use by both the Company and Perkins. The Company shares equally with Perkins in reimbursing TRC Realty Co. for leasing, tax and insurance expenses. In addition, the Company also incurs actual usage costs. Total expense for 1996, 1995 and 1994 was approximately $590,000, $620,000 and $336,000, respectively. The Company purchases certain food products used in the normal course of business from a division of Perkins. For 1996, 1995 and 1994, purchases were approximately $1.4 million, $1.9 million and $1.3 million, respectively. The Company currently pays TRC an annual management fee pursuant to a management fee letter agreement between the Company and TRC dated March 19, 1996 (the "TRC Management Contract"). The fee serves as compensation for (i) the services performed by Mr. Smith for the benefit of the Company (ii) office and secretarial services attributable to the Company and (iii) other related expenses. TRC was paid $800,000, $785,000 and $773,000 for such management services in 1996, 1995 and 1994, respectively. See "Management--Executive Compensation." During 1996, the Company incurred approximately $69,000 of expense related to fees and other reimbursements to the two board of directors members who represented the Company's lenders. In addition, for 1996, 1995 and 1994, the Company expensed approximately $196,000, $763,000 and $200,000, respectively, for fees paid to the lenders' agent bank. 53 The Company is a party to two agreements with TRC relating to taxes. In connection with the distribution by TRC to its shareholders of the Common Stock in the Company immediately prior to the 1996 bank restructuring, the Company entered into a Tax Disaffiliation Agreement dated March 25, 1996. Under the Tax Disaffiliation Agreement, TRC must indemnify the Company for all income taxes during periods when the Company and its affiliates were includible in a consolidated federal income tax return with TRC and for any income taxes due as a result of the Company ceasing to be a member of the TRC consolidated group. TRC does not retain any liability for periods when the Company and its affiliates were not includible in the TRC consolidated federal income tax return and the Company must indemnify TRC if any such income taxes are assessed against TRC. TRC also does not indemnify the Company for a reduction of the Company's existing NOLs or for NOLs previously utilized by TRC. The Tax Disaffiliation Agreement terminates 90 days after the statute of limitations expires for each tax covered by the agreement including unfiled returns as if such returns had been filed by the appropriate due date. The Company also entered into a Tax Responsibility Agreement dated as of March 19, 1997 in connection with the sale of RIC to the Company. Under the Tax Responsibility Agreement, the Company must indemnify TRC for any income taxes that are assessed against TRC as a result of the operations of RIC. The Tax Responsibility Agreement terminates 90 days after the statute of limitations expires for each tax covered by the agreement. DESCRIPTION OF NEW CREDIT FACILITY The Company has entered into a commitment letter with Societe Generale relating to a $175 million senior secured credit facility to be entered into contingent upon completion of the Offerings (the "New Credit Facility"). The following description, which sets forth the material terms of the New Credit Facility, does not purport to be complete and is qualified in its entirety by reference to the agreement setting forth the principal terms of the New Credit Facility, which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. The senior secured New Credit Facility will consist of (a) the $105 million Term Loan Facility, (b) the five-year Revolving Credit Facility providing for revolving loans to the Company in a principal amount not to exceed $55 million (including a $5 million sublimit for each of trade and standby letters of credit) and (c) the $15 million Letter of Credit Facility providing for standby letters of credit in the normal course of business and having a maturity contemporaneous with that of the Revolving Credit Facility. The full amount of the Term Loan Facility will be drawn on the closing date of the Recapitalization (the "Closing Date"). Amounts repaid or prepaid under the Term Loan Facility may not be reborrowed. Loans under the Revolving Credit Facility will be available at any time on and after the Closing Date and prior to the date which is five years after the Closing Date. Letters of credit shall expire annually, but shall have a final expiration date no later than thirty days prior to final maturity, which for the Letter of Credit Facility will also be five years from the Closing Date. It is expected that the Term Loan Facility will require quarterly amortization payments beginning on April 15, 1999. Annual amortization payments will total $4.7 million, $10.7 million, $12.7 million, $14.7 million, $18.7 million, $20.3 million and $23.5 million in 1999 through 2005, respectively. In addition to the scheduled amortization, it is expected that the Term Loan Facility will be permanently reduced by (i) specified percentages of each year's Excess Cash Flow (as defined in the New Credit Facility), (ii) specified percentages of the aggregate net cash proceeds from certain issuances of indebtedness and (iii) 100% of the aggregate net cash proceeds from asset sales not in the ordinary course of business and certain insurance claim proceeds, in each case in this clause (iii), not re-employed or committed to be re-employed within a specified period in the Company's business, exclusive of up to $7.5 million of aggregate net proceeds received from asset sales subsequent to the closing relating to the New Credit Facility. Such applicable proceeds and Excess Cash Flow shall be applied to the Term Loan Facility in inverse order of maturity. It is also expected that after the Term Loan Facility has been prepaid, applicable proceeds of debt 54 issuances, asset sales and insurance claims shall be applied to permanently reduce the Revolving Credit Facility. At the Company's option, loans may be prepaid at any time with certain notice and breakage cost provisions. The obligations of the Company under the New Credit Facility will be (i) secured by a first priority security interest in substantially all material assets of the Company and certain of its domestic subsidiaries and all other assets owned or hereafter acquired and (ii) guaranteed, on a senior secured basis, by the Company's Friendly's Restaurants Franchise, Inc. subsidiary and the Friendly's International, Inc. subsidiary and may also be so guaranteed by certain subsidiaries of the Company created or acquired after consummation of the Recapitalization. At the Company's option, the interest rates per annum applicable to the New Credit Facility will be either the Eurodollar Rate (as defined in the New Credit Facility), plus a margin ranging from 2.25% to 2.75%, or the ABR (as defined in the New Credit Facility), plus a margin ranging from 0.75% to 1.25%. The ABR is the greater of (a) Societe Generale's Prime Rate or (b) the Federal Funds Rate plus 0.50%. It is expected that after the first twelve calendar months of the New Credit Facility, pricing reductions will be available in certain circumstances. The New Credit Facility will contain a number of significant covenants that among other things, will operate as limitations on indebtedness; liens; guarantee obligations; mergers; consolidations, formation of subsidiaries, liquidations and dissolutions; sales of assets; leases; payments of dividends; capital expenditures; investments; optional payments and modifications of debt instruments; transactions with affiliates; sale and leaseback transactions; changes in fiscal year; negative pledge clauses; changes in lines of business; and restrictions on subsidiary distributions. 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 55 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 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. 56 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 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 57 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 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 $90.00 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. 58 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 (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. 59 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 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. 60 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 of trading of the Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements pertaining to the manner of such sales, notices of such sales and the availability of current public information concerning the Company. Affiliates of the Company may sell shares not constituting restricted shares in accordance with the foregoing volume limitations and other requirements but without regard to the one-year period. Under Rule 144(k), if a period of at least two years has elapsed between the later of the date on which restricted shares were acquired from the Company or the date on which they were acquired from an affiliate of the Company, a holder of such restricted shares who is not an affiliate of the Company at the time of the sale and has not been an affiliate of the Company for at least three months prior to the sale would be entitled to sell the shares immediately without regard to the volume limitations and other conditions described above. All executive officers and directors and the existing shareholders of the Company who, after the Common Stock Offering, will hold in the aggregate approximately 2,125,000 shares of Common Stock (1,500,158 shares if the Underwriters' over-allotment option is exercised in full), have agreed, pursuant to lock-up agreements, that they will not, without the prior written consent of NationsBanc Montgomery Securities, Inc., offer, sell, contract to sell or otherwise dispose of any shares of Common Stock beneficially owned by them for a period of 360 days after the date of this Prospectus, except that the lenders under the Old Credit Facility may sell (i) shares of Common Stock to other stockholders of the Company existing prior to the Common Stock Offering and (ii) any shares of Common Stock acquired by them in or after the Common Stock Offering, which shares are not "restricted securities" pursuant to Rule 144 under the Securities Act. The Company intends to file registration statements under the Securities Act to register (i) all shares of Common Stock issuable pursuant to the Company's Stock Option Plan and Restricted Stock Plan and (ii) certain shares of Common Stock to be issued under the Company's Management Stock Plan and Limited Stock Compensation Program. Subject to the completion of the 360-day period described above, shares of Common Stock issued under, or issued upon the exercise of awards issued under such plans and after the effective date of such registration statements, generally will be eligible for sale in the public market. See "Management--Executive Compensation" and "Ownership of Common Stock." The Company, its shareholders holding Class A and Class B common shares prior to the Recapitalization and certain warrant holders have entered into an amendment to an existing registration rights agreement providing that such shareholders may demand registration under the Securities Act, at any time within 18 months (the "Registration Period") after the end of the 360-day lock-up period commencing with the date of this Prospectus, of shares of the Company's Common Stock into which such Class A and Class B common shares are converted in connection with the Recapitalization or for which such warrants are exercised. The Company may postpone such a demand under certain circumstances. In addition, such shareholders may request the Company to include such shares of Common Stock in any registration by the Company of its capital stock under the Securities Act during the Registration Period. In addition, prior to the consummation of the Common Stock Offering, the Company and Mr. Smith intend to enter into a registration rights agreement providing Mr. Smith with a demand registration right covering his shares of Common Stock. See "Ownership of Common Stock." 61 UNDERWRITING The underwriters named below, represented by NationsBanc Montgomery Securities, Inc., Piper Jaffray Inc. and Tucker Anthony Incorporated (the "Representatives"), have severally agreed, subject to the terms and conditions contained in the underwriting agreement (the "Underwriting Agreement") by and among the Company and the Underwriters, to purchase from the Company the number of shares of Common Stock indicated below opposite their respective names at the initial public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of such shares if they purchase any.
NUMBER OF UNDERWRITERS SHARES - ------------------------------------------------------------ ---------- NationsBanc Montgomery Securities, Inc. .................... Piper Jaffray Inc........................................... Tucker Anthony Incorporated................................. ---------- Total................................................... 5,000,000 ---------- ----------
The Representatives have advised the Company that the Underwriters propose initially to offer the shares of Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow to selected dealers a concession of not more than $ per share, and the Underwriters may allow to selected dealers, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After the Common Stock Offering, the public offering price and other selling terms may be changed by the Representatives. The Common Stock is offered subject to receipt and acceptance by the Underwriters, and to certain other conditions, including the right to reject an order in whole or in part. The Company, certain lenders under the Old Credit Facility and certain other stockholders of the Company have granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 750,000 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial 5,000,000 shares to be purchased by the Underwriters. To the extent that the Underwriters exercise this option, the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with the Common Stock Offering. To the extent that such over-allotment option is not exercised in full, the Underwriters will purchase up to 125,158 of such shares of Common Stock from the Company pursuant to such option only after all of the 624,842 shares of Common Stock subject to such 62 option purchasable from the lenders under the Old Credit Facility and such other stockholders of the Company have been purchased. See "Ownership of Common Stock." The Underwriting Agreement provides that the Company will indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, as amended, or will contribute to payments the Underwriters may be required to make in respect thereof. The Representatives have informed the Company that the Underwriters do not expect to make sales of Common Stock offered by this Prospectus to accounts over which they exercise discretionary authority. Prior to the Common Stock Offering, there has been no public trading market for the Common Stock. Consequently, the initial public offering price will be determined by negotiations between the Representatives and the Company. Among the factors to be considered in such negotiations are the history of, and the prospects for, the Company and the industry in which it competes, an assessment of the Company's management, its past and present earnings and the trend of such earnings, the prospects for future earnings of the Company, the present state of the Company's development, the general condition of securities markets at the time of the Common Stock Offering and the market price of publicly traded stock of comparable companies in recent periods. The Company's executive officers, directors and certain principal stockholders have agreed that, for a period of 360 days from the date of this Prospectus, they will not offer, sell or otherwise dispose of any shares of their Common Stock or options to acquire shares of Common Stock without the prior written consent of NationsBanc Montgomery Securities, Inc. The Company has agreed not to sell any shares of Common Stock for a period of 90 days from the date of this Prospectus without the prior written consent of NationsBanc Montgomery Securities, Inc., except for shares issued pursuant to the exercise of options granted under employee stock option plans. Until the distribution of the Common Stock is completed, rules of the Securities and Exchange Commission (the "Commission") may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, the Representatives are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the Common Stock Offering, i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus, the Representatives may reduce that short position by purchasing Common Stock in the open market. The Representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The Representatives may also impose a penalty bid on certain Underwriters and selling group members. This means that if the Representatives purchase shares of Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of the Common Stock Offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither the Company nor any of the Underwriters makes any representation or predictions as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. Societe Generale Securities Corporation, the lead underwriter of the Senior Note Offering, is providing certain advisory services in connection with the Recapitalization, for which it is receiving a fee. Societe Generale, an affiliate of Societe Generale Securities Corporation, is to be a lender under the New 63 Credit Facility and to act as arranger and administrative agent thereunder. See "Description of New Credit Facility." At the request of the Company, up to 250,000 shares of Common Stock offered hereby have been reserved for sale to certain individuals, including directors and employees of the Company and members of their families, and in management's discretion, to others with whom the Company has maintained long-standing and significant business relationships. The price of such shares to such parties will be the initial public offering price set forth on the cover of this Prospectus. The number of shares available to the general public will be reduced to the extent those parties purchase reserved shares. Any shares not so purchased will be offered hereby at the initial public offering price set forth on the cover of this Prospectus. The Equitable, which currently beneficially owns 10.4% of the outstanding common shares, is an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation, a member of the National Association of Securities Dealers, Inc. (the "NASD") and an underwriter in the Common Stock Offering. As a result of the foregoing, the Common Stock Offering is subject to the provisions of Section 2720 of the Conduct Rules of the NASD (formerly Schedule E to the Bylaws of the NASD) ("Section 2720"). Accordingly, the underwriting terms for the Common Stock Offering will conform with the requirements set forth in Section 2720. In particular, the price at which the Common Stock is to be distributed to the public must be at a price no higher than that recommended by a "qualified independent underwriter" who has also participated in the preparation of this Prospectus and the Registration Statement of which this Prospectus is a part and who meets certain standards. In accordance with this requirement, NationsBanc Montgomery Securities, Inc. will serve in such role and will recommend the public offering price in compliance with the requirements of Section 2720. NationsBanc Montgomery Securities, Inc., in its role as qualified independent underwriter, has performed the due diligence investigations and reviewed and participated in the preparation