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Franchise Services of North America Inc. Announces Update on Private Placement

CALGARY, ALBERTA--(Marketwired - Sept. 4, 2013) -

THIS PRESS RELEASE IS NOT FOR DISTRIBUTION TO ANY UNITED STATES NEWSWIRE SERVICES OR OTHERWISE FOR DISTRIBUTION IN THE UNITED STATES. ANY FAILURE TO COMPLY WITH THIS RESTRICTION MAY CONSTITUTE A VIOLATION OF UNITED STATES SECURITIES LAW.

FRANCHISE SERVICES OF NORTH AMERICA INC. ("FSNA" or the "Company") (TSX VENTURE:FSN) today announced an update to the terms of the non-brokered private placement (the "Updated Private Placement") previously announced by the Company on July 8, 2013.

Pursuant to the Updated Private Placement, the Company will issue special warrants ("Special Warrants") at a subscription price of US$11.72 per Special Warrant (the "Subscription Price"). The Special Warrants will be exercisable into or redeemable for: (i) shares of convertible preferred stock in the capital of Company ("Preferred Shares"), (ii) unsecured subordinated convertible notes of the Company ("Notes"), (iii) shares of common stock of the Company ("Common Shares") or (iv) cash, as further described below. It is anticipated that, subject to demand, between 500,000 and 855,177 Special Warrants will be issued pursuant to the Updated Private Placement for gross proceeds of between US$5.9 and US$10.0 million. Net proceeds of the Updated Private Placement will be used for general working capital purposes. The Updated Private Placement is expected to close on two or more dates with the first closing occurring on or about September 6, 2013 (the "First Closing Date").

The Updated Private Placement is being made to existing stockholders of the Company who are "accredited investors" as defined in Rule 501(a) of Regulation D under the U.S. Securities Act of 1933, as amended, and "accredited investors" as defined in National Instrument 45-106 - Prospectus and Registration Exemptions of the Canadian Securities Administrators adopted under Canadian securities legislation.

Preferred Shares

Provided that certain conditions to exercise are satisfied on or before the day that is 120 days following the First Closing Date, including receipt by the Company of all consents of the stockholders of the Company and third parties required in order to issue the Preferred Shares (the "Preferred Share Exercise Conditions"), the Special Warrants will be exercised for Preferred Shares on a one-to-one basis upon satisfaction of such Preferred Share Exercise Conditions. Subject to standard anti-dilution adjustments, each Preferred Share will be convertible into 30.85 Common Shares, based on a conversion price per Common Share of US$0.38, which is equal to CDN$0.405 based on the closing rate of exchange on September 3, 2013 of US$1 = CDN$1.0530 as provided by the Bank of Canada (the "Preferred Share Conversion Rate"). 

Holders of Preferred Shares will be entitled to convert their Preferred Shares into Common Shares at the Preferred Share Conversion Rate following the earlier of: (i) November 3, 2014 or (ii) the date of the occurrence of a fundamental change of the Company, including a change in beneficial ownership of a majority of the total outstanding voting securities of the Company (other than by Boketo LLC or its related entities) (a "Fundamental Change"). The Company may additionally compel conversion of the Preferred Shares on the date of the occurrence of a Fundamental Change. The right to convert the Preferred Shares will expire on the fifth anniversary of the First Closing Date, at which time, to the extent of funds lawfully available therefor, all outstanding Preferred Shares will be redeemed by the Company at a price of US$11.72 per Preferred Share plus an amount on account of accrued but unpaid dividends. In the event that the Company is unable to pay the redemption price in cash through funds lawfully available therefor as required at the fifth anniversary of the First Closing Date, the Company may alternatively elect at such time to then satisfy the redemption price by issuing a number of Common Shares equal to the aggregate redemption price divided by the "Market Price" per Common Share as determined in accordance with the rules and requirements of the TSX Venture Exchange ("TSXV") at the time of redemption. The Company may additionally elect to redeem the Preferred Shares for cash at any time following the third anniversary of the First Closing Date at a price of US$11.72 per Preferred Share plus an amount on account of accrued but unpaid dividends. 

Holders of Preferred Shares will be entitled to dividends accruing daily at a rate of 16% per annum, including an amount on account of dividends that would have accrued on the Preferred Shares had such Preferred Shares been issued on the First Closing Date, which dividends will be payable in cash or in the form of Common Shares at the option of the Company. The Preferred Shares will be non-voting prior to November 3, 2014, following which time each Preferred Share will be entitled to that number of votes equal to the number of Common Shares then issuable upon its conversion.

