SAN ANTONIO, March 6 /PRNewswire-FirstCall/ -- Sardar Biglari,
Chairman of the Board of Western Sizzlin Corporation (OTC:WSZL)
(BULLETIN BOARD: WSZL) and The Lion Fund, LP, issued the following
letter today to the shareholders of Friendly Ice Cream Corporation
(AMEX:FRN): Dear Fellow Shareholder: I want to share with you our
deep concerns about Friendly Ice Cream Corp. as misgoverned by its
Chairman Donald Smith and its board of directors. My fellow nominee
Philip L. Cooley and I are seeking two seats out of six on the
company's board of directors. Now will be your first opportunity as
shareholders to vote for candidates not allied with a board that
has failed to create value since going public in 1997. After you
read this entire letter outlining our philosophy, we urge you to
support us. Every vote matters. Despite Mr. Smith's false
allegation that we intend to control the board, we cannot do so
because we are seeking only two board seats out of the entire six.
Of course, we will reserve the ability to hold the board
accountable in the future, and we will not forgo the right to seek
further board changes if they are warranted and supported by
shareholders. Mr. Smith also disseminates the faulty assumption
that the company possesses cash flows to divert. The reality is
that since the company's initial public offering in 1997, it, in
aggregate, has generated negative cash flows. Naturally, I wish the
company were generating positive cash flows. The value of an asset,
including Friendly's common stock, is derived from its future cash
flows and is referred to as its intrinsic value. This intrinsic
value is computed by taking all future cash flows into and out of a
business and then discounting the resultant number at an
appropriate interest rate. Mr. Smith must cope with our guarantee:
Phil and I will strenuously lobby the board to focus on cash flows
to increase the intrinsic value of the company. If we can increase
intrinsic value per share, the stock price will eventually follow
suit. Capital Structure. Part of the reason Friendly's cash flows
have been negative is that the corporation must service an enormous
debt, which is akin to a dagger pointed at the heart of the
business. With one small bump, we could return to the grim scenario
of a few years ago when the company was near insolvency and its
stock below $2 per share. I believe the company will become
bankrupt if it does not attempt to deliver the balance sheet.
Friendly's has paid more than $230 million in interest over the
past decade and $620 million since 1988, when Mr. Smith took over
the company. The debt constrains possibilities for growth and the
ability to execute a viable business strategy. In direct contrast,
we will champion a disciplined financial structure to increase
shareholder wealth. Currently the enterprise value (total market
value of stock plus total debt less cash) of Friendly's is about
$300 million. The channeling of free cash flow to reduce debt will
result either in stock appreciation (if enterprise value remains
constant) or improvement of the value of the stock relative to its
price. Historically, capital investments have yielded the company
sub-par returns whereas debt reduction locks in a positive return.
I would prefer a certain good return over a possibly forlorn
anticipation of a great but unknown one. Strategy. We believe the
future of Friendly's lies in its franchisees. The initiative to
accelerate refranchising would yield several long-term strategic
advantages. By lowering the number of company-owned and operated
units, Friendly's could distribute more of its resources to the
creation of better products, better quality control, shrewder, more
effective marketing practices, more effective franchisee training -
all with the objective of becoming a forceful franchisor capable of
efficiently enhancing the brand. A franchisee with experience in
operating multiple units can more efficaciously manage a
profit-producing restaurant than the company can. Presently,
Friendly's resources are overburdened and misdirected by the chore
of overseeing and managing an excessive number of company-run
outlets. Because returns on invested capital are higher from
franchising than from ownership, the brand would be better
supported by a focused strategy. Simply stated, the company should
be in the real estate, franchise, and foodservice business for the
very good reason that it would achieve high profit margins, take
less risk, and require very little in capital expenditures -- all
strategic moves leading to healthy cash flows and high returns on
capital. We are persuaded, therefore, that company-operated
restaurants would be best run by franchisees. Manifestly, the
company not only wastes scarce resources -- namely, time, energy,
and money -- on the demands of proprietorship but also winds up
less successful than its franchisees. Operating restaurants, as a
result, leads to substantially lower profit margins, higher risks
(e.g., sensitivity to food costs), a high degree of operating
leverage, higher cost of capital, and significant capital
expenditures to maintain the business -- all culminating in the
generation of poor free cash flow. Historically, the company has
taken a haphazard approach to refranchising without a compensating
reduction in debt. Unfortunately, Friendly's has taken a good idea
and executed it shoddily because cash generated from refranchising
should have been used exclusively to lower debt and improve the
capital structure. Discipline in Capital Allocation and Expenses.