of this Prospectus and the Registration Statement of which this Prospectus is a part. LEGAL MATTERS The validity of the securities offered hereby will be passed upon for the Company by Choate, Hall & Stewart, Boston, Massachusetts. Certain legal matters with respect to the securities offered hereby will be passed upon for the Underwriters by Simpson Thacher & Bartlett (a partnership which includes professional corporations), New York, New York. EXPERTS The financial statements included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (which term shall include any amendment thereto) on Form S-1 under the Securities Act, for the registration of the securities offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain items of which are omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock, reference is hereby made to the Registration Statement and the exhibits and schedules filed as a part thereof. Statements made in this Prospectus as to the contents of any contract, agreement or other document are not necessarily complete and, in each instance, reference is made to the copy of such document, filed as an exhibit to the Registration Statement, for a more complete description of the matter involved and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement and the exhibits 64 and schedules thereto filed by the Company with the Commission may be inspected, without charge, at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the following regional offices of the Commission: Seven World Trade Center, New York, New York 10048 and 500 West Madison Street, Chicago, Illinois 60661-2511. Copies of all or any portion of the Registration Statement may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees. The Company is not currently subject to the informational requirements of the Exchange Act. As a result of the Offerings, the Company will become subject to the informational requirements of the Exchange Act. The Company intends to furnish its stockholders with annual reports containing financial statements audited by independent accountants and with quarterly reports containing interim financial information for each of the first three quarters of each year. 65 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE --------- Report of Independent Public Accountants................................................................... F-2 Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 1995, December 29, 1996 and September 28, 1997 (unaudited)......................................................................................... F-3 Consolidated Statements of Operations for the Years Ended January 1, 1995, December 31, 1995 and December 29, 1996 and for the Nine Months Ended September 29, 1996 (unaudited) and September 28, 1997 (unaudited).................................................................................... F-4 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended January 1, 1995, December 31, 1995 and December 29, 1996 and for the Nine Months Ended September 28, 1997 (unaudited)......................................................................................... F-5 Consolidated Statements of Cash Flows for the Years Ended January 1, 1995, December 31, 1995 and December 29, 1996 and for the Nine Months Ended September 29, 1996 (unaudited) and September 28, 1997 (unaudited).................................................................................... F-6 Notes to Consolidated Financial Statements........................................................... F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Friendly Ice Cream Corporation: We have audited the accompanying consolidated balance sheets of Friendly Ice Cream Corporation and subsidiaries as of December 31, 1995 and December 29, 1996, and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 29, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Friendly Ice Cream Corporation and subsidiaries as of December 31, 1995 and December 29, 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 29, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Hartford, Connecticut February 14, 1997 (except with respect to the matter discussed in Note 16, as to which the date is July 14, 1997) F-2 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands)
SEPTEMBER 28, 1997 DECEMBER 31, DECEMBER 29, ------------- 1995 1996 ------------ ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents......................................................... $ 23,690 $ 18,626 $ 12,044 Restricted cash................................................................... -- -- 4,000 Trade accounts receivable......................................................... 5,233 4,992 7,863 Inventories....................................................................... 15,079 15,145 17,017 Deferred income taxes............................................................. 9,885 12,375 12,381 Prepaid expenses and other current assets......................................... 3,985 1,658 6,735 ------------ ------------ ------------- TOTAL CURRENT ASSETS................................................................ 57,872 52,796 60,040 RESTRICTED CASH..................................................................... -- -- 8,907 INVESTMENT IN JOINT VENTURE......................................................... -- 4,500 3,388 PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization............ 295,448 286,161 273,189 INTANGIBLES AND DEFERRED COSTS, net of accumulated amortization of $3,419, $4,790 and $5,858 (unaudited) at December 31, 1995, December 29, 1996 and September 28, 1997, respectively................................................................ 16,607 16,019 15,519 OTHER ASSETS........................................................................ 365 650 1,871 ------------ ------------ ------------- TOTAL ASSETS........................................................................ $ 370,292 $ 360,126 $ 362,914 ------------ ------------ ------------- ------------ ------------ ------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current maturities of long-term debt.............................................. $ 3,204 $ 1,289 $ 2,961 Current maturities of capital lease obligations................................... 6,466 6,353 4,778 Accounts payable.................................................................. 20,972 20,773 25,542 Accrued salaries and benefits..................................................... 13,525 13,855 14,130 Accrued interest payable.......................................................... 5,940 9,838 9,581 Insurance reserves................................................................ 6,605 3,973 6,773 Other accrued expenses............................................................ 15,838 17,415 14,170 ------------ ------------ ------------- TOTAL CURRENT LIABILITIES........................................................... 72,550 73,496 77,935 ------------ ------------ ------------- DEFERRED INCOME TAXES............................................................... 51,908 48,472 50,104 CAPITAL LEASE OBLIGATIONS, less current maturities.................................. 15,375 14,182 13,160 LONG-TERM DEBT, less current maturities............................................. 373,769 371,795 358,136 OTHER LONG-TERM LIABILITIES......................................................... 22,224 25,337 34,263 COMMITMENTS AND CONTINGENCIES (Notes 2, 6, 7, 8, 12, 15, 16 and 17) STOCKHOLDERS' EQUITY (DEFICIT): Common stock, $.01 par value - Class A, authorized 150,000, 150,000 and 4,000 shares at December 31, 1995, December 29, 1996 and September 28, 1997, respectively; 1,090,969, 1,285,384 and 1,285,384 (unaudited) shares issued and outstanding at December 31, 1995, December 29, 1996 and September 28, 1997, respectively......................... 11 13 13 Class B, authorized -0-, 2,000 and 2,000 shares at December 31, 1995, December 29, 1996 and September 28, 1997, respectively; -0-, 1,187,503 and 1,187,503 (unaudited) shares issued and outstanding at December 31, 1995, December 29, 1996 and September 28, 1997, respectively...................................... -- 12 12 Class C, authorized -0-, 2,000 and 2,000 shares at December 31, 1995, December 29, 1996 and September 28, 1997, respectively; -0- shares issued and outstanding at December 31, 1995, December 29, 1996 and September 28, 1997..... -- -- -- Additional paid-in capital........................................................ 46,842 46,905 46,905 Unrealized gain on investment securities, net of taxes............................ -- -- 130 Accumulated deficit............................................................... (212,387) (220,159) (217,796) Cumulative translation adjustment................................................. -- 73 52 ------------ ------------ ------------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT)................................................ (165,534) (173,156) (170,684) ------------ ------------ ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)................................ $ 370,292 $ 360,126 $ 362,914 ------------ ------------ ------------- ------------ ------------ -------------
The accompanying notes are an integral part of these consolidated financial statements. F-3 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share data)
FOR THE YEARS ENDED -------------------------------------------- FOR THE NINE MONTHS ENDED JANUARY 1, DECEMBER 31, DECEMBER 29, -------------------------------- 1995 1995 1996 SEPTEMBER 29, SEPTEMBER 28, ------------ -------------- -------------- 1996 1997 --------------- --------------- (UNAUDITED) (UNAUDITED) REVENUES................................... $ 631,014 $ 649,149 $ 650,807 $ 491,819 $ 508,033 COSTS AND EXPENSES: Cost of sales.......................... 179,793 192,600 191,956 143,388 147,105 Labor and benefits..................... 211,838 214,625 209,260 159,502 159,315 Operating expenses..................... 132,010 143,854 143,163 109,006 112,009 General and administrative expenses.... 38,434 40,705 42,721 31,948 32,775 Debt restructuring expenses (Note 5)... -- 3,346 -- -- -- Write-down of property and equipment (Note 6)............................. -- 4,006 227 -- 607 Depreciation and amortization.......... 32,069 33,343 32,979 25,127 24,226 GAIN ON SALE OF RESTAURANT OPERATIONS (NOTE 16)...................................... -- -- -- -- 2,303 ------------ -------------- -------------- --------------- --------------- OPERATING INCOME........................... 36,870 16,670 30,501 22,848 34,299 Interest expense, net of capitalized interest of $176, $62, $49, $44 (unaudited) and $27 (unaudited) and interest income of $187, $390, $318, $273 (unaudited) and $239 (unaudited) for the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the nine months ended September 29, 1996 and September 28, 1997, respectively......... 45,467 41,904 44,141 33,084 32,972 Equity in net loss of joint venture........ -- -- -- -- 1,112 ------------ -------------- -------------- --------------- --------------- INCOME (LOSS) BEFORE BENEFIT FROM (PROVISION FOR) INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE................................ (8,597 ) (25,234 ) (13,640 ) (10,236 ) 215 Benefit from (provision for) income taxes.................................... 4,661 (33,419 ) 5,868 4,442 (88 ) ------------ -------------- -------------- --------------- --------------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE........... (3,936 ) (58,653 ) (7,772 ) (5,794 ) 127 Cumulative effect of change in accounting principle, net of income tax expense of $1,554 (Note 10)......................... -- -- -- -- 2,236 ------------ -------------- -------------- --------------- --------------- NET INCOME (LOSS).......................... $ (3,936 ) $ (58,653 ) $ (7,772 ) $ (5,794 ) $ 2,363 ------------ -------------- -------------- --------------- --------------- ------------ -------------- -------------- --------------- --------------- PRO FORMA NET INCOME (LOSS) PER SHARE (NOTE 17) (UNAUDITED): Income (loss) before cumulative effect of change in accounting principle.... $ (1.09 ) $ (0.81 ) $ 0.02 Cumulative effect of change in accounting principle, net of income tax expense.......................... -- -- 0.31 -------------- --------------- --------------- Net income (loss)...................... $ (1.09 ) $ (0.81 ) $ 0.33 -------------- --------------- --------------- -------------- --------------- --------------- PRO FORMA AMOUNTS ASSUMING NEW PENSION METHOD IS RETROACTIVELY APPLIED: Net income (loss) (Note 10)............ $ (3,506 ) $ (58,134 ) $ (7,214 ) $ (5,375 ) $ 127 ------------ -------------- -------------- --------------- --------------- ------------ -------------- -------------- --------------- --------------- Net income (loss) per share (unaudited).......................... $ (1.01 ) $ (0.75 ) $ 0.02 -------------- --------------- --------------- -------------- --------------- --------------- PRO FORMA SHARES USED IN NET INCOME (LOSS) PER SHARE CALCULATION (NOTE 17) (UNAUDITED).............................. 7,125 7,125 7,125 -------------- --------------- --------------- -------------- --------------- ---------------
The accompanying notes are an integral part of these consolidated financial statements. F-4 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Dollar amounts in thousands)
COMMON STOCK -------------------------------------------------------------------------- CLASS A CLASS B CLASS C ADDITIONAL ---------------------- ---------------------- -------------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL --------- ----------- --------- ----------- ------------- ----------- --------------- BALANCE, JANUARY 2, 1994...... 1,090,969 $ 11 -- $ -- -- $ -- $ 46,822 Net loss.................... -- -- -- -- -- -- -- -- --------- --- --------- --- --- ------- BALANCE, JANUARY 1, 1995...... 1,090,969 11 -- -- -- -- 46,822 Net loss.................... -- -- -- -- -- -- -- Contribution of capital..... -- -- -- -- -- -- 20 -- --------- --- --------- --- --- ------- BALANCE, DECEMBER 31, 1995.... 1,090,969 11 -- -- -- -- 46,842 Net loss.................... -- -- -- -- -- -- -- Issuance of common stock to lenders................... -- -- 1,187,503 12 -- -- 38 Proceeds from exercise of warrants.................. 71,527 1 -- -- -- -- 21 Compensation expense associated with management stock plan................ 122,888 1 -- -- -- -- 4 Translation adjustment...... -- -- -- -- -- -- -- -- --------- --- --------- --- --- ------- BALANCE, DECEMBER 29, 1996.... 1,285,384 13 1,187,503 12 -- -- 46,905 Net income (unaudited)...... -- -- -- -- -- -- -- Change in unrealized gain on investment securities, net of tax (unaudited)........ -- -- -- -- -- -- -- Translation adjustment (unaudited)............... -- -- -- -- -- -- -- -- --------- --- --------- --- --- ------- BALANCE, SEPTEMBER 28, 1997 (unaudited).................. 1,285,384 $ 13 1,187,503 $ 12 -- $ -- $ 46,905 -- -- --------- --- --------- --- --- ------- --------- --- --------- --- --- ------- UNREALIZED GAIN ON INVESTMENT CUMULATIVE SECURITIES, ACCUMULATED TRANSLATION NET OF TAXES DEFICIT ADJUSTMENT TOTAL ------------------- ----------------- ------------------- --------- BALANCE, JANUARY 2, 1994...... $ -- $ (149,798) $ -- $(102,965) Net loss.................... -- (3,936) -- (3,936) --- ----------------- --- --------- BALANCE, JANUARY 1, 1995...... -- (153,734) -- (106,901) Net loss.................... -- (58,653) -- (58,653) Contribution of capital..... -- -- -- 20 --- ----------------- --- --------- BALANCE, DECEMBER 31, 1995.... -- (212,387) -- (165,534) Net loss.................... -- (7,772) -- (7,772) Issuance of common stock to lenders................... -- -- -- 50 Proceeds from exercise of warrants.................. -- -- -- 22 Compensation expense associated with management stock plan................ -- -- -- 5 Translation adjustment...... -- -- 73 73 --- ----------------- --- --------- BALANCE, DECEMBER 29, 1996.... -- (220,159) 73 (173,156) Net income (unaudited)...... -- 2,363 -- 2,363 Change in unrealized gain on investment securities, net of tax (unaudited)........ 130 -- -- 130 Translation adjustment (unaudited)............... -- -- (21) (21) --- ----------------- --- --------- BALANCE, SEPTEMBER 28, 1997 (unaudited).................. $ 130 $ (217,796) $ 52 $(170,684) --- ----------------- --- --------- --- ----------------- --- ---------
The accompanying notes are an integral part of these consolidated financial statements. F-5 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
FOR THE NINE FOR THE YEARS ENDED MONTHS ENDED ----------------------------------------- ------------- JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, 1995 1995 1996 1996 ----------- ------------- ------------- ------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).......................................... $ (3,936) $ (58,653) $ (7,772) $ (5,794) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of change in accounting principle...... -- -- -- -- Depreciation and amortization............................ 32,069 33,343 32,979 25,127 Write-down of property and equipment..................... -- 4,006 227 -- Deferred income tax (benefit) expense.................... (4,207) 33,419 (5,926) (4,442) (Gain) loss on asset retirements......................... (259) 595 (916) (303) Equity in net loss of joint venture...................... -- -- -- -- Changes in operating assets and liabilities: Receivables............................................ (2,071) 679 241 480 Inventories............................................ 1,635 (1,044) (66) (2,183) Other assets........................................... (1,603) 587 1,309 247 Accounts payable....................................... 2,333 (1,714) (199) 5,127 Accrued expenses and other long-term liabilities....... 14,420 16,572 6,286 5,378 ----------- ------------- ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 38,381 27,790 26,163 23,637 ----------- ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment........................ (29,507) (19,092) (24,217) (18,547) Proceeds from sales of property and equipment.............. 1,475 926 8,409 5,107 Purchases of investment securities......................... -- -- -- -- Proceeds from sales and maturities of investment securities............................................... -- -- -- -- Acquisition of Restaurant Insurance Corporation, net of cash acquired............................................ -- -- -- -- Advances to or investments in joint venture................ -- -- (4,500) (4,500) ----------- ------------- ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES...................... (28,032) (18,166) (20,308) (17,940) ----------- ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Contribution of capital.................................... -- 20 -- -- Proceeds from exercise of stock purchase warrants.......... -- -- 22 22 Proceeds from borrowings................................... 67,629 80,162 48,196 32,196 Repayments of debt......................................... (69,338) (72,713) (52,084) (41,658) Repayments of capital lease obligations.................... (6,190) (7,293) (7,131) (5,484) ----------- ------------- ------------- ------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES........ (7,899) 176 (10,997) (14,924) ----------- ------------- ------------- ------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH...................... -- -- 78 -- ----------- ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 2,450 9,800 (5,064) (9,227) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............... 11,440 13,890 23,690 23,690 ----------- ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 13,890 $ 23,690 $ 18,626 $ 14,463 ----------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- SUPPLEMENTAL DISCLOSURES Interest paid.............................................. $ 29,430 $ 25,881 $ 36,000 $ 26,042 Capital lease obligations incurred......................... 