-----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, J/S5YFxGWVFV2UAkphZ9EKQkDY+w+gaFnZbmUUrVbwQi3dG98hqNUgHOcVftFs+/ sKvRGF8lrPxiNMT+qSCshg== 0001047469-97-002890.txt : 19971107 0001047469-97-002890.hdr.sgml : 19971107 ACCESSION NUMBER: 0001047469-97-002890 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 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: 333-34635 FILM NUMBER: 97708874 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 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRIENDLYS RESTAURANTS FRANCHISE INC CENTRAL INDEX KEY: 0001044278 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 510296446 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-34635-01 FILM NUMBER: 97708875 BUSINESS ADDRESS: STREET 1: 1855 BOSTON RD CITY: WILBRAHAM STATE: MA ZIP: 01095 BUSINESS PHONE: 4135432400 MAIL ADDRESS: STREET 1: 1855 BOSTON RD 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. 333-34635 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 FRIENDLY'S RESTAURANTS CORPORATION FRANCHISE, INC. (Exact name of registrant issuer as specified in its (Exact name of registrant guarantor as specified in its charter) charter) MASSACHUSETTS DELAWARE (State of Incorporation) (State of Incorporation) 04-2053130 51-0296446 (I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.) 5812 5812 (Primary Standard Industrial (Primary Standard Industrial Classification Code Number) Classification Code Number) 1855 BOSTON ROAD 1855 BOSTON ROAD WILBRAHAM, MASSACHUSETTS 01095 WILBRAHAM, MASSACHUSETTS 01095 (413) 543-2400 (415) 543-2400 (Address, including zip code, and (Address, including zip code, telephone number, including area code, and telephone number, including of registrant's principal executive offices) area code, of agent for service)
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, NY 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 SENIOR NOTE OFFERING PRICE(1) REGISTRATION FEE % Senior Notes due 2007......................... $175,000,000 100% $175,000,000 $53,031(2) Guarantee of % Senior Notes due 2007 by Friendly's Restaurants Franchise, Inc........... (3)
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457. (2) Previously paid. (3) Pursuant to Rule 457(n), no separate filing fee is required for the guarantee. -------------------------- THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED NOVEMBER 6, 1997 INFORMATION CONTAINED HEREIN IS SUBJECT TO CHANGE, COMPLETION OR AMENDMENT, WITHOUT NOTICE. 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. [LOGO] $175,000,000 FRIENDLY ICE CREAM CORPORATION % Senior Notes Due 2007 ---------------- Friendly Ice Cream Corporation (the "Company") is offering (the "Senior Note Offering") $175 million of its % Senior Notes due 2007 (the "Senior Notes"). Concurrent with the Senior Note Offering, the Company is offering to the public 5,000,000 shares of the Company's common stock (the "Common Stock") at an estimated initial public offering price of between $19.00 and $21.00 per share (the "Common Stock Offering" and, together with the Senior Note Offering, the "Offerings"). Concurrent with, and contingent upon, the consummation of the Offerings, the Company will enter into the New Credit Facility (as defined herein). The Offerings, the New Credit Facility and the application of the estimated net proceeds therefrom are hereinafter referred to as the "Recapitalization." Consummation of each of the Senior Note Offering, the Common Stock Offering and the New Credit Facility is contingent upon consummation of the other. See "Use of Proceeds." 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 the redemption prices set forth herein, 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 (as defined herein); 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 (as defined herein), 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 date of repurchase. There is no assurance that in the event of a Change of Control the Company will have, or will have access to, sufficient funds to repurchase any of the Senior Notes. See "Description of Senior Notes." The Senior Notes will be unsecured, senior obligations of the Company, will rank PARI PASSU in right of payment with all other existing and future senior indebtedness of the Company and will rank senior in right of payment to all existing and future subordinated indebtedness of the Company. The Senior Notes will be effectively subordinated to all existing and 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 be structurally subordinated to all existing and future indebtedness of any subsidiary of the Company that is not a Subsidiary Guarantor (as defined herein). The Senior Notes will be unconditionally guaranteed on an unsecured, senior basis by Friendly's Restaurants Franchise, Inc., the Company's franchise subsidiary. As of September 28, 1997, on a pro forma basis after giving effect to the Recapitalization and the Related Transactions (as defined herein), the Company would have had a total of $293.0 million of long-term debt and capital lease obligations outstanding, $115.1 million of which would have been secured and none of which would have been subordinated. As of September 28, 1997, on a pro forma basis after giving effect to the Recapitalization and the Related Transactions, non-guarantor subsidiaries of the Company would have had no long-term debt or capital lease obligations outstanding. The Indenture relating to the Senior Notes (the "Indenture") will permit the Company to incur additional indebtedness, including senior indebtedness and indebtedness of non-guarantor subsidiaries, subject to certain limitations. See "Description of Senior Notes." --------------------------- See "Risk Factors" beginning on page 14 for a discussion of certain factors that should be considered in connection with an investment in the Senior Notes. ------------------- 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 (a) Discount (b) Company (a) (c) - --------------------------------------------------------------------------------------------------------------------- Per Senior Note................................. % % % Total........................................... $ $ $ - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
(a) Plus accrued interest, if any, from the date of issuance. (b) The Company and the Subsidiary Guarantor have agreed, jointly and severally, to indemnify the Underwriters (as defined herein) against certain liabilities, including liabilities under the Securities Act. See "Underwriting." (c) Before deducting expenses payable by the Company estimated at $1,398,000. --------------------------- The Senior Notes are being offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters and subject to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Senior Notes will be made against payment therefor on or about , 1997, in book-entry form through the facilities of The Depository Trust Company. SOCIETE GENERALE SECURITIES CORPORATION DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION NATIONSBANC MONTGOMERY SECURITIES, INC. , 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 THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SENIOR NOTES, INCLUDING OVERALLOTMENT, STABILIZING TRANSACTIONS AND SYNDICATE SHORT COVERING TRANSACTIONS. FOR A DESCRIPTION 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 (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" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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 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 4 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. 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. 5 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 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 6 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 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. The principal executive offices of the Company are located at 1855 Boston Road, Wilbraham, Massachusetts 01095, and the telephone number is (413) 543-2400. 7 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." 8 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." 9 THE SENIOR NOTE OFFERING Issuer....................... Friendly Ice Cream Corporation. Securities Offered........... $175,000,000 aggregate principal amount of % Senior Notes due 2007 (the "Senior Notes"). Maturity Date................ , 2007. Interest Payment Dates....... and of each year, commencing , 1998. Optional Redemption.......... 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 the redemption prices set forth herein, 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 (as defined herein); PROVIDED, HOWEVER, that at least $115 million of the aggregate principal amount of the Senior Notes remains outstanding following each such redemption. Subsidiary Guarantees........ The Senior Notes will be fully and unconditionally guaranteed (the "Subsidiary Guarantees"), on an unsecured, senior basis, by Friendly's Restaurants Franchise, Inc., the Company's franchise subsidiary, and will also be guaranteed by each new subsidiary (other than Unrestricted Subsidiaries and Foreign Subsidiaries (as defined herein)) created or acquired after the issue date of the Senior Notes (collectively, the "Subsidiary Guarantors"). See "Description of Senior Notes--Guarantees." Ranking...................... The Senior Notes will be unsecured, senior obligations of the Company, will rank PARI PASSU in right of payment with all existing and future senior indebtedness of the Company and will rank senior in right of payment to all existing and future subordinated indebtedness of the Company. The Senior Notes will be effectively subordinated to all existing and 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 be structurally subordinated to all existing and future indebtedness of any subsidiary of the Company that is not a Subsidiary Guarantor. As of September 28, 1997, on a pro forma basis after giving effect to the Recapitalization and the Related Transactions, the Company would have had a total of $293.0 million of long-term debt and capital lease obligations outstanding, $115.1 million of which would have been secured and none of which would have been subordinated. The Subsidiary Guarantees will be unsecured, senior obligations of the Subsidiary Guarantors. As of September 28, 1997, on a pro forma basis after giving effect to the Recapitalization and the Related Transactions, non-guarantor subsidiaries of the Company would have had no long-term debt or capital lease obligations outstanding. See "Description of Senior Notes--Ranking."