That the company has spent over $230 million in capital
expenditures since 1997 with a loss to show for its outlay is a
demonstrable illustration of poor operational and financial
management. The unfit leadership of Chairman Smith has been the
prime cause of the corporation's poor performance. A few years ago
when the company's performance was deteriorating, Mr. Smith
inappropriately and irresponsibly paid for a Learjet instead of
following the alternative we would have recommended: reduce debt.
Nero may have fiddled while Rome was burning, but at least he did
not throw fuel on the fire. If Mr. Smith is obviously behaving so
extravagantly, we wonder what other wasteful, self-serving
decisions he has made behind the scenes. According to the cockroach
theory, there is seldom only one in the kitchen. The private jet
symbolizes an ongoing culture, one that doesn't care about its
shareholders. An absolute business essential is an ethos with firm
self-control involving capital allocation and company expenses.
Furthermore, the company must allocate capital only when returns
compensate for relevant risks. Compensation. Friendly's
Compensation Committee is composed of Chairman Michael J. Daly,
Burton J. Manning, and Perry D. Odak. As stated in the company's
proxy statement, "The Compensation Committee annually recommends to
the Board of Directors the base salary, incentive compensation and
other compensation of the Chairman of the Board, Chief Executive
Officer and elected officers of Friendly's." We are disappointed by
the Committee's unwise recommendations. To begin with, we find it
reprehensible that Mr. Smith, who is Chairman of the Board,
receives an additional compensation of $100,000 over and above his
director fees. Up to a few years ago, Mr. Smith was rewarded with a
salary and bonus of $493,000 during a period in which as he put
during a taped meeting: "I don't spend hardly any time at
Friendly's anymore. I go in two days a month, I go in to board
meetings, I'm available and we talk once or twice a week on the
phone, but make no doubt about it -- I really do not run Friendly's
anymore" (Wall Street Journal, 6/9/06). We don't understand the
rationale behind Mr. Smith's compensation, especially since he
admits that he hardly spends any time at the company. His is not
only an inappropriate policy but just another marker of a
self-interested culture, which sets the wrong tone at the top.
Moreover, the Committee has designed a faulty compensation
structure. According to the company's Annual Incentive Plan, "Each
year, the Compensation Committee establishes company financial
objectives. The financial objectives are based on Friendly's
achievement of specified levels of earnings as measured by EBITDA
(i.e., earnings before interest, taxes, depreciation and
amortization)." There are many unintended consequences to linking
bonus to EBITDA. For instance, doing so can encourage the use of
leverage (an encouragement the company clearly does not need) to
increase EBITDA at any cost without regard to attaining an
appropriate return on invested capital. Setting the incentive
around EBITDA can lead to poor capital allocation decisions, as
evidenced by the company's troubling capital allocation record.
Thus, free cash flow generation would be more apropos for bonus
eligibility than relying on EBITDA. Furthermore, capital does not
come free. Thus, the bonus calculation must be symmetrical.
Management must be assessed for incremental capital employed. If
incremental investment produces a below- minimum rate, the pain
suffered by shareholders must be shared by management. The
implication is that no addition to shareholder value results in no
bonus. An absolute essential in sensible compensation structure is
to align management performance with shareholders' interests. Two
of the directors, Messrs. Daly and Manning, will be up for election
at the next annual stockholder meeting. In addition to their
inability to create shareholder value since they became directors
in 1997, they have failed as Compensation Committee members. As
two-thirds of the Compensation Committee, they had the opportunity
to think and act rationally. It is imperative to be as sensible
about compensation as about capital allocation. It is time to
replace Messrs. Daly and Manning. Corporate Governance.
Representation by very significant shareholders is the best way to
fill a board, to think about improving the governance of the
company, and to produce shareholder wealth. We believe a board of
directors should participate in the future of a company by making a
substantial financial commitment on the same basis as other
shareholders do. Presently, five of the six board members have
virtually no stake in the company, while our stock ownership
exceeds the aggregate of all six directors. As consequential
shareholders on the board, we would be in the preeminent position
to think about value creation over the long term. We would espouse
superior corporate governance by promoting ideas that would benefit
the true owners of the company, the shareholders, and hold board
members responsible for their actions. To start, we believe the
company's board election should be held annually. The staggered
board entrenches incumbent board members and insulates them from
accountability. We believe that the poison pill, courtesy of the
board, is holding back the stock. There is no reason for Mr. Smith
to be exempt from swallowing the poison pill, which effectively
limits other shareholders from purchasing over 15% of the company.