7,767 3,305 5,951 3,570 Capital lease obligations terminated....................... 391 288 128 126 Conversion of accrued interest payable to debt............. 11,217 14,503 -- -- Issuance of common stock to lenders........................ -- -- 50 -- SEPTEMBER 28, 1997 ------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).......................................... $ 2,363 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of change in accounting principle...... (2,236) Depreciation and amortization............................ 24,226 Write-down of property and equipment..................... 607 Deferred income tax (benefit) expense.................... 78 (Gain) loss on asset retirements......................... 1,077 Equity in net loss of joint venture...................... 1,112 Changes in operating assets and liabilities: Receivables............................................ (1,122) Inventories............................................ (1,872) Other assets........................................... 3,049 Accounts payable....................................... 4,769 Accrued expenses and other long-term liabilities....... (2,827) ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 29,224 ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment........................ (14,656) Proceeds from sales of property and equipment.............. 4,842 Purchases of investment securities......................... (8,181) Proceeds from sales and maturities of investment securities............................................... 316 Acquisition of Restaurant Insurance Corporation, net of cash acquired............................................ (35) Advances to or investments in joint venture................ (1,400) ------------- NET CASH USED IN INVESTING ACTIVITIES...................... (19,114) ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Contribution of capital.................................... -- Proceeds from exercise of stock purchase warrants.......... -- Proceeds from borrowings................................... 44,211 Repayments of debt......................................... (56,199) Repayments of capital lease obligations.................... (4,683) ------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES........ (16,671) ------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH...................... (21) ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... (6,582) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............... 18,626 ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 12,044 ------------- ------------- SUPPLEMENTAL DISCLOSURES Interest paid.............................................. $ 30,236 Capital lease obligations incurred......................... 2,227 Capital lease obligations terminated....................... 141 Conversion of accrued interest payable to debt............. -- Issuance of common stock to lenders........................ --
The accompanying notes are an integral part of these consolidated financial statements. F-6 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 29, 1996 AND SEPTEMBER 28, 1997 IS UNAUDITED) 1. ORGANIZATION In September 1988, The Restaurant Company ("TRC") and another investor acquired Friendly Ice Cream Corporation ("FICC") for $297,500,000. Subsequent to the acquisition, Friendly Holding Corporation ("FHC") was organized to hold the outstanding common stock of FICC and in March 1996, FHC was merged into FICC. The accompanying consolidated financial statements include the accounts of FICC and its wholly-owned subsidiaries (collectively, "FICC"). Under the terms of the TRC acquisition financing agreements, warrants to purchase shares of FICC's common stock were issued to the lenders. These warrants were exercisable on or before September 2, 1998. In connection with FICC's debt restructuring in 1991 (see Note 7), these warrants were cancelled and one of the lenders was issued new warrants for 13,836 shares of FICC's (formerly FHC's) Class A Common Stock, subject to dilution, at an exercise price of $445,000 or $32.16 per share. These warrants expire on September 2, 1998. As of December 29, 1996 and September 28, 1997, none of these warrants had been exercised. As of December 29, 1996 and September 28, 1997, three classes of common stock were authorized: Class A ("voting"), Class B ("limited voting") and Class C ("non-voting"). Prior to the occurrence of a Special Rights Default (see Note 7), lenders with limited voting common stock have voting rights only for certain transactions as defined in the loan documents. Common stock held by the lenders will automatically convert to voting common stock upon an underwritten public offering by FICC of at least $30,000,000 (see Note 17). As of December 31, 1995, TRC owned 913,632 shares or 83.75% of FICC's voting common stock. In March 1996, TRC distributed its shares of FICC's voting common stock to TRC's shareholders and FICC deconsolidated from TRC. As of December 29, 1996, TRC's shareholders and FICC's lenders (see Note 7) owned 36.95% and 48.03%, respectively, of FICC's outstanding common stock. As part of the debt restructuring in 1991 (see Note 7), certain officers of FICC purchased 97,906 shares of Class A Common Stock and warrants convertible into an additional 71,527 shares of voting common stock for an aggregate purchase price of $55,550. These warrants were exercised on April 19, 1996 at an aggregate exercise price of $22,000. 2. NATURE OF OPERATIONS FICC owns and operates full-service restaurants in fifteen states. The restaurants offer a wide variety of reasonably priced breakfast, lunch and dinner menu items as well as frozen dessert products. FICC manufactures substantially all of the frozen dessert products it sells, which are also distributed to supermarkets and other retail locations. For the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the nine months ended September 29, 1996 and September 28, 1997, restaurant sales were approximately 93%, 91%, 92%, 92% and 90%, respectively, of FICC's revenues. As of January 1, 1995, December 31, 1995, December 29, 1996 and September 28, 1997, approximately 80%, 80%, 80% and 85% of FICC's owned restaurants were located in the Northeast United States. As a result, a severe or prolonged economic recession in this geographic area may adversely affect FICC more than certain of its competitors which are more geographically diverse. Commencing in 1997, FICC has franchised restaurants (see Note 16). F-7 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of FICC and its subsidiaries after elimination of intercompany accounts and transactions. FISCAL YEAR -- FICC's fiscal year ends on the last Sunday in December, unless that day is earlier than December 27 in which case the fiscal year ends on the following Sunday. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Future facts and circumstances could alter management's estimates with respect to the carrying value of long-lived assets and the adequacy of insurance reserves. REVENUE RECOGNITION -- FICC recognizes restaurant revenue upon receipt of payment from the customer and retail revenue upon shipment of product. Franchise royalty income, based on gross sales of franchisees, is payable monthly and is recorded on the accrual method as earned. Initial franchise fees are recorded upon completion of all significant services, generally upon opening of the restaurant. CASH AND CASH EQUIVALENTS -- FICC considers all investments with an original maturity of three months or less when purchased to be cash equivalents. INVENTORIES -- Inventories are stated at the lower of first-in, first-out cost or market. Inventories at December 31, 1995, December 29, 1996 and September 28, 1997 were (in thousands):
DECEMBER 31, DECEMBER 29, SEPTEMBER 28, 1995 1996 1997 ------------ ------------ ------------- Raw Materials.................................... $ 2,129 $ 1,436 $ 2,191 Goods In Process................................. 114 58 207 Finished Goods................................... 12,836 13,651 14,619 ------------ ------------ ------------- Total...................................... $ 15,079 $ 15,145 $ 17,017 ------------ ------------ ------------- ------------ ------------ -------------
INVESTMENT IN JOINT VENTURE -- In February 1996, FICC and another entity entered into a joint venture, Shanghai Friendly Food Co., Ltd., a Chinese corporation. FICC has a 50% ownership interest in the venture. Operations commenced in April 1997. FICC accounts for the investment using the equity method. As of September 28, 1997, FICC F-8 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) had a receivable for approximately $1.4 million from the joint venture related to advances made to the venture in 1997 and net accounts receivable of approximately $956,000. INVESTMENTS -- FICC, through its wholly-owned subsidiary Restaurant Insurance Corporation ("RIC") (see Note 4), invests in equity securities ($576,000 fair market value at September 28, 1997) which are included in other assets in the accompanying consolidated balance sheet. FICC classifies all of these investments as available for sale. Accordingly, these investments are reported at estimated fair market value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of related income taxes. RESTRICTED CASH -- RIC is required by the third party insurer of FICC to hold assets in trust whose value is at least equal to certain of RIC's outstanding estimated insurance claim liabilities. As of September 28, 1997, cash of $12,907,000 was restricted. PROPERTY AND EQUIPMENT -- Property and equipment are carried at cost except for impaired assets which are carried at fair value less cost to sell (see Note 6). Depreciation of property and equipment is computed using the straight-line method over the following estimated useful lives: Buildings--30 years Building improvements and leasehold improvements--20 years Equipment--3 to 10 years At December 31, 1995, December 29, 1996 and September 28, 1997, property and equipment included (in thousands):
DECEMBER 31, DECEMBER 29, SEPTEMBER 28, 1995 1996 1997 ------------ ------------ ------------- Land............................................. $ 77,765 $ 75,004 $ 74,022 Buildings and Improvements....................... 110,231 112,359 113,347 Leasehold Improvements........................... 37,703 39,120 38,850 Assets Under Capital Leases...................... 37,307 42,893 41,642 Equipment........................................ 206,266 216,536 209,269 Construction In Progress......................... 6,147 6,424 13,941 ------------ ------------ ------------- Property and Equipment........................... 475,419 492,336 491,071 Less: Accumulated Depreciation and Amortization................................... (179,971) (206,175) (217,882) ------------ ------------ ------------- Property and Equipment--Net...................... $ 295,448 $ 286,161 $ 273,189 ------------ ------------ -------------
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 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LONG-LIVED ASSETS -- Effective January 2, 1995, FICC adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which had no impact. FICC reviews the license agreement for the right to use various trademarks and tradenames (see Note 5) for impairment on a quarterly basis. FICC recognizes an impairment has occurred when the carrying value of the license agreement exceeds the estimated future cash flows of the trademarked products. FICC reviews each restaurant property quarterly to determine which properties should be disposed of. This determination is made based on poor operating results, deteriorating property values and other factors. FICC recognizes an impairment has occurred when the carrying value of property exceeds its estimated fair value, which is estimated based on FICC's experience with similar properties and local market conditions, less costs to sell. (see Note 6). RESTAURANT CLOSURE COSTS -- Restaurant closure costs are recognized when a decision is made to close a restaurant. Restaurant closure costs include the cost of writing-down the carrying amount of a restaurant's assets to estimated fair market value, less costs of disposal, and the net present value of any remaining operating lease payments after the expected closure date. INSURANCE RESERVES -- FICC is self-insured through retentions or deductibles for the majority of its workers' compensation, automobile, general liability, product liability and group health insurance programs. Self-insurance amounts vary up to $500,000 per occurrence. Insurance with third parties, some of which is then reinsured through RIC (see Note 4), is in place for claims in excess of these self-insured amounts. RIC assumes 100% of the risk from $500,000 to $1,000,000 per occurrence for FICC's worker's compensation, general liability and product liability insurance. FICC and RIC's liability for estimated incurred losses are actuarially determined and recorded on an undiscounted basis. INCOME TAXES -- FICC accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. A valuation allowance is recorded for deferred tax assets whose realization is not likely. ADVERTISING -- FICC expenses production and other advertising costs the first time the advertising takes place. For the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the nine months ended September 29, 1996 and September 28, 1997, advertising expense was approximately $15,430,000, $17,459,000, $18,231,000, $13,854,000 and $15,270,000, respectively. F-10 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS -- Effective December 30, 1996, FICC adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", which had no effect. This statement requires that after a transfer of financial assets, an entity should recognize all financial assets and servicing assets it controls and liabilities it has incurred, derecognize financial assets when control has been surrendered, and derecognize liabilities when extinguished. This statement also provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings and is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share", which establishes new standards for computing and presenting earnings per share. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997 and earlier application is not permitted. Upon adoption, all prior period earnings per share data presented will be restated. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income (net income (loss) together with other non-owner changes in equity) and its components in a full set of general purpose financial statements. SFAS No. 130 is effective for financial statements issued for periods ending after December 15, 1997 and earlier application is permitted. Comprehensive income is not materially different than net income (loss) for all periods presented. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which requires disclosures for each segment of an enterprise that are similar to those required under current standards with the addition of quarterly disclosure requirements and a finer partitioning of geographic disclosures. SFAS No. 131 is effective for financial statements issued for periods ending after December 15, 1997 and earlier application is encouraged. Under the terms of the new standard, FICC will report segment information for restaurant and retail operations when material. RECLASSIFICATIONS -- Certain prior year amounts have been reclassified to conform with current year presentation. INTERIM FINANCIAL INFORMATION -- The accompanying financial statements as of September 28, 1997 and for the nine months ended September 29, 1996 and September 28, 1997 are unaudited, but, in the opinion of management, include all adjustments which are necessary for a fair presentation of the financial position and the results of operations and cash flows of FICC. Such adjustments consist solely of normal recurring accruals. Operating results for the nine months ended September 29, 1996 and September 28, 1997 are not necessarily indicative of the results that may be expected for the entire year due to the seasonality of the business. Historically, higher revenues and profits are experienced during the second and third fiscal quarters. F-11 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): 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 --------- ---------
5. INTANGIBLE ASSETS AND DEFERRED COSTS Intangible assets and deferred costs net of accumulated amortization as of December 31, 1995, December 29, 1996 and September 28, 1997 were (in thousands):
DECEMBER 31, DECEMBER 29, SEPTEMBER 28, 1995 1996 1997 ------------ ------------ ------------- License agreement for the right to use various trademarks and tradenames amortized over a 40 year life on a straight line basis... $ 15,231 $ 14,764 $ 14,415 Deferred financing costs amortized over the terms of the loans on an effective yield basis.......................................... 1,376 1,255 540 Deferred financing costs related to pending registration statement (see Note 17)........... -- -- 564 ------------ ------------ ------------- $ 16,607 $ 16,019 $ 15,519 ------------ ------------ ------------- ------------ ------------ -------------