10 Change of Control............ Upon the occurrence of a Change of Control (as defined herein), each holder of Senior Notes may require the Company to repurchase any or all outstanding Senior Notes owned by such holder at a repurchase price of 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of repurchase. See "Description of Senior Notes--Change of Control." Restrictive Covenants........ The Indenture under which the Senior Notes will be issued will contain certain covenants pertaining to the Company and its Restricted Subsidiaries (as defined herein), 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 on restrictions on distributions from Restricted Subsidiaries, (iv) limitations on sales of assets and of 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. Each of Friendly's International, Inc. and its United Kingdom subsidiaries will be an Unrestricted Subsidiary on the Issue Date (as defined herein). See "Description of Senior Notes--Certain Covenants." Concurrent Common Stock Offering................... Concurrent with the Senior Note Offering, the Company is offering to the public 5,000,000 shares of Common Stock at an estimated initial public offering price of between $19.00 and $21.00 per share. Consummation of each of the Senior Note Offering and the Common Stock Offering is contingent upon consummation of the other. Use of Proceeds.............. The Company intends to use up to approximately $356.0 million of the 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." Risk Factors................. Prospective purchasers of the Senior Notes 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 Senior Notes. 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, resulting in its inability to cover fixed charges since the TRC Acquisition, (iii) implementation of new business concepts and strategies, (iv) development of a franchising program beyond the DavCo Agreement, (v) expansion of its international operations in existing and new markets, (vi) geographic concentration in the Northeast, and (vii) highly competitive business environment, as well as factors 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 Senior Notes offered hereby.
11 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) (l).................................... -- -- 3.8 x 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 AS ADJUSTED -------------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital (deficit)....................................................................... $ (17,895) $ (10,949)(p) Total assets.................................................................................... 362,914 358,348(q) Total long-term debt and capital lease obligations, excluding current maturities................ 371,296 288,585(r) Total stockholders' equity (deficit)............................................................ $ (170,684) $ (73,471)(s)
12 (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 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 SEPTEMBER 28, 1997 ------------------- ------------------- ------------------- (IN THOUSANDS) Elimination of interest on Old Credit Facility......... $ (41,827) $ (31,337) $ (31,434) Reduction of interest on capital lease obligations..... (774) (580) (580) Interest on Revolving Credit Facility.................. 779 624 732 Interest on Letter of Credit Facility.................. 268 134 134 Interest on Term Loan Facility......................... 8,279 6,202 6,340 Interest on Senior Notes............................... 17,938 13,453 13,453 -------- -------- -------- Decrease in Interest expense, net.................... $ (15,337) $ (11,504) $ (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 of 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 under 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) the 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) the repayment of the $358,042 outstanding under 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) the 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. 13 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. 14 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 15 terms, permitting and regulatory compliance and general economic and business conditions. See "Prospectus Summary--Recent Developments" and "Business--Restaurant Operations--Franchising Program." 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." 16 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 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 17 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, 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 PRIOR PUBLIC MARKET Prior to the Senior Note Offering, there has been no public market for the Senior Notes. The Company has no present plans to list the Senior Notes on any national securities exchange or to apply for quotation thereof on the Nasdaq National Market. The Company has been advised by the Underwriters that the Underwriters presently intend to make a market in the Senior Notes as permitted by applicable laws and regulations. However, the Underwriters are not obligated to do so, and any such market-making may be discontinued at any time without notice at the sole discretion of the Underwriters. Accordingly, no assurance can be given that any market for the Senior Notes will develop, or, if any such market develops, as to the liquidity of such market. 18 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." 19 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. 20 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)(l)...... -- -- 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)(l)...... 3.8x
21
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 of 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 under 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) the 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) the repayment of the $358,042 outstanding under 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) the 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. 22 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 23 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.
FISCAL YEAR NINE MONTHS ENDED --------------------------------- --------------------- SEPTEMBER SEPTEMBER 29, 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 24 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 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. 25 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 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. 26 OPERATING EXPENSES--Operating expenses decreased $0.7 million, or 0.5%, to $143.2 million in 1996 from $143.9 million in 1995. Operating expenses as a percentage of Total revenues decreased in 1996 to 22.0% from 22.2% in 1995. The decrease was due to the allocation of fixed costs over higher total revenues. GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses increased $2.0 million, or 4.9%, to $42.7 million in 1996 from $40.7 million in 1995. General and administrative expenses as a percentage of Total revenues increased to 6.5% in 1996 from 6.2% in 1995. This increase was due to an increase in management bonuses and the annual merit-based salary increases, partially offset by reductions in group medical insurance claims and the elimination of field management positions associated with the closing of 31 restaurants in 1996. General and administrative expenses, exclusive of management bonuses, increased $0.3 million in 1996. EBITDA--As a result of the above, EBITDA increased by $6.3 million, or 11.0%, to $63.7 million in 1996 from $57.4 million in 1995. EBITDA as a percentage of Total revenues increased to 9.8% in 1996 from 8.8% in 1995. NON-CASH WRITE-DOWNS--Non-cash write-downs decreased $7.2 million to $0.2 million in 1996 from $7.4 million in 1995. The decrease was due to a reduction in the carrying value of properties held for disposition of $0.2 million in 1996 and $4.0 million in 1995. In 1995, the Company also incurred a non-cash write-down of $3.3 million relating to costs resulting from a postponed debt refinancing. For further explanation of the non-cash write-downs, see Notes 3, 5 and 6 of Notes to Consolidated Financial Statements. 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 27 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 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. 28 BENEFIT FROM (PROVISION FOR) INCOME TAXES--The provision for income taxes was $33.4 million as compared to the benefit from income taxes of $4.7 million in 1994. The provision for income taxes of $33.4 million in 1995 was due to the anticipated deconsolidation from TRC. As a result, the deferred tax asset of approximately $19 million related to the NOLs utilized by TRC as of December 13, 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
29 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 30 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 restaurants 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 in the Common Stock Offering is exercised in full) and such lenders' nominees on the Board of Directors will be replaced. See "Management," "Ownership of Common Stock" and Note 7 of Notes to Consolidated Financial Statements. 31 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. 32 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 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 33 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 "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 34 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. 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 35 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 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. 36 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 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." 37 The 546 freestanding restaurants, including the 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 the 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." 38 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 39 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- 40 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 41 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. 42 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 43 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 44 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. 45 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. 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. 46 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 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. 47 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. 