Notes

In the event that Preferred Shares have not been issued to holders of Special Warrants on or before the day that is 120 days following the First Closing Date, and provided that certain conditions to exercise are satisfied on or before such date, including receipt by the Company of all consents of third parties required in order to issue the Notes (the "Note Exercise Conditions"), then, upon satisfaction of the Note Exercise Conditions, the Special Warrants will instead be exercised for Notes of the Company having an aggregate principal amount equal to the aggregate amount of the Subscription Price (the "Base Principal") plus the amount that would have accrued on a daily basis on such Subscription Price at a rate of 20% per annum had such Notes been issued on the First Closing Date (the "Accrued Principal").

Holders of Notes will be entitled to convert their Notes into Common Shares following the earlier of: (i) November 3, 2014 or (ii) the date of the occurrence of a Fundamental Change. The Company may additionally compel conversion of the Notes on the date of the occurrence of a Fundamental Change. In each case, outstanding Base Principal owing under the Notes will be convertible into Common Shares on the basis of a conversion price per Common Share of US$0.38, subject to standard anti-dilution adjustments, and outstanding Accrued Principal and accrued but unpaid interest owing under the Notes will be convertible into Common Shares on the basis of a conversion price per Common Share equal to the "Market Price" as determined in accordance with the rules and requirements of the TSXV at the time of conversion (collectively, the "Note Conversion Rate").

Holders of the Notes will be entitled to interest accruing daily at a rate of 20% per annum, which interest will be payable in cash or in the form of Common Shares at the option of the Company. The Notes will mature on the fifth anniversary of the First Closing Date, at which time all outstanding principal and accrued and unpaid interest thereon will be repayable in full by the Company in cash. In the event that the Company is unable to repay the outstanding principal and accrued and unpaid interest in cash through funds lawfully available therefor, the Company may repay such amount by issuing a number of Common Shares equal to the aggregate amount owing divided by the "Market Price" per Common Share as determined in accordance with the rules and requirements of the TSXV at the time of settlement. The Company may additionally elect to repay the Notes in whole or in part at any time following the third anniversary of the First Closing Date.

Common Shares

In the event that neither Preferred Shares nor Notes have been issued to holders of Special Warrants on or before the day that is 120 days following the First Closing Date, then, following November 3, 2014 (or an earlier date consented to by the Corporation, in its sole discretion), holders of Special Warrants will be entitled to exercise their Special Warrants into 30.85 Common Shares per Special Warrant, based on a conversion price per Common Share of US$0.38, plus a number of Common Shares equal to the amount that would have accrued on a daily basis on the Subscription Price at a rate of 20% per annum since the First Closing Date through to conversion, divided by the "Market Price" as determined in accordance with the rules and requirements of the TSXV at the time of conversion (collectively, the "Special Warrant Conversion Rate"). Additionally, in the event that a Fundamental Change occurs prior to the exercise of the Special Warrants as outlined above, the holders of Special Warrants will have the right to exercise the Special Warrants for Common Shares at the Special Warrant Conversion Rate immediately prior to the occurrence of such Fundamental Change.

Subject to applicable law, all outstanding Special Warrants will be redeemed by the Company at the earlier of: (i) the fifth anniversary of the First Closing Date (a "Fifth Anniversary Redemption") or (ii) the date of the occurrence of a Fundamental Change, at a price of US$11.72 per Special Warrant plus the amount that would have accrued on a daily basis on the Subscription Price at a rate of 20% per annum since the First Closing Date through to redemption. With respect to a Fifth Anniversary Redemption, in the event that the Company is unable to pay the redemption price in cash through funds available therefor, the Company may alternatively elect to satisfy the redemption price by issuing a number of Common Shares equal to the aggregate redemption price divided by the "Market Price" per Common Share as determined in accordance with the rules and requirements of the TSXV at the time of redemption. The Company may additionally elect to redeem the Special Warrants for cash at any time on or after the third anniversary of the First Closing Date at a price of US$11.72 per Special Warrant plus an amount that would have accrued on a daily basis on the Subscription Price at a rate of 20% per annum since the First Closing Date through to redemption.

In the event that Common Shares are issued on the exercise or redemption of Special Warrants as set forth above, the Company shall waive any future application of the standstill provision contained in Section 2.5 of the Stockholders Agreement of the Company, which provides that, until June 12, 2014, Boketo LLC may not, directly or indirectly, acquire any equity securities of the Company or any rights, warrants or options to acquire any equity securities of the Company, other than in certain limited circumstances.