In November 1994, FHC filed a Form S-1 Registration Statement and in 1995 elected not to proceed with the registration. Accordingly, previously deferred costs totaling $3,346,000 related to this registration were expensed during the year ended December 31, 1995. 6. WRITE-DOWN OF PROPERTY AND EQUIPMENT At December 31, 1995, December 29, 1996 and September 28, 1997, there were 81, 50 and 41 restaurant properties held for disposition, respectively. The restaurants held for disposition generally have F-12 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. WRITE-DOWN OF PROPERTY AND EQUIPMENT (CONTINUED) poor operating results, deteriorating property values or other adverse factors. FICC determined that the carrying values of certain of these properties exceeded their estimated fair values less costs to sell. Accordingly, during the year ended December 31, 1995, the carrying values of 51 properties were reduced by an aggregate of $4,006,000; during the year ended December 29, 1996, the carrying values of 6 properties were reduced by an aggregate of $227,000 and during the nine months ended September 28, 1997, the carrying values of 10 properties were reduced by an aggregate of $607,000. FICC plans to dispose of the 41 properties by December 31, 1998. The operating loss, prior to depreciation expense which is not reported at the restaurant level, for the properties held for disposition was $1,972,000, $1,129,000 and $769,000 for the years ended December 31, 1995 and December 29, 1996 and the nine months ended September 28, 1997, respectively. The carrying value of the properties held for disposition at December 31, 1995, December 29, 1996 and September 28, 1997 was approximately $7,491,000, $4,642,000 and $3,308,000, respectively. 7. DEBT Effective January 1, 1991, FICC and its lenders entered into an Amended and Restated Revolving Credit and Term Loan Agreement (the "Credit Agreement"), and effective January 1, 1996, the Credit Agreement was again amended and restated. In connection with the January 1, 1996 amendment (the "Amendment"), revolving credit loans and term loans totaling $373,622,000 at December 31, 1995 were converted to revolving credit loans of $38,549,000 and term loans of $335,073,000. For the year ended December 29, 1996 and the nine months ended September 28, 1997, interest was accrued on the revolving credit and term loans at an annual rate of 11%, with .5% of the accrued interest which is not currently payable being accrued and classified as other long-term liabilities in the accompanying consolidated balance sheet. The deferred interest will be waived if the revolving credit and term loans are repaid in full in cash on or before the due date. The deferred interest as of September 28, 1997 was approximately $3,302,000. Under the terms of the Amendment, as of December 29, 1996, principal of $371,678,000 is due on May 1, 1998. FICC may extend the due date to May 1, 1999 by paying a fee equal to 1% of the aggregate of the revolver commitment of $50,000,000, the letters of credit commitment (see below) and the principal amount of the term loan. FICC does not expect to generate sufficient cash flow to make all of the principal payments required by May 1, 1998; therefore, FICC will exercise its option to extend the due date to May 1, 1999 if the pending recapitalization is not consummated (see Note 17). Accordingly, these loans are classified as long-term in the accompanying consolidated financial statements. In connection with the Amendment, in March 1996 the lenders received 1,090,972 shares of FICC's Class B Common Stock, which represented 50% of the issued and outstanding equity of FICC. As a result of the issuance of stock under the Management Stock Plan (see Note 13) and the exercise of certain warrants (see Note 1), additional shares of FICC's Class B Common Stock were issued to the lenders in 1996 to maintain their minimum equity interest in FICC of 47.50% on a fully diluted basis in accordance with the Amendment. Total shares issued to the lenders as of December 29, 1996 were 1,187,503. The estimated fair market value of the shares issued of $50,000 was recorded as a deferred financing cost during the year ended December 29, 1996. Prior to the occurrence of a Special Rights Default (see below), lenders with limited voting stock may elect two of the five members to FICC's board of directors. In the event of a Special Rights Default, lenders with limited voting stock may appoint two additional directors to FICC's board. Additionally, in the event of a Special Rights Default, the lenders are entitled to receive F-13 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. DEBT (CONTINUED) additional shares of FICC's limited voting common stock thereby increasing their equity interest in FICC by 5% initially, with additional shares of limited voting common stock issued quarterly thereafter for a maximum of eight quarters. Each quarterly issuance of limited voting common stock would increase the lenders' equity interest in FICC by 2.5%. A Special Rights Default occurs if (i) FICC files for bankruptcy or enters into any insolvency proceeding, (ii) FICC fails to pay principal or interest on the revolving credit and term loans when due, (iii) FICC fails to comply with financial covenants for two consecutive quarters, or (iv) certain other conditions relating to ownership of FICC's subsidiaries and ownership of FICC are not met. As of September 28, 1997, a Special Rights Default had not occurred. Covenant violations prior to December 31, 1995 were waived by the lenders. The Amendment provided for new covenant requirements effective December 31, 1995 (see below). Under the terms of the Amendment, covenants require attainment of minimum earnings, as defined, debt service coverage ratios, as defined, and minimum net worth, as defined. Restrictions also have been placed on capital expenditures, asset dispositions, proceeds from asset dispositions, investments, pledging of assets, sale and leasebacks and the incurrence of additional indebtedness. The covenant requirements, as defined under the Amendment, and actual ratios/amounts as of and for the twelve months ended December 31, 1995 and December 29, 1996 and as of and for the twelve months ended September 28, 1997 were:
DECEMBER 31, 1995 DECEMBER 29, 1996 SEPTEMBER 28, 1997 -------------------------- -------------------------- --------------------------- REQUIREMENT ACTUAL REQUIREMENT ACTUAL REQUIREMENT ACTUAL ------------ ------------ ------------ ------------ ------------ ------------- Consolidated Earnings Before Interest, Taxes, Depreciation and Amortization, as defined.... $ 55,000,000 $ 58,094,000 $ 58,000,000 $ 64,001,000 $ 63,000,000 $ 73,352,000 Ratio of Consolidated Adjusted EBITDA to Consolidated Debt Service Payments................ .95 to 1 1.11 to 1 .73 to 1 .99 to 1 .82 to 1 1.25 to 1 Consolidated Net Worth............ $(168,000,000) $(165,534,000) $(181,000,000) $(173,156,000) $(186,000,000) $(170,684,000)
FICC has a commitment from a bank to issue letters of credit totaling $5,815,000 through May 1, 1998, or through May 1, 1999 if the Credit Agreement is extended. As of December 31, 1995, December 29, 1996 and September 28, 1997, total letters of credit issued were $5,815,000, $4,390,000 and $3,695,000, respectively. An annual fee of 2% is charged on the maximum drawing amount of each letter of credit issued. During the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the nine months ended September 29, 1996 and September 28, 1997, there were no drawings against the letters of credit. Under the terms of the Amendment, interest will be charged at 13.5%, compounded monthly, on drawings against letters of credit issued. F-14 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. DEBT (CONTINUED) Debt at December 31, 1995, December 29, 1996 and September 28, 1997 consisted of the following (in thousands):
DECEMBER 31, DECEMBER 29, SEPTEMBER 28, 1995 1996 1997 ------------ ------------ ------------- Revolving Credit Loan, 12% through December 31, 1995 and 11% thereafter; due May 1, 1998 unless FICC extends to May 1, 1999.................... $ 210,984 $ 36,605 $ 22,969 Term Loan, 8.5% compounded monthly through December 31, 1995 and 11% thereafter; due May 1, 1998 unless FICC extends to May 1, 1999..... 162,638 335,073 335,073 Insurance Premium Finance Loans, 5.55%-8.75%; due July 10, 1998-November 2, 1998................. 3,177 1,259 2,930 Other............................................ 174 147 125 ------------ ------------ ------------- 376,973 373,084 361,097 Less: Current Portion............................ 3,204 1,289 2,961 ------------ ------------ ------------- Total Long-Term Debt............................. $ 373,769 $ 371,795 $ 358,136 ------------ ------------ ------------- ------------ ------------ -------------
The revolving credit and term loans are collateralized by a lien on substantially all of FICC's assets and by a pledge of FICC's shares of its subsidiaries' stock. At December 29, 1996, aggregate future annual principal payments of debt, exclusive of capitalized leases (see Note 8), were: 1997, $1,289,000; 1998, $33,000; 1999, $371,715,000; and 2000, $47,000. The payments for the revolving credit and term loans are reflected in 1999, since, as discussed above, FICC will not repay the loans in 1998. At December 31, 1995, December 29, 1996 and September 28, 1997, the unused portion of the revolving credit loan was $11,451,000, $13,395,000 and $27,031,000, respectively. A 0.5% annual commitment fee was charged on the unused portions of the revolver and letters of credit commitments. The total average unused portions of the revolver and letters of credit commitments was $10,685,000, $12,796,000 and $13,359,000 for the years ended December 31, 1995 and December 29, 1996 and the nine months ended September 28, 1997, respectively. In October 1994, FICC paid a fee of approximately $3,582,000 to the lenders to facilitate a refinancing of the obligations under the Credit Agreement. This amount was included in interest expense for the year ended January 1, 1995 since, under the proposed refinancing, the Credit Agreement would have been repaid. FICC's revolving credit and term loans are not publicly traded and prices and terms of the few transactions which were completed are not available to FICC. Since no information is available on prices of completed transactions, the terms of the loans are complex and the relative risk involved is difficult to evaluate, management believes it is not practicable to estimate the fair value of the revolving credit and term loans without incurring excessive costs. Additionally, since the letters of credit are associated with the F-15 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. DEBT (CONTINUED) revolving credit and term loan agreement, management believes it is also not practicable to estimate the fair value of the letters of credit without incurring excessive costs. 8. LEASES As of December 31, 1995, December 29, 1996 and September 28, 1997, FICC operated 735, 707 and 662 restaurants, respectively. These operations were conducted in premises owned or leased as follows:
DECEMBER 31, DECEMBER 29, SEPTEMBER 28, 1995 1996 1997 ----------------- ----------------- ----------------- Land and Building Owned.......................... 313 296 279 Land Leased and Building Owned................... 164 161 145 Land Leased and Building Leased.................. 258 250 238 --- --- --- 735 707 662 --- --- --- --- --- ---
Restaurants in shopping centers are generally leased for a term of 10 to 20 years. Leases of freestanding restaurants generally are for a 15 or 20 year lease term and provide for renewal options for three or four five-year renewals. Most leases provide for minimum payments plus a percentage of sales in excess of stipulated amounts. Additionally, FICC leases certain restaurant equipment over lease terms from three to seven years. Future minimum lease payments under non-cancellable leases with an original term in excess of one year as of December 29, 1996 were (in thousands):
OPERATING CAPITAL YEAR LEASES LEASES - ------------------------------------------------------------------------ ----------- --------- 1997.................................................................... $ 13,366 $ 8,446 1998.................................................................... 12,524 6,445 1999.................................................................... 11,635 3,429 2000.................................................................... 10,277 2,354 2001.................................................................... 8,401 1,815 2002 and thereafter..................................................... 26,096 7,163 ----------- --------- Total Minimum Lease Payments............................................ $ 82,299 29,652 ----------- Less: Amounts Representing Interest..................................... 9,117 --------- Present Value of Minimum Lease Payments................................. $ 20,535 --------- ---------
F-16 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. LEASES (CONTINUED) Capital lease obligations reflected in the accompanying consolidated balance sheets have effective rates ranging from 8% to 12% and are payable in monthly installments through 2016. Maturities of such obligations at December 29, 1996 were (in thousands):
YEAR AMOUNT - --------------------------------------------------------------- --------- 1997........................................................... $ 6,353 1998........................................................... 4,967 1999........................................................... 2,371 2000........................................................... 1,539 2001........................................................... 1,187 2002 and thereafter............................................ 4,118 --------- Total.................................................... $ 20,535 --------- ---------
Rent expense included in the accompanying consolidated financial statements for operating leases was (in thousands):
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28, 1995 1995 1996 1996 1997 ----------- ------------ ------------ ------------- ------------- Minimum Rentals....... $ 14,767 $ 15,175 $ 16,051 $ 12,229 $ 12,456 Contingent Rentals.... 2,003 2,012 1,918 1,292 1,164 ----------- ------------ ------------ ------------- ------------- Total........... $ 16,770 $ 17,187 $ 17,969 $ 13,521 $ 13,620 ----------- ------------ ------------ ------------- ------------- ----------- ------------ ------------ ------------- -------------
9. INCOME TAXES Prior to March 23, 1996 (see below), FICC and its subsidiaries were included in the consolidated Federal income tax return of TRC. Under a tax sharing agreement between TRC and FICC (formerly FHC) (the "TRC/FICC Agreement"), FICC and its subsidiaries (the "FICC Group") were obligated to pay TRC its allocable share of the TRC group tax liability, determined as if the FICC Group were filing a separate consolidated income tax return. On March 23, 1996, TRC distributed its shares of FICC's voting common stock to TRC's shareholders (see Note 1), the FICC Group deconsolidated from the TRC group and the TRC/FICC Agreement expired. In addition, on March 26, 1996, shares of Class B Common Stock were issued to FICC's lenders which resulted in an ownership change pursuant to Internal Revenue Code Section 382. As a result of the deconsolidation from TRC, the FICC Group is required to file two short year Federal income tax returns for 1996. For the period from January 1, 1996 through March 23, 1996, the FICC Group was included in the consolidated Federal income tax return of TRC and for the period from March 24, 1996 through December 29, 1996, the FICC Group filed a consolidated return for its group only. Under the TRC/FICC Agreement, NOLs generated by the FICC Group and utilized or allocated to TRC were available to the FICC Group on a separate company basis to carryforward. Pursuant to the TRC/FICC Agreement, as of March 23, 1996, $99,321,000 of carryforwards would have been available to the FICC Group to offset future taxable income of the FICC Group. However, as a result of the deconsolidation from TRC, the deferred tax asset of approximately $23 million related to the $65,034,000 of NOLs utilized by TRC was written off. Approximately $19.0 million of the write-off was recorded in F-17 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES (CONTINUED) fiscal 1995, which amount approximated the benefit of NOLs utilized by TRC as of December 31, 1995, and the balance was recorded in fiscal 1996, which amount approximated the benefit of the NOLs utilized by TRC for the period from January 1, 1996 to the deconsolidation. Additionally, as a result of the change in ownership and Section 382 limitation, a valuation allowance of approximately $10 million has been placed on $29,686,000 of the $34,287,000 remaining Federal NOL carryforwards generated for the period prior to March 23, 1996. The amount of pre-change NOLs not reserved for represents the amount of NOLs which have become available as a result of FICC realizing gains which were unrealized as of the date of the ownership change. FICC will reduce the valuation allowance on pre-change NOLs if they become available to FICC via realization of additional unrealized gains. FICC does not believe that it is more likely than not that such NOLs will become available, and therefore the valuation allowance is appropriate. For the period from March 23, 1996 to December 29, 1996, FICC generated a net operating loss carryforward of $5,765,000. Due to restrictions similar to Section 382 in most of the states FICC operates in and short carryforward periods, FICC has fully reserved for all state NOL carryforwards generated through March 26, 1996 as of December 29, 1996. The benefit from (provision for) income taxes for the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the nine months ended September 29, 1996 and September 28, 1997 was as follows (in thousands):
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28, 1995 1995 1996 1996 1997 ----------- ------------ ------------- ------------- ------------- Current Benefit (Provision) Federal.............................. $ 454 $ -- $ -- $ -- $ -- State................................ -- -- -- -- -- Foreign.............................. -- -- (58) -- (10) ----------- ------------ ------ ------ ------ Total Current Benefit (Provision)...... 454 -- (58) -- (10) ----------- ------------ ------ ------ ------ Deferred Benefit (Provision) Federal.............................. 3,608 (27,465) 5,126 3,848 (78) State................................ 599 (5,954) 800 594 -- Foreign.............................. -- -- -- -- -- ----------- ------------ ------ ------ ------ Total Deferred Benefit (Provision)..... 4,207 (33,419) 5,926 4,442 (78) ----------- ------------ ------ ------ ------ Total Benefit From (Provision For) Income Taxes......................... $ 4,661 $ (33,419) $ 5,868 $ 4,442 $ (88) ----------- ------------ ------ ------ ------ ----------- ------------ ------ ------ ------
F-18 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES (CONTINUED) A reconciliation of the differences between the statutory Federal income tax rate and the effective income tax rates follows:
JANUARY 1, DECEMBER 31, DECEMBER 29, 1995 1995 1996 ------------- --------------- ----------------- Statutory Federal Income Tax Rate.................... 35% 35 % 35 % State Income Taxes Net of Federal Benefit............ 17 11 14 Write-off of Intercompany NOL Carryforwards 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% -- -- -- -- --- ---
Deferred tax assets and liabilities are determined as the difference between the financial statement and tax bases of the assets and liabilities multiplied by the enacted tax rates in effect for the year in which the differences are expected to reverse. Significant deferred tax assets (liabilities) at December 31, 1995 and December 29, 1996 were as follows (in thousands):
DECEMBER 31, DECEMBER 29, 1995 1996 ------------ ------------ Property and Equipment........................................... $ (51,903) $ (50,866) Federal and State NOL Carryforwards (net of valuation allowance of $23,026 and $21,220 at December 31, 1995 and December 29, 1996, respectively)............................................ -- 4,355 Insurance Reserves............................................... 6,311 5,788 Inventories...................................................... 2,450 1,862 Accrued Pension.................................................. 3,272 4,388 Intangible Assets................................................ (3,600) (6,037) Tax Credit Carryforwards......................................... -- 1,001 Other............................................................ 1,447 3,412 ------------ ------------ Net Deferred Tax Liability....................................... $ (42,023) $ (36,097) ------------ ------------ ------------ ------------
At December 31, 1995, December 29, 1996 and September 28, 1997, the classification of deferred taxes was as follows (in thousands):
DECEMBER 31, DECEMBER 29, SEPTEMBER 28, 1995 1996 1997 ------------ ------------ ------------- Current Asset.................................... $ 9,885 $ 12,375 $ 12,381 Long-term Liability.............................. (51,908) (48,472) (50,104) ------------ ------------ ------------- $ (42,023) $ (36,097) $ (37,723) ------------ ------------ ------------- ------------ ------------ -------------
F-19 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. EMPLOYEE BENEFIT PLANS Substantially all of the employees of FICC are covered by a non-contributory defined benefit pension plan. Effective January 1, 1992, the plan was changed to a defined benefit cash balance plan. Plan benefits are based on years of service and participant compensation during their years of employment. FICC accrues the cost of its pension plan over its employees' service lives. Under the cash balance plan, a nominal account for each participant is established. The plan administrator makes an annual contribution to each account based on current wages and years of service. Each account earns a specified rate of interest which is adjusted annually. FICC's policy is to make contributions to the plan which provide for benefits and pay plan expenses. Contributions are intended to provide not only for benefits attributable to service to date, but also for those benefits expected to be earned in the future. For the years ended January 1, 1995, December 31, 1995 and December 29, 1996, net pension expense was (in thousands):