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. 48 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. 49 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. 50 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 51 will become exercisable over a five-year period, subject to the optionee's continued employment with the Company. All awards under the Stock Option Plan will become fully vested and exercisable upon a change in control of the Company. Approximately 120 employees of the Company who are classified as salary grade 107 or 108 will initially be eligible for participation in the Stock Option Plan. The Board of Directors, in its sole discretion, 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. 52 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 STOCK COMMON SHARES BENEFICIALLY OWNED PRIOR TO THE RECAPITALIZATION BENEFICIALLY ---------------------------------------- OWNED AFTER THE RECAPITALIZATION (A) NUMBER ---------------------- ------------------------- PERCENTAGE PERCENTAGE NAME CLASS A (B) CLASS B (B) OF TOTAL NUMBER OF TOTAL - ---------------------------------------------------------------- ----------- ----------- ------------ --------- ---------- 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 L. 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 to certain members of management under the 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. Brown, 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 all Directors and Executive Officers as a group under the Restricted Stock Plan shortly after consummation of the Recapitalization. See Note 17 of Notes to Consolidated Financial Statements. (b) In connection with the Recapitalization, each outstanding Class A common share and Class B common share of the Company will be converted into one share of Common Stock. (c) 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 of the Common Stock Offering 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 Common Stock Offering 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." 53 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. 54 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. 55 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 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. 56 DESCRIPTION OF SENIOR NOTES GENERAL The Senior Notes are to be issued under an Indenture, to be dated as of , 1997 (the "Indenture"), between the Company, Friendly's Restaurants Franchise, Inc. and The Bank of New York, as Trustee (the "Trustee"), a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The following summary of certain provisions of the Indenture and the Senior Notes does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Indenture, including the definitions of certain terms therein and those terms made a part thereof by the TIA. The summary provides an accurate description of all material terms of the Senior Notes. Capitalized terms used herein and not otherwise defined have the meanings set forth under "--Certain Definitions." Principal of, premium, if any, and interest on the Senior Notes will be payable, and the Senior Notes may be exchanged or transferred, at the office or agency of the Company in the Borough of Manhattan, The City of New York (which initially shall be the corporate trust office of the Trustee, at 101 Barclay Street, New York, New York 10286), except that, at the option of the Company, payment of interest may be made by check mailed to the registered holders of the Senior Notes at their registered addresses. The Senior Notes will be issued only in fully registered form, without coupons, in denominations of $1,000 and any integral multiple of $1,000. No service charge will be made for any registration of transfer or exchange of Senior Notes, but the Company may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection therewith. The definition of "Restricted Subsidiary" in the Indenture will exclude any "Unrestricted Subsidiary" and, as a result, Unrestricted Subsidiaries generally will not be bound by the restrictive provisions of the Indenture and will not be Subsidiary Guarantors. Each of Friendly's International, Inc. and its United Kingdom subsidiaries will be an Unrestricted Subsidiary on the Issue Date. TERMS OF THE SENIOR NOTES The Senior Notes will be unsecured, senior obligations of the Company, limited to $175 million aggregate principal amount, and will mature on , 2007. Each Senior Note will bear interest at the rate per annum shown on the front cover of this Prospectus from , 1997, or from the most recent date to which interest has been paid or provided for, payable semiannually to Holders of record at the close of business on the or immediately preceding the interest payment date on and of each year, commencing , 1998. Interest on the Senior Notes will be computed on the basis of a 360-day year of twelve 30-day months. OPTIONAL REDEMPTION The Senior Notes will be redeemable, at the Company's option, in whole or in part, at any time on or after , 2002, and prior to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by first-class mail to each Holder's registered address, at the following redemption prices (expressed as a percentage of principal amount), plus accrued interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on of the years set forth below:
REDEMPTION PERIOD PRICE - --------------------------------------------------------------------------------- ----------- 2002............................................................................. % 2003............................................................................. % 2004............................................................................. % 2005 and thereafter.............................................................. 100.000%
57 In addition, at any time and from time to time prior to , 2000, the Company may redeem in the aggregate up to $60 million principal amount of the Senior Notes with the proceeds of one or more Qualified Equity Offerings at a redemption price (expressed as a percentage of principal amount thereof) of % plus accrued interest, if any, to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that at least $115 million principal amount of the Senior Notes must remain outstanding after each such redemption. In the case of any partial redemption, selection of the Senior Notes for redemption will be made by the Trustee on a pro rata basis, by lot or by such other method as the Trustee in its sole discretion shall deem to be fair and appropriate, although no Senior Note of $1,000 in original principal amount will be redeemed in part. If any Senior Note is to be redeemed in part only, the notice of redemption relating to such Senior Note shall state the portion of the principal amount thereof to be redeemed. A new Senior Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Senior Note. GUARANTEES The obligations of the Company pursuant to the Senior Notes, including the repurchase obligation resulting from a Change of Control, will be unconditionally guaranteed, on an unsecured, senior basis, by Friendly's Restaurant Franchise, Inc. and will also be guaranteed by each new Subsidiary (other than Unrestricted Subsidiaries and Foreign Subsidiaries) created or acquired after the Issue Date. Each Subsidiary Guaranty will be limited in amount to an amount not to exceed the maximum amount that can be guaranteed by the applicable Subsidiary Guarantor without rendering the Subsidiary Guaranty, as it relates to such Subsidiary Guarantor, void or voidable under applicable law relating to fraudulent conveyance or fraudulent transfer or similar laws affecting the rights of creditors generally. If a Subsidiary Guaranty were to be rendered void or voidable, it could be rendered unenforceable or subordinated by a court to all other indebtedness (including guarantees and other contingent liabilities) of the applicable Subsidiary Guarantor, and, depending on the amount of such indebtedness, a Subsidiary Guarantor's liability on its Subsidiary Guaranty could be reduced to zero. See "Risk Factors--Fraudulent Conveyance." The Indenture will provide that, subject to the following paragraph, the Company will not permit any Subsidiary Guarantor to consolidate with or merge with or into, or convey, transfer or lease, in one transaction or a series of transactions, all or substantially all of its assets to any Person unless (i) the resulting, surviving or transferee Person (if not such Subsidiary Guarantor) shall be a Person organized and existing under the laws of the jurisdiction under which such Subsidiary Guarantor was organized or under the laws of the United States of America, or any State thereof or the District of Columbia, and such Person shall expressly assume, by a supplement to the Indenture, in a form satisfactory to the Trustee, all the obligations of such Subsidiary Guarantor under its Subsidiary Guaranty; (ii) immediately after giving effect to such transaction or transactions on a pro forma basis (and treating any Indebtedness which becomes an obligation of the resulting, surviving or transferee Person as a result of such transaction as having been incurred by such Person at the time of such transaction), no Default or Event of Default shall have occurred and be continuing; and (iii) the Company delivers to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer, if any, complies with the Indenture. However, the Indenture will also provide that upon the sale or other disposition (including by way of consolidation or merger) of a Subsidiary Guarantor or the sale or disposition of all or substantially all the assets of a Subsidiary Guarantor (in each case other than to the Company or an Affiliate of the Company), such Subsidiary Guarantor will be released and relieved from all its obligations under its Subsidiary Guaranty; provided that such sale or disposition shall constitute an Asset Sale under, and the Net Available Cash from such sale or disposition shall be applied in accordance with, the covenant described below under "Limitation on Sales of Assets and Subsidiary Stock." 