General

In accordance with the Rules of the TSXV, FSNA announces that insiders of the Company will be subscribing for greater than 25% of the Updated Private Placement. Thomas P. McDonnell, III, Chairman and Chief Executive Officer of the Company, intends to subscribe for up to 85,289 Special Warrants (or such greater amount as is permitted under MI 61-101 (as defined below)). Mr. McDonnell presently owns or controls 22,535,635 Common Shares, representing 35.87% of the issued and outstanding Common Shares. Boketo LLC intends to subscribe for up to 389,809 Special Warrants (or such greater amount as is permitted under MI 61-101). Boketo LLC presently owns or controls 62,212,200 shares of series A preferred stock of the Company, representing all of the issued and outstanding series A preferred stock of the Company, and no Common Shares.

The Updated Private Placement will not result in the creation of any new insiders or control persons. No commission or finder's fee is payable in connection with the Updated Private Placement.

As Mr. McDonnell and Boketo LLC are each considered to be "related parties" of FSNA under Part 1.1 of Multilateral Instrument 61-101 ("MI 61-101"), their participation in the Updated Private Placement constitutes a "related party transaction" within the meaning of MI 61-101. The board of directors of FSNA has determined that the Updated Private Placement is exempt from the formal valuation and minority shareholder approval requirements of MI 61-101 as neither the fair market value of the subject matter of, nor the fair market value of the consideration for, the transaction, insofar as it involves related parties, exceeds 25% of FSNA's market capitalization calculated on the basis of its issued and outstanding Common Shares.

A material change report in respect of the transaction was not filed 21 days in advance of the expected closing of the Updated Private Placement. The shorter period was necessary in order to permit FSNA to close the Updated Private Placement in a timeframe consistent with usual market practice for transactions of this nature.

The Special Warrants, as well as the Preferred Shares, Notes and Common Shares for which the Special Warrants may be exercised, will be subject to a hold period and restricted period from the date of issuance in accordance with the policies of the TSXV and applicable securities legislation. The securities offered will not be registered under the United States Securities Act of 1933 (the "Act") and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Act. This news release does not constitute an offer to sell securities.

The Updated Private Placement remains subject to standard filing requirements and the receipt of approval from the TSXV.

About FSNA

FSNA is a publicly traded company listed on the TSX Venture Exchange. The Company and its subsidiaries own the following brands: Advantage Rent A Car ("Advantage"), U-Save Car & Truck Rental® ("U-Save"), U-Save Car Sales, Rent-A-Wreck of Canada, PractiCar, Auto Rental Resource Center ("ARRC"), Xpress Rent A Car and Peakstone Financial Services.

The Company operates the Advantage car rental brand at 72 corporate locations in 33 states. Advantage has airport locations servicing 60 of the top 70 airports across the United States and those airports account for more than US$10 billion in annual car rental revenue. Advantage is the fourth largest independent rental car company in the United States. 

U-Save, together with its subsidiary ARRC, has over 900 locations throughout the United States and is one of North America's largest franchise car rental companies. U-Save currently services 19 airport markets in 13 different states. Although primarily based in the United States, U-Save has 18 international locations in Mexico, Greece, the Middle East, Latin America, and the Caribbean.

Practicar Systems Inc. owns the rights to the Rent-A-Wreck® and the PractiCar® trademarks for all of Canada. The Rent-A-Wreck® system operates a network of 61 franchise locations from coast-to-coast in Canada, providing a range of vehicle rental, leasing and sales options to its customers. The Rent-A-Wreck® system has been in continuous operation in Canada since 1976.

Forward Looking Information

Certain statements made in this news release are forward-looking in nature, including statements concerning the completion and timing of the Updated Private Placement, the completion of one or more closings for the Updated Private Placements, the anticipated use of the net proceeds of the Updated Private Placement, the anticipated terms of the Updated Private Placement, the receipt of required stockholder and third party approvals to the transactions contemplated by the Updated Private Placement and statements made with respect to Advantage's operations, including expectations as to the number of locations and size of fleet. The closing of the Updated Private Placement could be delayed if FSNA is not able to obtain the necessary regulatory and stock exchange approvals on the timelines it has planned. The Updated Private Placement will not be completed at all if these approvals are not obtained or if some other condition to the closing is not satisfied. Accordingly, there is a risk that the Updated Private Placement will not be completed within the anticipated time or at all. The words "may", "could", "should", "would", "expect", "intend", "estimate", "anticipate", "believe", or "outlook" and similar expressions often identify forward-looking information. By their nature, forward-looking statements require FSNA to make assumptions and are subject to inherent risks and uncertainties. The forward-looking statements contained in this news release are based on certain key expectations and assumptions made by FSNA. Although FSNA believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because FSNA can give no assurance that they will prove to be correct. FSNA's forward-looking statements are qualified in their entirety by these cautionary statements. In addition, the forward-looking statements are made only as of the date of this news release, and except as required by applicable securities law, FSNA undertakes no obligation to publicly update these forward-looking statements to reflect new information, subsequent events or otherwise.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.