JANUARY 1, DECEMBER 31, DECEMBER 29, 1995 1995 1996 ----------- ------------ ------------ Service Cost......................................... $ 4,011 $ 3,877 $ 4,202 Interest Cost........................................ 5,106 5,420 5,781 Actual Loss (Gain) on Plan Assets.................... 5,180 (17,438) (9,428) Deferral of Asset (Loss) Gain........................ (11,725) 10,850 2,377 Net Amortization of Deferral of Asset Gain........... (548) (770) (651) ----------- ------------ ------------ Net Pension Expense.................................. $ 2,024 $ 1,939 $ 2,281 ----------- ------------ ------------ ----------- ------------ ------------
The funded status of the plan as of December 31, 1995 and December 29, 1996 was (in thousands):
DECEMBER 31, DECEMBER 29, 1995 1996 ------------ ------------ Actuarial Present Value of Benefit Obligations: Vested......................................................... $ 49,581 $ 56,752 Non-vested..................................................... 1,081 1,316 ------------ ------------ Accumulated Benefit Obligations.................................. $ 50,662 $ 58,068 ------------ ------------ ------------ ------------ Projected Benefit Obligations.................................... $ 69,188 $ 76,768 Plan Assets at Market Value...................................... 86,477 90,626 ------------ ------------ Plan Assets in Excess of Projected Benefit Obligation............ 17,289 13,858 Unrecognized Prior Service Costs................................. (3,486) (3,077) Unrecognized Net Gain............................................ (21,785) (21,044) ------------ ------------ Accrued Pension Liability........................................ $ (7,982) $ (10,263) ------------ ------------ ------------ ------------
For the years ended January 1, 1995, December 31, 1995 and December 29, 1996, the weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 8.50%, 8.00% and 7.75%, respectively. The rate of annual increase in future compensation levels used ranged from 5.0% to 6.5% for the year ended January 1, 1995, from 4.5% to 6.0% for the year ended F-20 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. EMPLOYEE BENEFIT PLANS (CONTINUED) December 31, 1995 and 4.0% to 5.5% for the year ended December 29, 1996, depending on the employee group. The expected long-term rate of return on plan assets was 9.5% for each of the three years. Effective December 30, 1996, FICC changed its method of calculating the market-related value of plan assets used in determining the return-on-asset component of annual pension expense and the cumulative net unrecognized gain or loss subject to amortization. Under the previous accounting method, the calculation of the market-related value of assets reflected amortization of the actual realized and unrealized capital return on assets on a straight-line basis over a five-year period. Under the new method, the calculation of the market-related value of assets reflects the long-term rate of return expected by FICC and amortization of the difference between the actual return (including capital, dividends and interest) and the expected return over a five-year period. FICC believes the new method is widely used in practice and preferable because it results in calculated plan asset values that more closely approximate fair value, while still mitigating the effect of annual market-value fluctuations. Under both methods, only the cumulative net unrecognized gain or loss which exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets is subject to amortization. This change resulted in a noncash benefit for the nine months ended September 28, 1997 of $2,236,000 (net of taxes of $1,554,000) which represents the cumulative effect of the change related to years prior to fiscal 1997 and $455,000 (net of taxes of $316,000) in lower pension expense related to the nine months ended September 28, 1997 as compared to the previous accounting method. Had this change been applied retroactively, pension expense would have been reduced by $729,000, $879,000 and $946,000 for the years ended January 1, 1995, December 31, 1995 and December 29, 1996, respectively. FICC's Employee Savings and Investment Plan (the "Plan") covers all eligible employees and is qualified under Section 401(k) of the Internal Revenue Code. For the years ended January 1, 1995, December 31, 1995 and December 29, 1996, FICC made discretionary matching contributions at the rate of 75% of a participant's first 2% of his/her contributions and 50% of a participant's next 2% of his/her contributions. All employee contributions are fully vested. Employer contributions are vested at the completion of five years of service or at retirement, death, disability or termination at age 65 or over, as defined by the Plan. Contribution and administrative expenses for the Plan were approximately $1,032,000, $1,086,000 and $1,002,000 for the years ended January 1, 1995, December 31, 1995 and December 29, 1996, respectively. 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS FICC provides health care and life insurance benefits to certain groups of employees upon retirement. Eligible employees may continue their coverages if they are receiving a pension benefit, are 55 years of age, and have completed 10 years of service. The plan requires contributions for health care coverage from participants who retired after September 1, 1989. Life insurance benefits are non-contributory. The plan is not funded. F-21 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) FICC accrues the cost of postretirement benefits over the years employees provide services to the date of their full eligibility for such benefits. The components of the net postretirement benefit cost for the years ended January 1, 1995, December 31, 1995 and December 29, 1996 were (in thousands):
JANUARY 1, DECEMBER 31, DECEMBER 29, 1995 1995 1996 ------------- --------------- --------------- Service Cost of Benefits Earned...................... $ 108 $ 105 $ 125 Interest Cost on Accumulated Postretirement Benefit Obligation, net of Amortization.................... 405 478 374 ----- ----- ----- Net Postretirement Benefit Expense................... $ 513 $ 583 $ 499 ----- ----- ----- ----- ----- -----
The postretirement benefit liability as of December 31, 1995 and December 29, 1996 included the following components (in thousands):
DECEMBER 31, DECEMBER 29, 1995 1996 ------------- ------------- Actuarial Present Value of Postretirement Benefit Obligation: Retirees..................................................... $ 4,267 $ 3,837 Other fully eligible plan participants....................... 428 358 Other active plan participants............................... 1,480 1,514 ------ ------ Accumulated Postretirement Benefit Obligation.................... 6,175 5,709 Plan Changes..................................................... 1,175 1,113 Unrecognized Net (Loss) Gain..................................... (293) 328 ------ ------ Postretirement Benefit Liability................................. $ 7,057 $ 7,150 ------ ------ ------ ------
The discount rate used to determine the accumulated postretirement benefit obligation was 8.50%, 8.00% and 7.75% for the years ended January 1, 1995, December 31, 1995 and December 29, 1996, respectively. The assumed health care cost trend rate used to measure the accumulated postretirement benefit obligation was 14% gradually declining to 6% in 2000 and thereafter for the year ended January 1, 1995, 11.5% gradually declining to 5.5% in 2000 and thereafter for the year ended December 31, 1995 and 9.25% gradually declining to 5.25% in 2000 and thereafter for the year ended December 29, 1996. A one-percentage-point increase in the assumed health care cost trend rate would have increased the postretirement benefit expense by approximately $56,000, $55,000 and $49,000, and would have increased the accumulated postretirement benefit obligation by approximately $484,000, $478,000 and $411,000 for the years ended January 1, 1995, December 31, 1995 and December 29, 1996, respectively. FICC increased the required contributions from participants who retired after July 31, 1994, for health coverage. This and other plan changes are being amortized over the expected remaining employee service period of active plan participants. 12. INSURANCE RESERVES At December 31, 1995, December 29, 1996 and September 28, 1997, insurance reserves of approximately $20,847,000, $16,940,000 and $29,306,000, respectively, had been recorded. Insurance reserves at F-22 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. INSURANCE RESERVES (CONTINUED) September 28, 1997 included RIC's reserve for FICC's insurance liabilities of approximately $13,625,000. Reserves at December 31, 1995, December 29, 1996 and September 28, 1997 also included accruals related to postemployment benefits and postretirement benefits other than pensions. While management believes these reserves are adequate, it is reasonably possible that the ultimate liabilities will exceed such estimates. Classification of the reserves was as follows (in thousands):
DECEMBER 31, DECEMBER 29, SEPTEMBER 28, 1995 1996 1997 ------------ ------------ ------------- Current.......................................... $ 6,605 $ 3,973 $ 6,773 Long-term........................................ 14,242 12,967 22,533 ------------ ------------ ------------- Total........................................ $ 20,847 $ 16,940 $ 29,306 ------------ ------------ ------------- ------------ ------------ -------------
Following is a summary of the activity in the insurance reserves for the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and for the nine months ended September 28, 1997 (in thousands):
JANUARY 1, 1995 DECEMBER 31, 1995 DECEMBER 29, 1996 SEPTEMBER 28, 1997 -------------- ----------------- ----------------- ------------------ Beginning balance..................... $ 24,977 $ 23,216 $ 20,847 $ 16,940 Provision............................. 11,727 11,336 8,363 8,948 Payments.............................. (13,488) (13,705) (12,270) (9,813) Acquisition of RIC.................... -- -- -- 13,231 ------- ------- ------- ------- Ending balance........................ $ 23,216 $ 20,847 $ 16,940 $ 29,306 ------- ------- ------- ------- ------- ------- ------- -------
13. STOCK PLANS A Stock Rights Plan ("SRP") was adopted by FICC in 1991. Under the SRP, certain eligible individuals were granted rights to purchase shares of voting common stock of FICC for $.01 per share, subject to certain vesting, anti-dilution and exercise requirements. As of December 31, 1995, the aggregate number of shares which could have been issued under the SRP was 88,801 of which 41,316 rights were issued and vested. The estimated fair value of the rights vested was not material and no compensation expense was recorded. On March 25, 1996, FICC established the Management Stock Plan ("MSP"). The MSP provided for persons with rights granted under the SRP to waive their rights under such plan and receive shares of FICC's Class A Common Stock. Accordingly, in April 1996, all of the participants in the SRP made this election and the SRP rights then outstanding were cancelled and 122,888 shares of Class A Common Stock were issued, of which 61,650 were vested as of December 29, 1996. In April 1996, the fair value of the 122,888 shares of Class A Common Stock issued was approximately $30,700, or $0.25 per share. The estimated fair value of the 20,334 additional shares vested in 1996 of $5,000 was recorded as compensation expense in the year ended December 29, 1996. The remaining issued, non-vested shares of 61,238 will vest based on the Company achieving certain performance measurements. As of September 28, 1997, 27,113 additional shares are available for grant under the MSP (see Note 17). Net loss and net loss per share (see Note 17) for the year ended December 29, 1996 would have been $7,786,000 and $1.09, respectively had FICC used the fair value based method prescribed by SFAS No. 123 to account for the restricted stock issued in 1996. F-23 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. STOCK PLANS (CONTINUED) In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation" which was adopted by FICC effective January 1, 1996. SFAS No. 123 requires the measurement of the fair value of stock options or warrants granted to be included in the statement of operations or that pro forma information related to the fair value be disclosed in the notes to financial statements. FICC has determined that it will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25 and elect the disclosure-only alternative under SFAS No. 123. Since no options were granted since January 2, 1995, the pro forma disclosures required by SFAS No. 123 are not applicable. 14. RELATED PARTY TRANSACTIONS In March 1996, the FICC pension plan acquired three restaurant properties from FICC. The land, buildings and improvements were purchased by the plan at their appraised value of $2,043,000 and are located in Connecticut, Vermont and Virginia. Simultaneous with the purchase, the pension plan leased back the three properties to FICC at an aggregate annual base rent of $214,000 for the first five years and $236,000 for the following five years. The pension plan was represented by independent legal and financial advisors. The transaction was recorded by FICC as a direct financing lease since FICC has the right to repurchase the property at fair market value. FICC's Chairman and President is an officer of the general partner of Perkins Family Restaurant L.P. ("PFR"), a subsidiary of TRC (formerly FICC's majority shareholder). Three of FICC's directors are also directors of PFR. FICC entered into subleases for certain land, buildings, and equipment with Perkins Restaurants Operating Company, L.P. (Perkins), a subsidiary of TRC. During the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the nine months ended September 29, 1996 and September 28, 1997, rent expense related to the subleases was approximately $245,000, $266,000, $278,000, $208,000 and $209,000, respectively. Additionally, during the year ended January 1, 1995, FICC purchased leasehold improvements and personal property at one of the locations for approximately $303,000 from Perkins. On March 19, 1997, FICC acquired all of the outstanding shares of common stock of Restaurant Insurance Corporation ("RIC") from TRC (see Note 4). Prior to the acquisition, RIC assumed, from a third party insurance company, reinsurance premiums related to insurance liabilities of FICC of approximately $7,046,000, $6,409,000 and $4,198,000 during the years ended January 1, 1995, December 31, 1995 and December 29, 1996, respectively. In addition, RIC had reserves of approximately $10,456,000, $12,830,000 and $13,038,000 related to FICC claims at January 1, 1995, December 31, 1995 and December 29, 1996, respectively. In fiscal 1994, TRC Realty Co. (a subsidiary of TRC) entered into a ten year operating lease for an aircraft, for use by both FICC and Perkins. FICC shares equally with Perkins in reimbursing TRC Realty Co. for leasing, tax and insurance expenses. In addition, FICC also incurs actual usage costs. Total expense for the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the nine months ended September 29, 1996 and September 28, 1997 was approximately $336,000, $620,000, $590,000, $447,000 and $465,000, respectively. FICC purchased certain food products used in the normal course of business from a division of Perkins. For the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the nine F-24 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. RELATED PARTY TRANSACTIONS (CONTINUED) months ended September 29, 1996 and September 28, 1997, purchases were approximately $1,335,000, $1,909,000, $1,425,000, $1,103,000 and $741,000, respectively. TRC provided FICC with certain management services for which TRC was reimbursed approximately $773,000, $785,000, $800,000, $600,000 and $618,000 for the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the nine months ended September 29, 1996 and September 28, 1997, respectively. Expenses were charged to FICC on a specific identification basis. FICC believes the allocation method used was reasonable and approximates the amount that would have been incurred on a stand alone basis had FICC been operated as an unaffiliated entity. During the year ended December 29, 1996 and the nine months ended September 29, 1996 and September 28, 1997, FICC paid approximately $69,000, $46,000 and $138,000, respectively, for fees and other reimbursements to four of FICC's board of directors members, two of whom represented FICC's lenders. For the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the nine months ended September 29, 1996 and September 28, 1997, FICC expensed approximately $200,000, $763,000, $196,000, $146,000 and $150,000, respectively, for fees paid to the lenders' agent bank. The expense for the year ended December 31, 1995 included approximately $563,000 related to the filing of a Form S-1 Registration Statement (see Note 5). 15. COMMITMENTS AND CONTINGENCIES FICC is a party to various legal proceedings arising in the ordinary course of business which management believes, after consultation with legal counsel, will not have a material adverse effect on FICC's financial position or future operating results. As of December 29, 1996, FICC had commitments to purchase approximately $50,587,000 of raw materials, food products and supplies used in the normal course of business that cover periods of one to twelve months. Most of these commitments are non-cancellable. 16. FRANCHISE AGREEMENT On July 14, 1997, FICC entered into an agreement which granted a franchisee exclusive rights to operate, manage and develop Friendly's full-service restaurants in the franchising region of Maryland, Delaware, the District of Columbia and northern Virginia (the "Agreement"). Pursuant to the Agreement, the franchisee purchased certain assets and rights in 34 existing Friendly's restaurants in this franchising region, has committed to open an additional 74 restaurants over the next six years and, subject to the fulfillment of certain conditions, has further agreed to open 26 additional restaurants, for a total of 100 new restaurants in this franchising region over the next ten years. Gross proceeds from the sale were approximately $8,488,000, which amount includes $250,000 held in escrow, $860,000 for initial franchise fees for the 34 initial restaurants, $500,000 for development rights and $930,000 for franchise fees for certain of the additional restaurants described above. FICC deferred the escrow amount as the franchisee had ninety days to make a claim against the escrow for losses relating to cash, inventory and restaurant conditions existing as of the date of the Agreement. The $860,000 was recorded as revenue in the nine months ended September 28, 1997 and the development and franchise fees received will be amortized into income over the initial ten-year term of the Agreement and as additional restaurants are opened, respectively. FICC recognized income of $2,303,000 related to the sale of the equipment and operating F-25 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. FRANCHISE AGREEMENT (CONTINUED) rights for the 34 existing franchised locations in the nine months ended September 28, 1997. The proceeds were allocated between the assets sold and the development rights by FICC and the franchisee based on the estimated fair market values. As part of the Agreement, the franchisee will also manage 14 other Friendly's restaurants located in the same area with an option to acquire these restaurants in the future. The franchisee is required by the terms of the Agreement to purchase from FICC all of the frozen dessert products it sells in the franchised restaurants. 