58 RANKING The indebtedness evidenced by the Senior Notes will be unsecured, Senior Indebtedness of the Company, will rank PARI PASSU in right of payment with all existing and future Senior Indebtedness of the Company and will rank senior in right of payment to all existing and future Subordinated Obligations of the Company. The Senior Notes will also be effectively subordinated to all existing and future Secured Indebtedness of the Company to the extent of the value of the assets securing such Secured Indebtedness and structurally subordinated to all existing and future Indebtedness of any Subsidiary of the Company that is not a Subsidiary Guarantor. As of September 28, 1997, on a pro forma basis after giving effect to the Recapitalization and the Related Transactions, the Company would have had a total of $293.0 million of long-term debt and capital lease obligations outstanding, $115.1 million of which would have been secured, and none of which would have been subordinated. As of September 28, 1997, after giving effect to the Recapitalization and the Related Transactions, Subsidiaries of the Company which are not Subsidiary Guarantors would have had no long-term debt or capital lease obligations outstanding. Although the Indenture contains limitations on the amount of additional Indebtedness which the Company or any Restricted Subsidiary may Incur, under certain circumstances the amount of such Indebtedness could be substantial and, in any case, such Indebtedness may be Senior Indebtedness, Secured Indebtedness or Indebtedness of Subsidiaries which are not Subsidiary Guarantors. See "-- Certain Covenants -- Limitation on Indebtedness and Preferred Stock." CHANGE OF CONTROL Upon the occurrence of any of the following events (each a "Change of Control") with respect to the Company, each Holder will have the right to require the Company to repurchase all or any part of such Holder's Senior Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase (subject to the right of Holders of record on the relevant record date to receive interest due on the related interest payment date): (i) (A) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than 35% of the total voting power of the Voting Stock of the Company and (B) the Permitted Holders "beneficially own" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, in the aggregate a lesser percentage of the total voting power of the Voting Stock of the Company than such other person and do not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the Board of Directors of the Company; (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of the Company (together with any new directors whose election by such Board of Directors or whose nomination for election by the shareholders of the Company was approved by a vote of a majority of the directors of the Company then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company then in office; (iii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company to any Person or group of Persons (other than to any Wholly Owned Subsidiary of the Company); (iv) the merger or consolidation of the Company with or into another Person or the merger of another Person with or into the Company and the securities of the Company that are outstanding immediately prior to such transaction and which represent 100% of the voting power of the Voting 59 Stock of the Company are changed into or exchanged for cash, securities or property, unless pursuant to such transaction such securities are changed into or exchanged for, in addition to any other consideration, securities of the surviving corporation that represent immediately after such transaction, at least a majority of the aggregate voting power of the Voting Stock of the surviving Person or transferee; or (v) the adoption of a plan of liquidation of the Company. Within 30 days following any Change of Control, the Company shall mail a notice to each Holder with a copy to the Trustee stating: (1) that a Change of Control has occurred and that such Holder has the right to require the Company to purchase any or all of such Holder's Senior Notes in denominations of $1,000 or any integral multiple thereof at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase (subject to the right of Holders of record on a record date to receive interest on the relevant interest payment date); (2) the circumstances and relevant facts and pro forma financial information regarding such Change of Control; (3) the repurchase date (which shall be no earlier than 30 days nor later than 60 days from the date such notice is mailed); and (4) the instructions determined by the Company, consistent with this covenant, that a Holder must follow in order to have its Senior Notes purchased by the Company. Notwithstanding the occurrence of a Change of Control, the Company shall not be obligated to repurchase the Senior Notes upon a Change of Control if the Company has irrevocably elected to redeem all of the Senior Notes under the provisions described under "-- Optional Redemption" above, provided that the Company does not default in its redemption obligations pursuant to such election. Neither the Trustee nor the Board of Directors of the Company may waive the covenant relating to the Holders' right to have its Senior Notes repurchased upon a Change of Control. The phrase "all or substantially all," as used with respect to a sale of assets in the definition in the Indenture of "Change of Control," varies according to the facts and circumstances of the subject transaction, has no clearly established meaning under New York law (the law governing the Indenture) and is subject to judicial interpretation. Accordingly, in certain circumstances, there may be a degree of uncertainty in ascertaining whether a particular transaction would involve a disposition of "all or substantially all" of the assets of a Person and therefore it may be unclear whether a Change of Control has occurred. The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Senior Notes pursuant to this covenant. To the extent that the provisions of any securities laws or regulations conflict with provisions of this covenant, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this paragraph by virtue thereof. The Change of Control purchase feature is a result of negotiations between the Company and the Underwriters. Management has no present intention to engage in a transaction involving a Change of Control, although it is possible that the Company could decide to do so in the future. Subject to the limitations discussed below, the Company could, in the future, enter into certain transactions, including acquisitions, refinancings or other recapitalizations, that would not constitute a Change of Control under the Indenture, but that could increase the amount of indebtedness outstanding at such time or otherwise affect the Company's capital structure or credit rating. The occurrence of certain of the events that would constitute a Change of Control would constitute a default under the New Credit Facility. Future Indebtedness of the Company may also contain prohibitions of certain events which would constitute a Change of Control or require such Indebtedness to be repurchased upon a Change of Control. Moreover, the exercise by the Holders of their right to require the Company to repurchase the Senior Notes could cause a default under such Indebtedness, even if the Change of Control itself does not, due to the financial effect of such repurchase on the Company. Finally, 60 the Company's ability to pay cash to the Holders upon a repurchase may be limited by the Company's then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required repurchases. CERTAIN COVENANTS The Indenture contains covenants including, among others, the following: LIMITATION ON INDEBTEDNESS AND PREFERRED STOCK. (a) (i) The Company will not Incur, and will not permit any Restricted Subsidiary to Incur, any Indebtedness (including Acquired Indebtedness) or issue Disqualified Stock and (ii) the Company will not permit any of its Restricted Subsidiaries that are not Subsidiary Guarantors to issue any shares of Preferred Stock; PROVIDED, HOWEVER, that the Company and any Subsidiary Guarantor may Incur Indebtedness (including Acquired Indebtedness) or issue Disqualified Stock if on the date thereof (and after giving effect to the application of proceeds therefrom) the Consolidated Coverage Ratio would be greater than 2.50:1 if such Incurrence shall occur prior to , 1999 or greater than 2.75:1 if such Incurrence shall occur thereafter. (b) Notwithstanding the foregoing paragraph (a), the Company and its Restricted Subsidiaries may Incur the following Indebtedness: (i) Indebtedness of the Company or any Restricted Subsidiary (including any Guarantees thereof) under the New Credit Facility and any Refinancing Indebtedness with respect thereto in an aggregate principal amount outstanding at any time not to exceed $175 million, less the aggregate amount of all proceeds from all Asset Dispositions that have been applied since the Issue Date to permanently reduce the outstanding amount of such Indebtedness pursuant to the covenant "Limitation on Sale of Assets and Subsidiary Stock" and less the aggregate amount of all mandatory repayments of principal of term loans thereunder that have been made since the Issue Date (other than repayments that are immediately re-borrowed); (ii) Indebtedness of the Company owing to and held by any Wholly Owned Subsidiary or Indebtedness of a Restricted Subsidiary owing to and held by the Company or any Wholly Owned Subsidiary; PROVIDED, HOWEVER, that (a) any such Indebtedness is made pursuant to an intercompany note and (other than any such Indebtedness of the Company to RIC or of RIC to the Company) is expressly subordinated to the Senior Notes or the applicable Subsidiary Guaranty, as the case may be, and (b) any subsequent issuance or transfer of any Capital Stock or any other event which results in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent transfer of any such Indebtedness (except to the Company or a Wholly Owned Subsidiary) will be deemed, in each case, to constitute the Incurrence of such Indebtedness by the issuer thereof; (iii) Indebtedness represented by the Senior Notes (including Subsidiary Guarantees), any Indebtedness of the Company or any Restricted Subsidiary (other than the Indebtedness described in clauses (i)-(ii) above) outstanding on the Issue Date and any Refinancing Indebtedness Incurred in respect of any Indebtedness described in this clause (iii); (iv) (A) Indebtedness of a Restricted Subsidiary outstanding on or prior to the date on which such Restricted Subsidiary was acquired by the Company or a Restricted Subsidiary (other than Indebtedness Incurred in connection with, or in contemplation of, the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was otherwise acquired by the Company or a Restricted Subsidiary); PROVIDED, HOWEVER, that at the time such Restricted Subsidiary is acquired by the Company or a Restricted Subsidiary, the Company would have been able to Incur $1.00 of additional Indebtedness pursuant to paragraph (a) of this covenant after giving effect to the Incurrence of such Indebtedness pursuant to this clause (iv) and such transaction or series of