The company also has other anti-takeover prohibitions, such us the
caveat against the shareholders calling a special meeting. The
current entrenchment scheme must end because it provides board
members immunity, not accountability, and in doing so
disenfranchises shareholders. Friendly's Stock Price. Since
disclosing our initial position in Friendly's on August 7, 2006,
the day our group filed its first 13D, the stock has appreciated by
more than 50%. This increment has been achieved during a period in
which the company's operating performance has been dismal. We
believe the reason for Friendly's strong absolute and relative
stock performance is that, despite the lackluster operational
performance of the company, the market expects that positive
changes are in the offing. Notwithstanding the recent run-up in
stock price, we believe the current market value does not reflect
the full potential of the company, a potential that can be reached
only with changes at the board level. You might think Mr. Smith,
who owns 12.8% of the company, would have his interests aligned
with yours. History has proven otherwise. Mr. Smith has used his
board control to extract handsome profits for himself. We believe
he has viewed Friendly's as his company. Friendly's is not a
private firm; therefore, public shareholders' interests should come
first. We, as the largest stockholders of the company, promise to
protect your interests, and, unlike the incumbents, we will not
rubber-stamp Mr. Smith's wishes. Many of the issues raised in this
letter -- from badly designed compensation systems to the costly,
unneeded use of a private jet -- are symptoms of a broader set of
problems. Unaddressed problems will continue to wash away
shareholder value. Mr. Smith has been sending the wrong messages to
Friendly's employees: that incurring expenses for luxuries like his
purchasing a corporate jet is acceptable behavior and a worthwhile
expenditure. In contrast, the company would send a positive message
if it announced that Mr. Smith's $100,000 remuneration would be
terminated. It would strongly signify to all employees that
everyone associated with the company must begin scrutinizing
company expenses to cut unnecessary overhead, a move which would
help rehabilitate the firm's potential for aggrandized
profitability. We encourage you to visit our website,
http://www.enhancefriendlys.com/, to access articles and court
filings that shed light on Mr. Smith's and the board's
inappropriate and, in the final analysis, inexcusable behavior. The
board has been careless with the company's cash flows and balance
sheet as well as insensitive to shareholder value and proper
treatment of shareholders. Shareholders have given Mr. Smith and
the board plenty of time, that is, a decade, to create shareholder
value and to substantiate the merits of any of their so-called
canny strategies. Clearly, they have failed. It is time that we
join the board and begin creating value for you -- and with a sense
of urgency. We appreciate your support, and we will value your
confidence and trust in us as we attempt to rectify the company's
problems. Sincerely, /s/ Sardar Biglari Sardar Biglari CERTAIN
INFORMATION CONCERNING THE PARTICIPANTS The Lion Fund L.P. (the
"Lion Fund") and Western Sizzlin Corp. ("Western Sizzlin"),
together with the other participants named herein, intend to make a
preliminary filing with the Securities and Exchange Commission
("SEC") of a proxy statement and an accompanying proxy card to be
used to solicit votes for the election of its director nominees at
the 2007 annual meeting of stockholders of Friendly Ice Cream
Corporation, a Massachusetts corporation (the "Company"). THE LION
FUND AND WESTERN SIZZLIN ADVISE ALL STOCKHOLDERS OF THE COMPANY TO
READ THE PROXY STATEMENT AND OTHER PROXY MATERIALS AS THEY BECOME
AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. SUCH
PROXY MATERIALS WILL BE AVAILABLE AT NO CHARGE ON THE SEC'S WEB
SITE AT http://www.sec.gov/. IN ADDITION, THE PARTICIPANTS IN THE
PROXY SOLICITATION WILL PROVIDE COPIES OF THE PROXY STATEMENT
WITHOUT CHARGE UPON REQUEST. REQUESTS FOR COPIES SHOULD BE DIRECTED
TO THE PARTICIPANTS' PROXY SOLICITOR, MORROW & CO., AT ITS
TOLL-FREE NUMBER: (800) 607-0088. The participants in the proxy
solicitation are anticipated to be The Lion Fund L.P., a Delaware
limited partnership, Biglari Capital Corp., a Texas corporation,
Western Sizzlin Corp., a Delaware corporation, Sardar Biglari and
Philip L. Cooley (the "Participants"). Each of the Participants may
be deemed to be the beneficial owner of 1,182,488 shares of Common
Stock of the Company. The Participants specifically disclaim
beneficial ownership of such shares of Common Stock except to the
extent of their pecuniary interest therein. DATASOURCE: Western
Sizzlin Corporation CONTACT: Robyn Mabe of Western Sizzlin
Corporation, +1-540-345-3195 Web site:
http://www.enhancefriendlys.com/
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