17. PROPOSED INITIAL PUBLIC OFFERING (UNAUDITED) The Company has filed Registration Statements with the Securities and Exchange Commission related to an initial public offering of 5,000,000 shares of the Company's Common Stock (the "Common Stock Offering") and $175 million of Senior Notes due 2007 (the "Senior Note Offering") and will, contingent upon consummation of the offerings, enter into a new credit facility consisting of a $105 million term loan facility, a $55 million revolving credit facility and a $15 million letter of credit facility (the "New Credit Facility"). The Company will amend its articles of organization in connection with the Common Stock Offering to give effect to a 923.6442-for-1 split of Class A and Class B Common Stock and increase the number of authorized shares. The accompanying consolidated financial statements have been restated to reflect the anticipated share split. Pursuant to a stockholder rights plan FICC plans to adopt (the "Plan"), prior to the consummation of the Common Stock Offering, the Board will declare a dividend distribution of one purchase right (a "Right") for each outstanding share of Common Stock. The Plan provides, in substance, that should any person or group (other than Mr. Smith, Equitable, senior management and their respective affiliates) acquire 15% or more of FICC's Common Stock, each Right, other than Rights held by the acquiring person or group, would entitle its holder to purchase a specified number of shares of Common Stock for 50% of their then current market value. Unless a 15% acquisition has occurred, the Rights may be redeemed by FICC at any time prior to the termination date of the Plan. In connection with the offerings, the 27,113 shares in the MSP not previously allocated will be allocated and immediately vested and the 61,238 shares previously issued but not vested will become vested (see Note 13). Additionally, 775,742 shares of Class A Common Stock will be returned to FICC from certain shareholders for no consideration. The shares are being returned in accordance with an agreement with FICC's existing lenders as a condition to the offerings. Of such shares, 100,742 shares will be issued to FICC's Chief Executive Officer and vest immediately, 375,000 shares will be reserved for issuance under a restricted stock option plan (the "Restricted Stock Plan") to be adopted by FICC in connection with the offerings and 300,000 shares will be issued to certain employees. The 300,000 shares will vest immediately. The estimated fair value of $9,782,000 of the (i) 27,113 vested shares to be issued under the MSP, (ii) 61,238 shares previously issued under the MSP which will vest in connection with the offerings, (iii) 100,742 vested shares to be issued to the Company's Chief Executive Officer in connection with the offerings and (iv) 300,000 vested shares to be issued to certain employees will be recorded as compensation expense by FICC upon consummation of the offerings. In connection with the offerings, FICC also plans to adopt a stock option plan. Pro forma net loss per share amounts assume the issuance of 5,000,000 additional shares of Common Stock in connection with the Common Stock Offering and the return of 375,000 net shares to FICC in F-26 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. PROPOSED INITIAL PUBLIC OFFERING (UNAUDITED) (CONTINUED) 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 accompanying consolidating financial statements. Stockholders' equity (deficit), total assets and net income (loss) of the Non-guarantor Subsidiaries are insignificant to consolidated amounts for prior periods. Accordingly, supplemental condensed consolidating financial information is not presented for prior periods. Separate complete financial statements and other disclosures of the respective Guarantor Subsidiary as of December 29, 1996 and September 28, 1997 and for the year and nine months then ended are not presented because management has determined that such information is not material to investors. Investments in subsidiaries are accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of the subsidiaries are, therefore, reflected in the Parent Company's investment accounts and earnings. The principal elimination entries eliminate the Parent Company's investments in subsidiaries and intercompany balances and transactions. F-27 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 29, 1996 (In thousands)
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ----------- ------------- ------------- ------------ Revenues.................................... $ 650,024 $ 145 $ 638 $ -- $ 650,807 Costs and expenses: Cost of sales............................. 191,578 51 327 -- 191,956 Labor and benefits........................ 209,145 115 -- -- 209,260 Operating expenses and write-down of property and equipment.................. 143,046 -- 344 -- 143,390 General and administrative expenses....... 41,061 106 1,554 -- 42,721 Depreciation and amortization............. 32,953 6 20 -- 32,979 Interest expense.......................... 44,141 -- -- -- 44,141 ---------- ----------- ------------- ------ ------------ Loss before benefit from (provision for) income taxes and equity in net loss of consolidated subsidiaries................. (11,900) (133) (1,607) -- (13,640) Benefit from (provision for) income taxes... 5,594 (2) 276 -- 5,868 ---------- ----------- ------------- ------ ------------ Loss before equity in net loss of consolidated subsidiaries................. (6,306) (135) (1,331) -- (7,772) Equity in net loss of consolidated subsidiaries.............................. (1,466) -- -- 1,466 -- ---------- ----------- ------------- ------ ------------ Net loss.................................... $ (7,772) $ (135) $ (1,331) $ 1,466 $ (7,772) ---------- ----------- ------------- ------ ------------ ---------- ----------- ------------- ------ ------------
F-28 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 29, 1996 (In thousands)
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ------------- --------------- ------------ ------------ Assets Current assets: Cash and cash equivalents.................. $ 17,754 $ 268 $ 604 $ -- $ 18,626 Trade accounts receivable.................. 4,765 -- 227 -- 4,992 Inventories................................ 14,796 24 325 -- 15,145 Deferred income taxes...................... 12,366 9 -- -- 12,375 Prepaid expenses and other current assets................................... 4,805 -- 517 (3,664) 1,658 ---------- ----- ------ ------------ ------------ Total current assets......................... 54,486 301 1,673 (3,664) 52,796 Investment in joint venture.................. -- -- 4,500 -- 4,500 Property and equipment, net.................. 285,460 522 179 -- 286,161 Intangibles and deferred costs, net.......... 16,019 -- -- -- 16,019 Investments in subsidiaries.................. 3,531 -- -- (3,531) -- Other assets................................. 650 -- -- -- 650 ---------- ----- ------ ------------ ------------ Total assets................................. $ 360,146 $ 823 $ 6,352 $ (7,195) $ 360,126 ---------- ----- ------ ------------ ------------ ---------- ----- ------ ------------ ------------ Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations.............................. $ 7,642 $ -- $ -- $ -- $ 7,642 Accounts payable........................... 20,773 -- -- -- 20,773 Accrued expenses........................... 44,780 141 3,824 (3,664) 45,081 ---------- ----- ------ ------------ ------------ Total current liabilities.................... 73,195 141 3,824 (3,664) 73,496 Deferred income taxes........................ 48,793 11 (332) -- 48,472 Long-term obligations, less current maturities................................. 385,977 -- -- -- 385,977 Other liabilities............................ 25,337 -- -- -- 25,337 Stockholders' equity (deficit)............... (173,156) 671 2,860 (3,531) (173,156) ---------- ----- ------ ------------ ------------ Total liabilities and stockholders' equity (deficit).................................. $ 360,146 $ 823 $ 6,352 $ (7,195) $ 360,126 ---------- ----- ------ ------------ ------------ ---------- ----- ------ ------------ ------------
F-29 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 29, 1996 (In thousands)
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ----------- --------------- ------------ ------------ Net cash provided by (used in) operating activities.................................. $ 25,519 $ (38) $ 682 $ -- $ 26,163 ---------- ----------- ------ ------------ ------------ Cash flows from investing activities: Purchases of property and equipment......... (24,043) -- (174) -- (24,217) Proceeds from sales of property and equipment................................. 8,409 -- -- -- 8,409 Investments in joint venture................ (4,500) -- -- -- (4,500) Investments in consolidated subsidiaries.... (306) -- -- 306 -- ---------- ----------- ------ ------------ ------------ Net cash used in investing activities......... (20,440) -- (174) 306 (20,308) ---------- ----------- ------ ------------ ------------ Cash flows from financing activities: Contribution of capital..................... -- 306 -- (306) -- Proceeds from exercise of stock purchase warrants.................................. 22 -- -- -- 22 Proceeds from borrowings.................... 48,196 -- -- -- 48,196 Repayments of long-term obligations......... (59,215) -- -- -- (59,215) ---------- ----------- ------ ------------ ------------ Net cash (used in) provided by financing activities.................................. (10,997) 306 -- (306) (10,997) ---------- ----------- ------ ------------ ------------ Effect of exchange rate changes on cash....... 5 -- 73 -- 78 ---------- ----------- ------ ------------ ------------ Net (decrease) increase in cash and cash equivalents................................. (5,913) 268 581 -- (5,064) Cash and cash equivalents, beginning of period...................................... 23,667 -- 23 -- 23,690 ---------- ----------- ------ ------------ ------------ Cash and cash equivalents, end of period...... $ 17,754 $ 268 $ 604 $ -- $ 18,626 ---------- ----------- ------ ------------ ------------ ---------- ----------- ------ ------------ ------------ Supplemental disclosures: Interest paid............................... $ 36,000 $ -- $ -- $ -- $ 36,000 Capital lease obligations incurred.......... 5,923 28 -- -- 5,951 Capital lease obligations terminated........ 128 -- -- -- 128 Issuance of common stock to lenders......... 50 -- -- -- 50
F-30 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1997 (In thousands)
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ----------- ------------- ------------ ------------ Revenues..................................... $ 506,407 $ 1,146 $ 480 $ -- $ 508,033 Costs and expenses: Cost of sales.............................. 146,674 -- 431 -- 147,105 Labor and benefits......................... 159,315 -- -- -- 159,315 Operating expenses and write-down of property and equipment................... 113,009 -- (393) -- 112,616 General and administrative expenses........ 31,908 158 709 -- 32,775 Depreciation and amortization.............. 24,226 -- -- -- 24,226 Interest expense (income).................. 33,029 -- (57) -- 32,972 Gain on sale of restaurant operations........ 2,303 -- -- -- 2,303 Equity in net loss of joint venture.......... -- -- 1,112 -- 1,112 ---------- ----------- ------------- ------------ ------------ Income (loss) before (provision for) benefit from income taxes, cumulative effect of change in accounting principle and equity in net loss of consolidated subsidiaries... 549 988 (1,322) -- 215 (Provision for) benefit from income taxes.... (225) (405) 542 -- (88) ---------- ----------- ------------- ------------ ------------ Income (loss) before cumulative effect of change in accounting principle and equity in net loss of consolidated subsidiaries.................. 324 583 (780) -- 127 Cumulative effect of change in accounting principle.................................. 2,236 -- -- -- 2,236 ---------- ----------- ------------- ------------ ------------ Income (loss) before equity in net loss of consolidated subsidiaries.................. 2,560 583 (780) -- 2,363 Equity in net loss of consolidated subsidiaries............................... (197) -- -- 197 -- ---------- ----------- ------------- ------------ ------------ Net income (loss)............................ $ 2,363 $ 583 $ (780) $ 197 $ 2,363 ---------- ----------- ------------- ------------ ------------ ---------- ----------- ------------- ------------ ------------
F-31 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 28, 1997 (In thousands)
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ----------- ------------- ------------ ------------ Assets Current assets: Cash and cash equivalents................. $ 10,976 $ 248 $ 820 $ -- $ 12,044 Restricted cash........................... -- -- 4,000 -- 4,000 Trade accounts receivable................. 7,105 277 481 -- 7,863 Inventories............................... 16,573 -- 444 -- 17,017 Deferred income taxes..................... 12,375 -- 6 -- 12,381 Prepaid expenses and other current assets.................................. 10,896 2,274 219 (6,654) 6,735 ----------- ----------- ------------- ------------ ------------ Total current assets........................ 57,925 2,799 5,970 (6,654) 60,040 Restricted cash............................. -- -- 8,907 -- 8,907 Investment in joint venture................. -- -- 3,388 -- 3,388 Property and equipment, net................. 272,950 -- 239 -- 273,189 Intangibles and deferred costs, net......... 15,519 -- -- -- 15,519 Investments in subsidiaries................. 4,970 -- -- (4,970) -- Other assets................................ 412 -- 2,359 (900) 1,871 ----------- ----------- ------------- ------------ ------------ Total assets................................ $ 351,776 $ 2,799 $ 20,863 $ (12,524) $ 362,914 ----------- ----------- ------------- ------------ ------------ ----------- ----------- ------------- ------------ ------------ Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations............................. $ 8,139 $ -- $ -- $ (400) $ 7,739 Accounts payable.......................... 25,542 -- -- -- 25,542 Accrued expenses.......................... 43,126 47 7,735 (6,254) 44,654 ----------- ----------- ------------- ------------ ------------ Total current liabilities................... 76,807 47 7,735 (6,654) 77,935 Deferred income taxes....................... 50,240 -- (136) -- 50,104 Long-term obligations, less current maturities................................ 372,196 -- -- (900) 371,296 Other liabilities........................... 23,217 1,422 9,624 -- 34,263 Stockholders' equity (deficit).............. (170,684) 1,330 3,640 (4,970) (170,684) ----------- ----------- ------------- ------------ ------------ Total liabilities and stockholders' equity (deficit)................................. $ 351,776 $ 2,799 $ 20,863 $ (12,524) $ 362,914 ----------- ----------- ------------- ------------ ------------ ----------- ----------- ------------- ------------ ------------
F-32 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1997 (In thousands)
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ----------- ------------- ------------- ------------ Net cash provided by (used in) operating activities.................................. $ 22,188 $ (162) $ 7,198 $ -- $ 29,224 ---------- ----------- ------------- ----- ------------ Cash flows from investing activities: Purchases of property and equipment......... (14,595) -- (61) -- (14,656) Proceeds from sales of property and equipment................................. 4,842 -- -- -- 4,842 Purchases of investment securities.......... -- -- (8,181) -- (8,181) Proceeds from sales and maturities of investment securities..................... -- -- 316 -- 316 Cash (paid) received in acquisition of Restaurant Insurance Corporation.......... (2,300) -- 2,265 -- (35) Advances to joint venture................... (1,400) -- -- -- (1,400) Investments in consolidated subsidiaries.... (142) -- -- 142 -- ---------- ----------- ------------- ----- ------------ Net cash (used in) provided by investing activities.................................. (13,595) -- (5,661) 142 (19,114) ---------- ----------- ------------- ----- ------------ Cash flows from financing activities: Contribution of capital..................... -- 142 -- (142) -- Proceeds from borrowings (advances to parent)................................... 45,511 -- (1,300) -- 44,211 Repayments of long-term obligations......... (60,882) -- -- -- (60,882) ---------- ----------- ------------- ----- ------------ Net cash (used in) provided by financing activities.................................. (15,371) 142 (1,300) (142) (16,671) ---------- ----------- ------------- ----- ------------ Effect of exchange rate changes on cash....... -- -- (21) -- (21) ---------- ----------- ------------- ----- ------------ Net (decrease) increase in cash and cash equivalents................................. (6,778) (20) 216 -- (6,582) Cash and cash equivalents, beginning of period...................................... 17,754 268 604 -- 18,626 ---------- ----------- ------------- ----- ------------ Cash and cash equivalents, end of period...... $ 10,976 $ 248 $ 820 $ -- $ 12,044 ---------- ----------- ------------- ----- ------------ ---------- ----------- ------------- ----- ------------ Supplemental disclosures: Interest paid............................... $ 30,236 $ -- $ -- $ -- $ 30,236 Capital lease obligations incurred.......... 2,227 -- -- -- 2,227 Capital lease obligations terminated........ 141 -- -- -- 141
F-33 - --------------------------------------------- --------------------------------------------- - --------------------------------------------- --------------------------------------------- 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 ------------------------
PAGE --------- PROSPECTUS SUMMARY................................ 3 RISK FACTORS...................................... 10 USE OF PROCEEDS................................... 17 DIVIDEND POLICY................................... 18 DILUTION.......................................... 18 CAPITALIZATION.................................... 19 SELECTED CONSOLIDATED FINANCIAL INFORMATION....... 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................... 22 BUSINESS.......................................... 32 MANAGEMENT........................................ 45 OWNERSHIP OF COMMON STOCK......................... 52 CERTAIN TRANSACTIONS.............................. 53 DESCRIPTION OF NEW CREDIT FACILITY................ 54 DESCRIPTION OF SENIOR NOTES....................... 55 DESCRIPTION OF CAPITAL STOCK...................... 56 SHARES ELIGIBLE FOR FUTURE SALE................... 60 UNDERWRITING...................................... 62 LEGAL MATTERS..................................... 64 EXPERTS........................................... 64 AVAILABLE INFORMATION............................. 64 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS........ F-1
------------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THE COMMON STOCK OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 5,000,000 SHARES [LOGO] COMMON STOCK ----------------- PROSPECTUS ----------------- NATIONSBANC MONTGOMERY SECURITIES, INC. PIPER JAFFRAY INC. TUCKER ANTHONY INCORPORATED , 1997 - --------------------------------------------- --------------------------------------------- - --------------------------------------------- --------------------------------------------- PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following is a statement of the expenses payable by the Company in connection with issuance and distribution of the securities being registered hereby. All amounts shown are estimates, except the SEC registration fee and the NASD filing fee. SEC registration fee.............................................. $ 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 --------- ---------
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 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 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits.