related transactions and (B) Refinancing Indebtedness Incurred by a Restricted Subsidiary in respect of Indebtedness Incurred by such Restricted Subsidiary pursuant to this clause (iv); (v) Indebtedness (A) represented by letters of credit (and reimbursement obligations with respect thereto) to secure the purchase price of inventory and/or equipment in the ordinary course of business or to secure Indebtedness (including Capitalized Lease Obligations) otherwise permitted to be incurred under the Indenture, (B) in respect of performance bonds (and letters of credit in respect thereof), bankers' acceptances, letters of credit for workers' compensation claims, and surety or appeal bonds (and letters of credit in respect thereof) provided by the Company or 61 any Restricted Subsidiary in the ordinary course of its business and which do not secure other Indebtedness and (C) under Currency Agreements, Interest Rate Agreements and Commodity Agreements Incurred which, at the time of Incurrence, is in the ordinary course of business; provided that such agreements are entered into for bona fide hedging purposes, are not for speculation or trading purposes and are designed to protect against fluctuations in interest rates, currency exchange rates or commodity prices, as the case may be, and, in the case of Interest Rate Agreements, any such Interest Rate Agreement has a notional amount corresponding to the Indebtedness being hedged thereby; (vi) Indebtedness represented by Guarantees by the Company of Indebtedness otherwise permitted to be Incurred pursuant to this covenant and Indebtedness represented by Guarantees by a Restricted Subsidiary of Indebtedness of the Company or of another Restricted Subsidiary otherwise permitted to be Incurred pursuant to this covenant; (vii) obligations with respect to customary provisions regarding post-closing purchase price adjustments and indemnification in agreements for the purchase or sale of a business or assets otherwise permitted by the Indenture; (viii) Guarantees of Indebtedness of franchisees of the Company or a Restricted Subsidiary in an aggregate principal amount at any one time outstanding not to exceed $20 million, provided that any such Guarantees shall be deemed to be Incurred by the Company or such Restricted Subsidiary at the time any such franchisee ceases to be a franchisee of the Company or such Restricted Subsidiary; (ix) Indebtedness Incurred by the Company or any Restricted Subsidiary to finance the payment of property, casualty and specialty insurance premiums in the ordinary course of the Company's business which is repaid within 18 months of its Incurrence, provided that such Indebtedness does not exceed $7.5 million in the aggregate at any one time outstanding; (x) Indebtedness of the Company Incurred to finance the acquisition, construction or improvement of fixed or capital assets, in an aggregate principal amount at any one time outstanding not to exceed $15 million, provided that such Indebtedness is incurred within 180 days after the date of such acquisition, construction or improvement and does not exceed the fair market value of such acquired, constructed or improved assets as determined in good faith by the Board of Directors; (xi) Indebtedness represented by Capitalized Lease Obligations in respect of Sale/Leaseback Transactions involving the sale of restaurants within 24 months of the purchase of the associated real property, in an aggregate principal amount at any one time outstanding not to exceed $20 million; (xii) Indebtedness represented by Guarantees of loans to employees of the Company or its Subsidiaries for the purpose of paying withholding taxes incurred by such employees in connection with the vesting of stock and/or stock options granted by the Company, in an aggregate amount at any one time outstanding not to exceed $3 million; and (xiii) other Indebtedness in an aggregate principal amount at any one time outstanding not to exceed $20 million. (c) Notwithstanding the foregoing, the Company shall not Incur any Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations unless such new Indebtedness shall be subordinated to the Senior Notes to at least the same extent as such Subordinated Obligations being Refinanced. No Subsidiary Guarantor shall incur any Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are used, directly or indirectly, to Refinance any subordinated obligation of such Subsidiary Guarantor unless such Indebtedness shall be subordinated to the obligations of such Subsidiary Guarantor under the Subsidiary Guaranty to at least the same extent as such Subordinated Obligation of such Subsidiary Guarantor. (d) The Company will not permit any Unrestricted Subsidiary to Incur any Indebtedness other than Non-Recourse Debt, except that an Unrestricted Subsidiary may incur Indebtedness Guaranteed by the Company or any of its Restricted Subsidiaries to the extent such Guarantee is permitted by clause (iv) of paragraph (b) under the covenant "Limitation on Restricted Payments;" provided, however, if any such Indebtedness ceases to be Non-Recourse Debt, such event shall be deemed to constitute an Incurrence of Indebtedness by the Company or a Restricted Subsidiary. (e) For purposes of determining compliance with the foregoing covenant, (i) in the event that an item of Indebtedness meets the criteria of more than one of the types of Indebtedness described above, the Company will classify, in its sole discretion, such item of Indebtedness and only be required to include the 62 amount and type of such Indebtedness in one of the above clauses and (ii) an item of Indebtedness may be divided and classified in more than one of the types of Indebtedness described above. LIMITATION ON RESTRICTED PAYMENTS. (a) The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, (i) declare or pay any dividend or make any distribution on or in respect of its Capital Stock (including any payment in connection with any merger or consolidation involving the Company) except dividends or distributions payable solely in its Capital Stock (other than Disqualified Stock) or in options, warrants or other rights to purchase such Capital Stock and except dividends or distributions payable to the Company or another Restricted Subsidiary (and, if such Restricted Subsidiary making such dividend or distribution is not wholly owned, to its other shareholders on a pro rata basis), (ii) purchase, repurchase, redeem, retire or otherwise acquire or retire for value any Capital Stock of the Company or any Restricted Subsidiary held by Persons other than the Company or another Restricted Subsidiary, (iii) purchase, repurchase, redeem, defease or otherwise acquire or retire for value, prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment any Subordinated Obligations (other than the purchase, repurchase or other acquisition of Subordinated Obligations in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of such purchase, repurchase or acquisition) or (iv) make any Investment (other than a Permitted Investment) in any Person (any such dividend, distribution, purchase, redemption, repurchase, defeasance, other acquisition, retirement, payment or Investment being herein referred to as a "Restricted Payment") if at the time the Company or such Restricted Subsidiary makes such Restricted Payment: (1) a Default or Event of Default shall have occurred and be continuing (or would result therefrom); (2) the Company and its Restricted Subsidiaries could not Incur at least $1.00 of additional Indebtedness under paragraph (a) of the covenant described under "--Limitation on Indebtedness and Preferred Stock;" or (3) the aggregate amount of such Restricted Payment and all other Restricted Payments (the amount so expended, if other than in cash, to be determined in good faith by the Board of Directors of the Company, whose determination will be evidenced by a resolution of such Board of Directors certified in an Officers' Certificate to the Trustee) declared or made subsequent to the Issue Date would exceed the sum of: (A) 50% of the Consolidated Net Income with respect to the period (treated as one accounting period) from the Issue Date to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or, in case such Consolidated Net Income is a deficit, minus 100% of such deficit); (B) the aggregate Net Cash Proceeds received by the Company from the issue or sale of Capital Stock (other than Disqualified Stock and other than the Common Stock issued in the Common Stock Offering) subsequent to the Issue Date (other than an issuance or sale to a Subsidiary); (C) the amount by which Indebtedness of the Company is reduced on the Company's balance sheet upon the conversion or exchange (other than by a Restricted Subsidiary) subsequent to the Issue Date of any Indebtedness of the Company convertible or exchangeable for Capital Stock (other than Disqualified Stock) of the Company (less the amount of any cash or other property distributed by the Company upon such conversion or exchange); and (D) the amount equal to the net reduction in Investments in Unrestricted Subsidiaries resulting from (i) repayments of the principal of loans or advances or other transfers of assets to the Company or any Restricted Subsidiary from Unrestricted Subsidiaries or (ii) the redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the definition of "Investment") not to exceed, in the case of any Unrestricted Subsidiary, the amount of Investments previously made by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary, which amount was previously included in the calculation of the amount of Restricted Payments. (b) The provisions of the foregoing paragraph (a) will not prohibit: (i) any purchase, redemption, defeasance or other acquisition of Capital Stock of the Company or Subordinated Obligations made by exchange for, or out of the net proceeds of the substantially concurrent sale of, Capital Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary); PROVIDED, HOWEVER, that (A) such purchase, redemption, defeasance or other acquisition will be excluded in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above and 63 (B) the Net Cash Proceeds from such sale will be excluded from clause (3)(B) of paragraph (a) above; (ii) any purchase, redemption, defeasance or other acquisition of Subordinated Obligations made by exchange for, or out of the net proceeds of the substantially concurrent sale of, Subordinated Obligations of the Company; PROVIDED, HOWEVER, that (A) the principal amount of such new Indebtedness does not exceed the principal amount of the Subordinated Obligations being so redeemed, repurchased, acquired or retired for value (plus the amount of any premium required to be paid under the terms of the instrument governing the Subordinated Obligations being so redeemed, repurchased, acquired or retired and related expenses), (B) such new Indebtedness is subordinated to the Senior Notes at least to the same extent as such Subordinated Obligations so purchased, exchanged, redeemed, repurchased, acquired or retired for value, (C) such new Indebtedness has a final scheduled maturity date later than the final scheduled maturity date of the Senior Notes and (D) such new Indebtedness has an Average Life equal to or greater than the Average Life of the Senior Notes; provided further, however, that such purchase, redemption, defeasance or other acquisition will be excluded in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above; (iii) dividends paid within 60 days after the date of declaration thereof if at such date of declaration such dividend would have complied with this covenant; PROVIDED, HOWEVER, that the amount of such dividend will be included in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above; (iv) Investments in the form of Guarantees by the Company or any of its Restricted Subsidiaries of Indebtedness of an Unrestricted Subsidiary solely to the extent that the Company or any such Restricted Subsidiary would then be permitted to make an Investment in such Unrestricted Subsidiary pursuant to clause (3) of paragraph (a) above; provided that the amount of any such Investment will be included in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above; (v) the repurchase, redemption or other acquisition or retirement for value of any Capital Stock of the Company held by any member of the Company's management pursuant to employee benefit plans or agreements; provided that the aggregate price paid for all such Capital Stock shall not exceed $2 million in any 12-month period and $5 million in the aggregate; provided further that such amounts will be included in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above; and (vi) other Restricted Payments in an aggregate amount not to exceed $5 million; provided that such amounts will be included in the calculation of the amount of Restricted Payments pursuant to clause (3) of paragraph (a) above; provided, however, that at the time of, and after giving effect to, any Restricted Payment permitted by clauses (v) and (vi), no Default or Event of Default shall have occurred and be continuing. LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES. The Company will not, and will not permit any Restricted Subsidiary to, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (i) pay dividends or make any other distributions on its Capital Stock or pay any Indebtedness or other obligation owed to the Company, (ii) make any loans or advances to the Company or (iii) transfer any of its property or assets to the Company or any Restricted Subsidiary, except: (1) any encumbrance or restriction pursuant to an agreement in effect at or entered into on the Issue Date (including pursuant to the New Credit Facility); (2) any encumbrance or restriction with respect to a Restricted Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by such Restricted Subsidiary on or prior to the date on which such Restricted Subsidiary was acquired by the Company or a Restricted Subsidiary and outstanding on such date (other than Indebtedness Incurred in connection with, or in contemplation of, the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company or a Restricted Subsidiary); (3) any encumbrance or restriction pursuant to an agreement effecting a Refinancing of Indebtedness Incurred pursuant to an agreement referred to in clause (1) or (2) of this covenant or contained in any amendment to an agreement referred to in clause (1) or (2) of this covenant; PROVIDED, HOWEVER, that the encumbrances and restrictions contained in any such refinancing agreement or amendment are not materially less favorable to the Senior Noteholders than the encumbrances and restrictions contained in any such agreement as determined in good faith by the Company and evidenced by an Officers' Certificate; (4) in the case of clause (iii), any 64 encumbrance or restriction (A) that restricts in a customary manner the subletting, assignment or transfer of any property or asset that is subject to a lease, license or similar contract, (B) by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of the Company or any Restricted Subsidiary not otherwise prohibited by the Indenture or (C) contained in security agreements securing Indebtedness of a Restricted Subsidiary to the extent such encumbrance or restrictions restrict the transfer of the property subject to such security agreements; (5) any restriction with respect to a Restricted Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of all or substantially all the Capital Stock or assets of such Restricted Subsidiary pending the closing of such sale or disposition; (6) any encumbrance or restriction arising under or by reason of applicable law; (7) any encumbrance or restriction contained in the Indenture; (8) customary provisions in joint venture agreements relating solely to the securities, assets and revenues of such joint venture or other business venture; (9) any encumbrance or restriction applicable to secured Indebtedness otherwise permitted to be Incurred under the Indenture that limits the right of the debtor to dispose of the assets securing such Indebtedness; (10) customary net worth provisions contained in leases and other agreements entered into by a Restricted Subsidiary in the ordinary course of business; and (11) customary restrictions with respect to a Restricted Subsidiary pursuant to an agreement that has been entered into for the sale or other disposition of all of the Capital Stock or assets of such Restricted Subsidiary. LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) The Company will not, and will not permit any Restricted Subsidiary to, make any Asset Disposition unless (i) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Disposition at least equal to the fair market value, as determined in good faith by senior management for Asset Dispositions of less than $5 million and by the Board of Directors of the Company in good faith for Asset Dispositions of $5 million or more (including in each case as to the value of all non cash consideration), of the shares and assets subject to such Asset Disposition, (ii) at least 75% of the consideration thereof received by the Company or such Restricted Subsidiary is in the form of cash or Temporary Cash Investments and (iii) an amount equal to 100% of the Net Available Cash from such Asset Disposition is applied by the Company or such Restricted Subsidiary, as the case may be, (A) within 270 days from the receipt of such Net Available Cash to the extent the Company or any Restricted Subsidiary, as the case may be, elects (or is required by the terms of the New Credit Facility or any Senior Indebtedness), to prepay, repay, purchase or otherwise acquire Indebtedness under the New Credit Facility or other Senior Indebtedness or Indebtedness (other than Disqualified Stock) of a Wholly Owned Subsidiary (in each case other than Indebtedness owed to the Company or an Affiliate of the Company); (B) to the extent of any remaining balance of Net Available Cash after any election in accordance with clause (A), to the extent the Company or such Restricted Subsidiary, as the case may be, elects, to the investment by the Company or any Wholly Owned Subsidiary in Additional Assets within 360 days from the receipt of such Net Available Cash (except that the Company shall be deemed to have so invested such Net Available Cash within 360 days if, within such 360 days, it has entered into a binding commitment to invest such Net Available Cash and such Net Available Cash is actually invested within 90 days thereafter); (C) to the extent of any remaining balance of such Net Available Cash after any election in accordance with clauses (A) and (B), to make an Offer (as defined below) to purchase Senior Notes pursuant to and subject to the conditions set forth in paragraph (b) of this covenant within 45 days from the application of Net Available Cash in accordance with clauses (A) and (B); and (D) to the extent of any remaining balance of such Net Available Cash after election or application in accordance with clauses (A), (B) and (C), to (x) the acquisition by the Company or any Wholly Owned Subsidiary of Additional Assets, (y) the prepayment, repayment, purchase or other acquisition of Indebtedness of the Company (other than Indebtedness owed to an Affiliate of the Company and other than Disqualified Stock of the Company) or Indebtedness of any Restricted Subsidiary (other than Indebtedness owed to the Company or an Affiliate of the Company) or (z) general corporate purposes; PROVIDED, HOWEVER that in connection with any prepayment, repayment, purchase or other acquisition of Indebtedness pursuant to clause (A), (C) or (D) above, the Company or such Restricted Subsidiary will retire such Indebtedness and will cause any related loan commitment or availability (if any) to be permanently reduced in an amount 65 equal to the principal amount so prepaid, repaid, purchased or acquired, except that pending the final application of any such Net Available Cash, the Company or such Restricted Subsidiary may temporarily reduce Indebtedness under a revolving credit facility or otherwise invest such Net Available Cash in Temporary Cash Investments. Notwithstanding the foregoing provisions, the Company and its Restricted Subsidiaries shall not be required to apply any Net Available Cash in accordance herewith except to the extent that the aggregate Net Available Cash from all Asset Dispositions which are not applied in accordance with this covenant exceeds $5,000,000. The Company shall not be required to make an Offer for Senior Notes pursuant to this covenant if the Net Available Cash available therefor (after application of the proceeds as provided in clauses (A) and (B)) is less than $7,500,000 (which lesser amounts shall be carried forward for purposes of determining whether an Offer is required with respect to the Net Available Cash from subsequent Asset Dispositions). For the purposes of this covenant, the following are deemed to be cash: (x) the assumption by the transferee of Indebtedness of the Company or any Restricted Subsidiary (other than Indebtedness that is subordinated to the Senior Notes or the Subsidiary Guarantees) and the release of the Company or such Restricted Subsidiary from all liability on such Indebtedness in connection with such Asset Disposition, (y) securities received by