**1.1 Form of Underwriting Agreement. **3.1 Restated Articles of Organization of Friendly Ice Cream Corporation (the "Company"). **3.2 Amended and Restated By-laws of the Company. **4.1 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. 4.4 Form of Common Stock Certificate. 5.1 Opinion and consent of Choate, Hall & Stewart, 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 Choate, Hall & Stewart (included in Exhibit 5.1). 23.2 Consent of Arthur Andersen LLP. **24.1 Power of attorney (included on Registration Statement signature page). **24.2 Power of Attorney of Charles A. Ledsinger, Jr. **99.1 Consent of Michael J. Daly, as a person about to become a director. **99.2 Consent of Burton J. Manning, as a person about to become a director.
- ------------------------ ** Previously filed. II-3 (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 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 5th day of November, 1997. FRIENDLY ICE CREAM CORPORATION By: /s/ GEORGE G. ROLLER ----------------------------------------- Name: George G. Roller Title:Vice President, Finance, Chief Financial Officer and Treasurer
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 November 5, 1997 Donald N. Smith Executive Officer and Director) Vice President, Finance, /s/ GEORGE G. ROLLER Chief Financial Officer - ------------------------------ and Treasurer November 5, 1997 George G. Roller (Principal Financial and Accounting Officer) * - ------------------------------ Director November 5, 1997 Charles A. Ledsinger, Jr. * - ------------------------------ Director November 5, 1997 Steven L. Ezzes - ------------------------------ Director Barry Krantz - ------------------------------ Director Gregory L. Segall */s/ GEORGE G. ROLLER ------------------------- George G. Roller ATTORNEY-IN-FACT II-5 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE - --------- -------------------------------------------------------------------------------------- --------- **1.1 Form of Underwriting Agreement. **3.1 Restated Articles of Organization of Friendly Ice Cream Corporation (the "Company"). **3.2 Amended and Restated By-laws of the Company. **4.1 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. 4.4 Form of Common Stock Certificate. 5.1 Opinion and consent of Choate, Hall & Stewart, 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 Choate, Hall & Stewart (included in Exhibit 5.1). 23.2 Consent of Arthur Andersen LLP. **24.1 Power of attorney (included on Registration Statement signature page). **24.2 Power of Attorney of Charles A. Ledsinger, Jr. **99.1 Consent of Michael J. Daly, as a person about to become a director. **99.2 Consent of Burton J. Manning, as a person about to become a director.
- ------------------------ ** Previously filed. EX-4.2 2 REGISTRATION RIGHTS AGREEMENT Exhibit 4.2 REGISTRATION RIGHTS AGREEMENT ------------------------------ This REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT") dated as of November ___, 1997 is among Friendly Ice Cream Corporation, a Massachusetts corporation (the "COMPANY") and Donald N. Smith (the "STOCKHOLDER"). This Agreement is made in connection with the registration for sale to the public of shares of common stock, $0.01 par value, of the Company (the "Common Stock") pursuant to a registration statement on Form S-1 and any amendments thereto originally filed with the Securities and Exchange Commission (the "Commission") on August 29, 1997 (File No. 333-34633) (the "Initial Public Offering"). Prior to the Initial Public Offering, the Stockholder owned approximately ____% of the issued and outstanding shares of Class A Common Stock of the Company, and upon consummation of the Company's Initial Public Offering, the Stockholder will own approximately ____% of the outstanding Common Stock. The parties hereto agree as follows: SECTION 1. DEFINITIONS. For purposes of this Agreement, the following terms shall have the meanings set forth below: AFFILIATE means with respect to the Company, any Person directly or indirectly controlling, controlled by or under direct or indirect common control with the Company and shall include (a) any Person who is a director or beneficial holder of at least 10% of the then outstanding capital stock of the Company, (b) any Person of which the Company or an Affiliate (as defined in clause (a) above) of the Company directly or indirectly, either beneficially owns at least 10% of the then outstanding capital stock (or partnership interests or other shares of beneficial interest) or constitutes at least a 10% equity participant, and (c) any Person of which an Affiliate (as defined in clause (a) above) of the Company is a partner, director, officer or executive employee. COMMISSION means the Securities and Exchange Commission. DEMAND is defined in Section 2(a) hereof. HOLDER means the Stockholder and any Person to whom he has assigned rights hereunder as permitted by Section 11. LOCKUP PERIOD means the period of time the Stockholder has agreed not to sell stock of the Company pursuant to lockup agreements entered into in connection with the Company's Initial Public Offering. PERSON means an individual, partnership, corporation, limited liability company, association, trust, joint venture, unincorporated organization, or any government, government department or agency or political subdivision thereof. PUBLIC OFFERING means any sale of Common Stock pursuant to a public offering registered under the Securities Act. REGISTRABLE SECURITIES means the Common Stock owned by the Stockholder on the date hereof, Common Stock issuable to the Stockholder upon conversion of the Company's outstanding shares of Class A Common Stock and any Common Stock or other securities which may be issued or distributed in respect thereof by way of or in connection with a stock dividend or stock split or other distribution, recapitalization, reclassification, combination of shares, merger, consolidation or other reorganization. As to any particular Registrable Securities, such Registrable Securities shall cease to be Registrable Securities when they cease to be owned by a Holder. REGISTRATION RIGHTS AGREEMENT means the Stockholder and Registration Rights Agreement, dated as of March 25, 1996, as amended, among the Company, the lenders and certain other stockholders. REGISTRATION SHARES is defined in Section 2(a) hereof. REGISTRATION STATEMENT means a registration statement on the appropriate form in order to register Shares of Common Stock under the Securities Act. SECURITIES ACT means the Securities Act of 1933, as amended. UNDERWRITER means, in the case of a Public Offering initiated under Section 2 hereunder, an underwriter selected by the Company and approved by Holders owning a majority of the Registration Shares to be included in such registration (which approval shall not be unreasonably withheld). UNDERWRITERS' MAXIMUM NUMBER means, for any registration which is an underwritten registration, that number of securities to which such registration should, in the written opinion of the managing Underwriters of such registration in the light of marketing factors, be limited. SECTION 2. REGISTRATION RIGHTS. 2 (a) At any time after the end of the Lockup Period, the Holder or Holders of a majority of the aggregate number of all outstanding Registrable Securities may by written notice (a "DEMAND") request the Company to file a Registration Statement in order to register all (or any portion as determined by such Holders) of the Registrable Securities owned by such Holder or Holders. In the event that the Company receives a Demand, the Company will give prompt written notice thereof to all other Holders. At the written request of any Holder delivered to the Company within fifteen (15) days after the receipt of such notice from the Company, which request shall state the number of shares of Common Stock held by such Holder that such Holder wishes to sell under the Registration Statement (shares of Common Stock held by any Holder that are requested to be offered and sold pursuant to this Section 2 are herein referred to as "REGISTRATION SHARES"), the Company agrees, subject to Section 2(b), to use its best efforts to cause all of the Registration Shares to be registered under the Securities Act on such Registration Statement to the extent and under the conditions such registration is permissible under the Securities Act and the rules and regulations of the Commission thereunder. (b) The number of Registration Shares to be registered pursuant to Section 2(a) for the benefit of any particular Holder is subject to mandatory reduction, in the event that the managing Underwriter(s) advise the Company of an Underwriter's Maximum Number, as follows: the Company will include in such registration: (i) first, the total number of Registration Shares up to the Underwriter's Maximum Number, with the amount to be registered for the account of any Holder not to exceed such Holder's PRO RATA portion of the Underwriter's Maximum Number; and (ii) in the event the number of shares to be registered pursuant to clause (i) above is less than the Underwriter's Maximum Number, the number of shares, if any, the Company wishes to register for its own account. (c) Upon receipt of a Demand, the Company shall promptly (and in any event within ninety (90) days) use its best efforts to file such Registration Statement under the Securities Act with respect to the Registration Shares subject to the following (i) If the Company has commenced taking action with respect to any financing, acquisition, reorganization or other transaction or development material to the Company, and in the reasonable and good faith opinion of the Company's Board of Directors, filing a Registration Statement would not be in the best interests of the Company, the Company may delay filing the Registration Statement until the earlier of (A) the termination of activities with respect to any such transaction or development, (B) the consummation or abandonment of any agreement with respect to such transaction or development or (C) one 3 hundred eighty (180) days following the Company's receipt of the Holder's notice of a Demand pursuant to this Section 2. (ii) If filing a Registration Statement could require the Company to undergo a special interim audit, and in the reasonable and good faith opinion of the Board of Directors, the cost of such special interim audit would exceed $50,000, the Company may delay filing a Registration Statement until ninety (90) days after the close of the fiscal year in which the request by the applicable Holder for registration of shares of Common Stock is made, unless the Holder or Holders making such Demand agree to reimburse the Company for the cost of such special interim audit. In the event that the Company elects to delay filing a Registration Statement in accordance with this Section 2(c), it will promptly notify the demanding Holder or Holders thereof. The demanding Holder or Holders may, within twenty (20) days following receipt of such notice, decide to withdraw its or their request that the Company file a Registration Statement, in which case the withdrawn request will not count as an exercise of any of such Holders' right to request the Company to file a Registration Statement pursuant to this Agreement. The Company may only exercise its right to postpone the filing of a Registration Statement under this Section 2(c) once in any calender year. (d) If the Company so requests, it shall not be required to effect a Public Offering under this Section 2 for a period not to exceed six (6) months immediately following the date any other Public Offering was commenced and consummated. (e) No more than one (1) Demand to the Company shall be made pursuant to this Agreement. A Holder or Holders may not require the Company to file any Registration Statement on Form S-1 (or other comparable form adopted by the Commission) unless Form S-3 (or any comparable form adopted by the Commission) is not available for such filing. Any registration initiated by a Holder or Holders pursuant to a Demand pursuant to this Agreement shall not, for purposes of this Agreement, count as a Demand unless and until such registration shall have become effective and, if such registration is an underwritten offering, at least 80% of the Registration Shares included in such registration (other than any Registration Shares included in any over-allotment option granted to the underwriters) shall have been actually sold. A Holder or Holders may not require the Company to file a Registration Statement pursuant to a Demand unless the Registration Statement is one for the registration of Registration Shares having an expected price to the public (determined in accordance with Rule 457 promulgated under the Securities Act) of at least $3,000,000. (f) Any registration initiated by a Holder or Holders pursuant to a Demand may be revoked by such Holder or Holders by giving written notice thereof to the Company at any time before such registration shall have become effective; PROVIDED, HOWEVER, that in the event of such 4 a revocation, either the demanding Holder or Holders shall pay all expenses of such registration required to be paid by the Company pursuant to Section 5, in which case such registration shall not, for purposes of this Agreement, count as a Demand, or if the demanding Holder or Holders fail to pay such expenses within a reasonable period of time after receipt of appropriate documentation for such expenses, such registration shall count as a Demand for purposes of this Agreement. (g) A request for registration under this Agreement shall not be counted as a Demand (i) unless a Registration Statement has become effective and has been kept continuously effective for the period required under Section 3(b), (ii) if after it has become effective, use of such Registration Statement is suspended by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court, (iii) if no Registrable Shares are sold within the period during which the Registration Statement has been kept continuously effective as required under Section 3(b). SECTION 3. PROCEDURES. Whenever the Company shall include Registrable Shares owned by any Holder or Holders in a Registration Statement, the Company shall: (a) prepare and file with the Commission a Registration Statement with respect to such Registrable Shares and use its best efforts to cause such Registration Statement to become promptly effective and furnish to the demanding Holder or Holders copies of the Registration Statement and any amendments or supplements thereto and any prospectus included therein prior to filing; (b) prepare and file with the Commission such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for the lesser of (A) a period of time necessary to permit the demanding Holder or Holders to dispose of all of the Registration Shares and (B) six (6) months (as appropriately extended to reflect any periods when any Holder is not permitted to sell Registration Shares pursuant to such Registration Statement), and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during such effective period in accordance with the intended methods of disposition by the demanding Holder or Holders set forth in such Registration Statement and cause the prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act; (c) Upon request, furnish to the demanding Holder or Holders such number of copies of such Registration Statement, each amendment and supplement thereto, the prospectus included in such Registration Statement (including each preliminary prospectus and each prospectus filed under Rule 424 of the Securities Act) and such other documents as each such Holder or Holders may reasonably request in order to facilitate the disposition of the Registration Shares owned by such Holder or Holders (it being understood that the Company consents to the use of the prospectus and any amendment or supplement thereto by such Holder or Holders in connection with the offering 5 and sale of the Registration Shares covered by the prospectus or any amendment or supplement thereto): (d) use its best efforts to register or quality such Registration Shares under such other securities or blue sky laws of such jurisdictions as determined by the managing Underwriter after consultation with the Company (or, if there is no managing Underwriter, as determined by the Company), use its best efforts to keep such registration or qualification effective, including through new filings, amendments or renewals, during the period such Registration Statement is required to be kept effective, and do any and all other acts and things which may be reasonably necessary or advisable to enable the demanding Holder or Holders to consummate the disposition in such jurisdictions of the Registration Shares; PROVIDED that the Company will not be required (A) to qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (B) to subject itself to taxation in any such jurisdiction, (C) to consent to general service of process in any such jurisdiction, (D) to register or qualify as a broker-dealer in any such jurisdiction or (E) to qualify or register in any particular state if such state refuses to permit such registration or qualification because of the expense allocation provisions set forth in Section 5; (e) notify