the Company or any Restricted Subsidiary from the transferee that are promptly converted by the Company or such Restricted Subsidiary into cash and (z) Additional Assets received in an exchange of assets transaction; provided that (i) in the event such exchange of assets transaction or series of related exchange of assets transactions (each an "Exchange Transaction") involves an aggregate value in excess of $2,500,000, the terms of such Exchange Transaction shall have been approved by a majority of the disinterested members of the Board of Directors, (ii) in the event such Exchange Transaction involves an aggregate value in excess of $5,000,000, the Company shall have received a written opinion from a nationally recognized independent investment banking firm that the Company has received consideration equal to the fair market value of the assets disposed of and (iii) any assets to be received shall be comparable to those being exchanged as determined in good faith by the Board of Directors, except that up to $1,000,000 of consideration in any Exchange Transaction may consist of marketing and similar credits in lieu of comparable assets. (b) In the event of an Asset Disposition that requires the purchase of Senior Notes pursuant to clause (a)(iii)(C) of this covenant, the Company will be required to purchase Senior Notes tendered pursuant to an offer by the Company for the Senior Notes (the "Offer") at a purchase price of 100% of their principal amount plus accrued interest to the date of purchase in accordance with the procedures (including prorating in the event of oversubscription) set forth in the Indenture. If the aggregate purchase price of Senior Notes tendered pursuant to the Offer is less than the Net Available Cash allotted to the purchase of the Senior Notes, the Company will apply the remaining Net Available Cash in accordance with clause (a)(iii)(D) above. (c) The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Senior Notes pursuant to this covenant. To the extent that the provisions of any securities laws or regulations conflict with provisions of this covenant, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this covenant by virtue thereof. LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, enter into or conduct any transaction or series of transactions (including the purchase, sale, lease or exchange of any property, or rendering of any service) with any Affiliate of the Company (an "Affiliate Transaction") unless (i) the terms of such transaction are no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that could be obtained at the time of such transaction in arm's-length dealings with a Person who is not such an Affiliate; (ii) in the event such Affiliate Transaction involves an aggregate amount in excess of $2,500,000, the terms 66 of such transaction shall have been approved by a majority of the disinterested members of the Board of Directors (and such majority determines that such Affiliate Transaction satisfies the criteria in clause (i) above) and (iii) in the event such Affiliate Transaction involves an aggregate amount in excess of $5,000,000, the Company has received a written opinion from a nationally recognized independent investment banking firm that such Affiliate Transaction is fair to the Company from a financial point of view. (b) The foregoing shall not apply to (i) any Restricted Payment permitted to be made pursuant to "Limitation on Restricted Payments," (ii) any issuance of securities, or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment arrangements, stock options and stock ownership plans approved by the Board of Directors, (iii) any fees, indemnities, loans or advances to employees in the ordinary course of business, (iv) any transaction between the Company and a Restricted Subsidiary or between Restricted Subsidiaries, (v) transactions with suppliers or other purchasers of goods and services (including, without limitation, pursuant to joint venture agreements and franchise agreements) and (vi) any agreement in effect on the Issue Date or any amendment thereto or transaction contemplated thereby (and any replacement or amendment of any such agreement so long as any such amendment or replacement thereof is not materially less favorable to the Holders than the original agreement in effect on the Issue Date). LIMITATION ON LIENS. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or permit to exist any Lien on any of its property or assets (including Capital Stock), whether owned on the Issue Date or thereafter acquired, securing any obligation, other than Permitted Liens, unless contemporaneously therewith effective provision is made to secure the Senior Notes equally and ratably with (or on a senior basis to, in the case of Subordinated Obligations) such obligation for so long as such obligation is so secured by a Lien on property or assets of the Company or a Restricted Subsidiary. LIMITATION ON SALES OF SUBSIDIARY CAPITAL STOCK. The Company (i) will not, and will not permit any Restricted Subsidiary of the Company to, transfer, convey, sell, lease or otherwise dispose of any Capital Stock of any Restricted Subsidiary to any Person (other than to the Company or a Wholly Owned Subsidiary) and (ii) will not permit any Restricted Subsidiary to issue any of its Capital Stock (other than, if necessary, shares of its Capital Stock constituting directors' qualifying shares) to any Person other than to the Company or a Wholly Owned Subsidiary, unless (a) after any such transfer, conveyance, sale, lease, disposition or issuance, such Subsidiary constitutes a Restricted Subsidiary and (b) the net cash proceeds from such transfer, conveyance, sale, lease or other disposition are applied in accordance with the covenant described above under "Limitation on Sales of Assets and Subsidiary Stock;" provided, however, that this provision shall not prohibit the transfer, conveyance, sale, lease or other disposition of all of the Capital Stock of any Restricted Subsidiary. SEC REPORTS. Notwithstanding that the Company may not be required to remain subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company will file with the SEC and provide the Trustee and Senior Noteholders with the annual reports and such information, documents and other reports which are specified in Sections 13 and 15(d) of the Exchange Act. The Company also will comply with the other provisions of TIA Section 314(a). FUTURE GUARANTORS. The Company shall cause each new Subsidiary (other than (i) a new Subsidiary designated as an Unrestricted Subsidiary and (ii) Foreign Subsidiaries) to become a Subsidiary Guarantor under the Indenture and thereby Guarantee the Senior Notes on the terms and conditions set forth in the Indenture. 67 MERGER AND CONSOLIDATION The Company will not consolidate with or merge with or into, or convey, transfer or lease all or substantially all its assets to, any Person, unless: (i) the resulting, surviving or transferee Person (the "Successor Company") will be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia and the Successor Company (if not the Company) will expressly assume, by supplemental indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Senior Notes and the Indenture; (ii) immediately after giving pro forma effect to such transaction (and treating any Indebtedness which becomes an obligation of the Successor Company or any Restricted Subsidiary as a result of such transaction as having been Incurred by the Successor Company or such Restricted Subsidiary at the time of such transaction), no Default or Event of Default will have occurred and be continuing; (iii) immediately after giving pro forma effect to such transaction, the Successor Company would be able to Incur an additional $1.00 of Indebtedness under paragraph (a) of the covenant described under "-- Limitation on Indebtedness and Preferred Stock;" (iv) immediately after giving effect to such transaction, the Successor Company will have a Consolidated Net Worth in an amount which is not less than the Consolidated Net Worth of the Company immediately prior to such transaction; and (v) the Company will have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger or transfer and such supplemental indenture (if any) comply with the Indenture, as set forth in the Indenture. The Successor Company will succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture, but the predecessor Company in the case of a lease of all its assets or a conveyance, transfer or lease of substantially all its assets will not be released from the obligation to pay the principal of and interest on the Senior Notes. DEFAULTS An Event of Default is defined in the Indenture as (i) a default in any payment of interest on any Senior Note when due, continued for 30 days, (ii) a default in the payment of principal of any Senior Note when due at its Stated Maturity, upon optional redemption, upon required repurchase, upon declaration or otherwise, (iii) the failure by the Company to comply with its obligations under "-- Merger and Consolidation," (iv) the failure by the Company to comply for 30 days after notice with any of its obligations under the covenants described under "-- Change of Control" or "-- Certain Covenants" (in each case, other than a failure to purchase Senior Notes), (v) the failure by the Company to comply for 60 days after notice with its other agreements contained in the Indenture, (vi) the failure by the Company or any Significant Subsidiary of the Company to pay any Indebtedness within any applicable grace period after final maturity or the acceleration of any such Indebtedness by the holders thereof because of a default and the total amount of such Indebtedness unpaid or accelerated exceeds $10 million or its foreign currency equivalent (the "cross acceleration provision"), (vii) certain events of bankruptcy, insolvency or reorganization of the Company or any Significant Subsidiary of the Company (the "bankruptcy provisions"), (viii) any judgment or decree for the payment of money in excess of $10 million is rendered against the Company or any Significant Subsidiary of the Company and such judgment or decree remains outstanding for a period of 60 days following such judgment and is not discharged, waived or stayed (the "judgment default provision") or (ix) a Subsidiary Guaranty ceases to be in full force and effect (other than in accordance with the terms thereof) or a Subsidiary Guarantor denies or disaffirms its obligations under its Subsidiary Guaranty. The foregoing will constitute Events of Default whatever the reason for any such Event of Default and whether it is voluntary or involuntary or is effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body. 68 However, a default under clauses (iv) or (v) will not constitute an Event of Default until the Trustee or the Holders of 25% in aggregate principal amount of the outstanding Senior Notes notify the Company as provided in the Indenture of the default and the Company does not cure such default within the time specified in clauses (iv) and (v) hereof after receipt of such notice. If an Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of the outstanding Senior Notes by notice to the Company may declare the principal of and accrued but unpaid interest on all the Senior Notes to be due and payable. Upon such a declaration, such principal and interest will be due and payable immediately. 