the demanding Holder or Holders, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such Registration Statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of the demanding Holder or Holders, the Company will promptly prepare (and, when completed, give notice to such Holder or Holders) a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registration Shares, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; PROVIDED that upon such notification by the Company, such Holder or Holders will not offer to sell such Registration Shares until the Company has notified such Holder or Holders that it has prepared a supplement or amendment to such prospectus and delivered copies of such supplement or amendment to such Holder or Holders; (f) use its best efforts to cause all such Registration Shares to be listed, prior to the date of the first sale of such Registration Shares pursuant to such registration, on each securities exchange on which similar securities issued by the Company are then listed, and, if not so listed, to be listed with The NASDAQ Stock Market; (g) enter into all such customary agreements (including underwriting agreements in customary form) and take all such other actions as the demanding Holder or the Holders of a majority of the Registration Shares being sold or the Underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registration Shares; 6 (h) make available for inspection on a confidential basis by the demanding Holder or Holders, any Underwriter participating in any disposition pursuant to such Registration Statement, and any attorney, accountant or other agent retained by any such Holder, Holders or Underwriter (in each case after reasonable prior notice), all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply on a confidential basis all information reasonably requested by such Holder, Holders, Underwriter, attorney, accountant or agent in connection with such Registration Statement; (i) use its best efforts to cause the Registration Shares to be registered with or approved by such other governmental agencies or authorities within the United States and having jurisdiction over the Company as may reasonably be necessary to enable the demanding Holder or Holders or the Underwriter or Underwriters, if any, to consummate the disposition of such Registration Shares; (j) obtain a cold comfort letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters; (k) cause the Company's counsel to provide customary legal opinions in connection with such Registration Statement; and (l) provide a transfer agent and registrar for all such Registration Shares not later than the effective date of such Registration Statement. SECTION 4. INDEMNIFICATION. (a) The Company will indemnify and hold harmless the demanding Holder or Holders and each Underwriter of shares of Common Stock sold pursuant to this Agreement (and any person who controls such Holder or Holders or any such Underwriter within the meaning of Section 15 of the Securities Act) against all claims, losses, damages, liabilities and expenses resulting from any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement or in any related prospectus, notification or the like and from any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar (i) as the same may have been based on information furnished in writing to the Company by the demanding Holder or Holders or such Underwriter expressly for use therein and used in accordance with such writing or (ii) as such claims, losses, damages, liabilities and expenses result from a breach by the Holder of its obligations under Section 3(e) hereof. (b) The demanding Holder or Holders, by acceptance of the registration provisions provided herein, agree to furnish to the Company such information concerning such Holder or Holders and the proposed sale or distribution as shall, in the opinion of counsel for the Company, be necessary in connection with any such registration or qualification of any shares of stock proposed to be made pursuant to this Agreement and to indemnify and hold harmless the Company, 7 its officers and directors, and each of its Underwriters (and any person who controls the Company or such Underwriters within the meaning of Section 15 of the Securities Act) against all claims, losses, damages, liabilities and expenses resulting from any untrue statement or alleged untrue statement of a material fact furnished in writing to the Company by the demanding Holder or Holders expressly for use in connection with such registration or qualification and used in accordance with such writing and from any omission therefrom or alleged omission therefrom of a material fact needed to be furnished or necessary to make the information furnished not misleading; PROVIDED, HOWEVER, that no Holder shall have liability under this Section 4(b) in excess of the net proceeds received by such Holder from the sale of Registration Shares. (c) If any party (the "INDEMNITEE") receives notice of any claim or the commencement of any action or proceeding with respect to which any other party (or parties) is obligated to provide indemnification (the "INDEMNIFYING PARTY") pursuant to this Section 4, the Indemnitee shall promptly give the Indemnifying Party notice thereof. If the Indemnitee does not promptly give this notice, the Indemnifying Party shall not be obligated to provide indemnification hereunder to the extent that the liability for which such indemnification is claimed could have been avoided or mitigated if the Indemnitee had promptly given notice to the Indemnifying Party. The Indemnifying Party may compromise, defend or settle, at such Indemnifying Party's own expense and by such Indemnifying Party's own counsel, any such matter involving the asserted liability of the Indemnitee. If the Indemnifying Party chooses to defend any claim, the Indemnitee shall make available to the Indemnifying Party any books, records or other documents within its control that are necessary or appropriate for such defense. SECTION 5. EXPENSES. Subject to Section 2(f), the Company shall pay all of the expenses in connection with a Public Offering pursuant to a Demand by a Holder or Holders in accordance with this Agreement, including, without limitation, costs of complying with federal and state securities laws and regulations, attorneys' and accounting fees of the Company, printing expenses and federal and state filing fees, except that transfer taxes, underwriting commissions, fees and expenses incurred by any demanding Holder or Holders and fees and disbursements of counsel (if any) to such Holders will be borne by such Holders. SECTION 6. RESTRICTIONS ON PUBLIC SALE BY HOLDERS OF REGISTRATION SHARES. The demanding Holder or Holders, if the Company or the managing Underwriters so request in connection with any underwritten Public Offering subject to the provisions of this Agreement, will not, without the prior written consent of the Company or such underwriters, effect any public sale or other distribution of any equity securities of the Company, including any sale pursuant to Rule 144, during the seven (7) days prior to, and during the ninety-day period commencing on, the effective date of such underwritten Public Offering, except in connection with such underwritten Public Offering; PROVIDED, that the 8 demanding Holder or Holders is or are permitted to include in such registration at least 80% of the Registrable Shares requested to be included in such registration by such Holder or Holders. SECTION 7. REGISTRATION RIGHTS AGREEMENT. Notwithstanding anything contained herein to the contrary the exercise of any right by any Holder pursuant to the Registration Rights Agreement, including but not limited to the delivery of a notice of demand to the Company or participation in a Public Offering, shall not limit such Holder's ability to exercise any right hereunder, including but not limited to such Holder's right to make a Demand hereunder, or the Company's obligation to register shares of Common Stock pursuant to this Agreement. SECTION 8. NO INCONSISTENT AGREEMENTS. The Company will not enter into any registration rights or other agreement that conflicts with its obligations under this Agreement. SECTION 9. SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. SECTION 10. ENTIRE AGREEMENT. Except as otherwise expressly set forth herein, this document embodies the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and thereof and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. SECTION 11. SUCCESSORS AND ASSIGNS. This Agreement will bind and inure to the benefit of and be enforceable by the Company and each of the Holders and their respective successors and assigns. A Holder shall be permitted to assign its rights hereunder to any Person to whom it transfers any Registrable Securities in a transaction not involving any public offering, provided that (A) the number of Registrable Securities so transferred is not less than 300,000 shares (adjusted for any stock split, reverse stock split or combination of shares) and the assignee agrees with the Company in writing to be bound by the provisions of this Agreement or (B) such Person is an Affiliate of Stockholder; provided, however, that the 300,000 share limit in clause (A) shall not apply to transferees who are immediate family members of the Stockholder. SECTION 12. COUNTERPARTS. This Agreement may be executed in separate counterparts each of which will be an original and all of which taken together will constitute one and the same agreement. SECTION 13. REMEDIES. Each of the Holders will be entitled to enforce its rights under this Agreement specifically (without posting a bond or other security), to recover damages by reason 9 of any breach of any provision of this Agreement and to exercise all other rights existing in their favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that each of the Holders may in its sole discretion apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive relief in order to enforce or prevent any violation of the provisions of this Agreement. In the event of any dispute involving the terms of this Agreement, the prevailing party shall be entitled to collect reasonable fees and expenses incurred by the prevailing party in connection with such dispute from the other parties to such dispute. SECTION 14. NOTICES. Any notice provided for in this Agreement will be in writing and will be deemed properly delivered if either personally delivered or sent by telecopier, overnight courier or mailed certified or registered mail, return receipt requested, postage prepaid to a recipient (a) if to a Holder, to Donald N. Smith, c/o The Restaurant Comapany, 1 Pierce Place, Suite 100 East, Itasca, IL 60143 and (b) if to the Company, to 1855 Boston Road, Wilbraham, Massachusetts 01095, Attention: Aaron B. Parker. Any such notice shall be effective (i) if delivered personally or by telecopier, when received, (ii) if sent by overnight courier, when receipted for, and (iii) if mailed, 3 days after being mailed as described above. The Company agrees to make available to any Holder upon request an address list of all holders of the Common Stock to ensure correct delivery of all notices hereunder. SECTION 15. AMENDMENT AND WAIVER. No modification, amendment or waiver of any provision of this Agreement will be effective against the Company or any Holder unless such modification, amendment or waiver is approved in writing by the parties. The failure of any party to enforce any of the provisions of this Agreement will in no way be construed as a waiver of such provisions and will not affect the right of such party thereafter to enforce each and every provision of this Agreement in accordance with its terms. SECTION 16. TERMINATION. The provisions of this Agreement (except for Sections 4, 5 and 6 hereof) will terminate upon the earliest to occur of (a) the completion of any voluntary or involuntary liquidation or dissolution of the Company or (b) the completion of a Public Offering pursuant to Section 2 hereof. SECTION 17. GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT WILL BE GOVERNED BY THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. SECTION 18. DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. SECTION 19. CONSTRUCTION. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction will be applied against any party. 10 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. FRIENDLY ICE CREAM CORPORATION By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- By: -------------------------------------- Donald N. Smith 11 EX-4.4 3 FORM OF STOCK CERTIFICATE Exhibit 4.4 NUMBER F SHARES _________________ [LOGO] ___________________ FRIENDLY ICE CREAM CORPORATION Incorporated under the Laws of the Commonwealth of Massachusetts COMMON STOCK SEE REVERSE FOR CERTAIN DEFINITIONS CUSIP 358497 10 5 THIS CERTIFIES THAT [Name] is the owner of [Amount] FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.01 PER SHARE, OF FRIENDLY ICE CREAM CORPORATION transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney, on surrender of this certificate properly endorsed. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. [SEAL] Dated: Treasurer President FRIENDLY ICE CREAM CORPORATION THE CORPORATION IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS AND SERIES OF STOCK. THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS A COPY OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF, WHICH THE CORPORATION IS AUTHORIZED TO ISSUE, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. ANY SUCH REQUEST MAY BE MADE TO THE CORPORATION OR THE TRANSFER AGENT. --------------------------------- KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR DESTROYED THE COMPANY WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT ________ Custodian_______ TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right under Uniform Gifts to Minors of survivorship and not as Act_____________ tenants in common (State)
Additional abbreviations may also be used though not in the above list. For value received, ____________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE =========================== =========================== - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ___________ shares of the capital stock represented by the within Certificate and do hereby irrevocably constitute and appoint _____________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated __________________ --------------------------------------------- NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER Signature(s) Guaranteed: - -------------------------------------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-5.1 4 OPINION AND CONSENT Exhibit 5.1 [Choate, Hall & Stewart Letterhead] November 5, 1997 Friendly Ice Cream Corporation 1855 Boston Road Wilbraham, MA 01095 RE: Friendly Ice Cream Corporation Registration Statement on Form S-1 ----------------------------------------------------------------- Dear Ladies and Gentlemen: We have served as special Massachusetts counsel to Friendly Ice Cream Corporation, a Massachusetts corporation (the "Company"), in connection with the registration of 5,750,000 shares of Common Stock, par value $0.01 per share, of the Company (the "Shares") and the sale of such Shares to the public pursuant to an underwriting agreement (the "Underwriting Agreement") to be entered into between the Company and the underwriters party thereto. In connection with our representation, we have examined the corporate records of the Company, including its Articles of Organization, its By-Laws, and other corporate records and documents and have made such other examinations as we consider necessary to render this opinion. For purposes of our opinion set forth in paragraphs (ii) and (iii) below, we have assumed (a) the filing with the Secretary of the Commonwealth of Massachusetts of Restated Articles of Organization of the Company which, among other things, increase the number of authorized shares of Common Stock, par value $0.01 per share, of the Company to 50,000,000 shares and (b) the effectiveness of the 923.6442 for one stock split described under "Prospectus Summary" in the prospectus included in the registration statement, which will occur contemporaneously with the execution and delivery of the Underwriting Agreement. Based upon the foregoing, it is our opinion that: (i) the Company is a corporation duly organized and validly existing in good standing under the laws of the Commonwealth of Massachusetts; Friendly Ice Cream Corporation November 5, 1997 Page 2 (ii) the Shares to be sold by the certain selling stockholders pursuant to the Underwriting Agreement have been validly issued and are fully paid and non-assessable; and (iii) the Shares to be sold by the Company will be validly issued and, assuming such Shares are sold pursuant to the terms of the Underwriting Agreement, fully paid and non-assessable. We consent to the filing of this opinion as an exhibit to the registration statement referred to above and to all references to this firm in such registration statement. Sincerely, /s/ Choate, Hall & Stewart ------------------------------ Choate, Hall & Stewart EX-23.2 5 EXHIBIT 23.2 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 November 5, 1997 -----END PRIVACY-ENHANCED MESSAGE-----