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 without any declaration or other act on the part of the Trustee or any Holders. 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. Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default occurs and is continuing, the Trustee will be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the Holders unless such Holders shall have offered to the Trustee reasonable indemnity or security against any loss, liability or expense. Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no Holder may pursue any remedy with respect to the Indenture or the Senior Notes unless (i) such Holder shall have previously given the Trustee notice that an Event of Default is continuing, (ii) Holders of at least 25% in aggregate principal amount of the outstanding Senior Notes shall have requested the Trustee to pursue the remedy, (iii) such Holders shall have offered the Trustee reasonable security or indemnity against any loss, liability or expense, (iv) the Trustee shall not have complied with such request within 60 days after the receipt of the request and the offer of security or indemnity and (v) the Holders of a majority in principal amount of the outstanding Senior Notes shall not have given the Trustee a direction inconsistent with such request within such 60-day period. Subject to certain restrictions, the Holders of a majority in principal amount of the outstanding Senior Notes are given the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or the Indenture or that the Trustee determines is unduly prejudicial to the rights of any other Holder or that would involve the Trustee in personal liability. Prior to taking any action under the Indenture, the Trustee will be entitled to indemnification satisfactory to it in its sole discretion against all losses and expenses caused by taking or not taking such action. The Indenture provides that if a Default occurs and is continuing and is known to the Trustee, the Trustee must mail to each Holder notice of the Default within the earlier of 90 days after it occurs or 30 days after it is known to a Trust Officer or written notice of it is received by the Trustee. Except in the case of a Default in the payment of principal of, premium (if any) or interest on any Senior Note, the Trustee may withhold notice if and so long as a committee of its Trust Officers in good faith determines that withholding notice is in the interests of the Senior Noteholders. In addition, the Company is required to deliver to the Trustee, within 120 days after the end of each fiscal year, a certificate indicating whether the signers thereof know of any Default that occurred during the previous year. The Company also is required to deliver to the Trustee, within 30 days after the occurrence thereof, written notice of any event which would constitute certain Defaults, their status and what action the Company is taking or proposes to take in respect thereof. AMENDMENTS AND WAIVERS Subject to certain exceptions, the Indenture may be amended with the consent of the Holders of a majority in principal amount of the Senior Notes then outstanding and any past default or compliance with 69 any provisions may be waived with the consent of the Holders of a majority in principal amount of the Senior Notes then outstanding. However, without the consent of each Holder of an outstanding Senior Note affected, no amendment may, among other things, (i) reduce the amount of Senior Notes whose Holders must consent to an amendment, (ii) reduce the rate of or extend the time for payment of interest on any Senior Note, (iii) reduce the principal of or extend the Stated Maturity of any Senior Note, (iv) reduce the premium payable upon the redemption of any Senior Note or change the time at which any Senior Note may be redeemed as described under "-- Optional Redemption," (v) make any Senior Note payable in money other than that stated in the Senior Note, (vi) impair the right of any Holder to receive payment of principal of and interest on such Holder's Senior Notes on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such Holder's Senior Notes or (vii) make any change in the amendment provisions which require each Holder's consent or in the waiver provisions. Without the consent of any Holder, the Company and the Trustee may amend the Indenture to cure any ambiguity, omission, defect or inconsistency, to provide for the assumption by a successor corporation of the obligations the Company under the Indenture, to provide for uncertificated Senior Notes in addition to or in place of certificated Senior Notes (provided that the uncertificated Senior Notes are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated Senior Notes are as described in Section 163(f)(2)(B) of the Code), to add additional Guarantees with respect to the Senior Notes, to secure the Senior Notes, to add to the covenants of the Company for the benefit of the Senior Noteholders or to surrender any right or power conferred upon the Company, to make any change that does not adversely affect the rights of any Holder and to comply with any requirement of the SEC in connection with the qualification of the Indenture under the TIA. The consent of the Senior Noteholders is not necessary under the Indenture to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment. After an amendment under the Indenture becomes effective, the Company is required to mail to Senior Noteholders a notice briefly describing such amendment. However, the failure to give such notice to all Senior Noteholders, or any defect therein, will not impair or affect the validity of the amendment. TRANSFER AND EXCHANGE A Senior Noteholder may transfer or exchange Senior Notes in accordance with the Indenture. Upon any transfer or exchange, the registrar and the Trustee may require a Senior Noteholder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Senior Noteholder to pay any taxes required by law or permitted by the Indenture, including any transfer tax or other similar governmental charge payable in connection therewith. The Company is not required to transfer or exchange any Senior Note selected for redemption or to transfer or exchange any Senior Note for a period of 15 days prior to a selection of Senior Notes to be redeemed. The Senior Notes will be issued in registered form and the registered holder of a Senior Note will be treated as the owner of such Senior Note for all purposes. DEFEASANCE The Company at any time may terminate all its obligations under the Senior Notes and the Indenture ("legal defeasance"), except for certain obligations, including those with respect to the defeasance trust and obligations to register the transfer or exchange of the Senior Notes, to replace mutilated, destroyed, lost or stolen Senior Notes and to maintain a registrar and paying agent in respect of the Senior Notes. The Company at any time may terminate its obligations under the covenants described under "Certain Covenants," the operation of the cross acceleration provision, the bankruptcy provisions with respect to 70 Significant Subsidiaries and the judgment default provision described under "-- Defaults" and the limitations contained in clauses (iii) and (iv) under "-- Merger and Consolidation" ("covenant defeasance"). The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Company exercises its legal defeasance option, payment of the Senior Notes may not be accelerated because of an Event of Default with respect thereto. If the Company exercises its covenant defeasance option, payment of the Senior Notes may not be accelerated because of an Event of Default specified in clause (iv), (v), (vi), (vii) (with respect only to Significant Subsidiaries) or (viii) under "-- Defaults" above or because of the failure of the Company to comply with clause (iii) or (iv) under "-- Merger and Consolidation." In order to exercise either defeasance option, the Company must irrevocably deposit or cause to be deposited in trust (the "defeasance trust") with the Trustee money or U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide cash at such times and in such amounts as will be sufficient to pay principal and interest when due on all the Senior Notes (except lost, stolen or destroyed Senior Notes which have been replaced or repaid) to maturity or redemption, as the case may be, and must comply with certain other conditions, including delivery to the Trustee of an Opinion of Counsel to the effect that holders of the Senior Notes will not recognize income, gain or loss for federal income tax purposes as a result of such deposit and defeasance and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred (and, in the case of legal defeasance only, such Opinion of Counsel must be based on a ruling of the Internal Revenue Service or other change in applicable federal income tax law). CONCERNING THE TRUSTEE The Bank of New York is to be the Trustee under the Indenture and has been appointed by the Company as Registrar and Paying Agent with regard to the Senior Notes. GOVERNING LAW The Indenture provides that it and the Senior Notes will be governed by, and construed in accordance with, the laws of the State of New York without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby. CERTAIN DEFINITIONS "Acquired Indebtedness" of any specified Person means Indebtedness of any other Person existing at the time such other Person is merged with or into or becomes a Restricted Subsidiary of such specified Person, including Indebtedness Incurred in connection with, or in contemplation of, such other Person's becoming a Restricted Subsidiary of such specified Person. "Additional Assets" means (i) any property or assets (other than Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary; or (iii) Capital Stock constituting a minority interest in any Person that at such time is a Restricted Subsidiary; PROVIDED, HOWEVER, that, in the case of clauses (ii) and (iii), such Restricted Subsidiary is primarily engaged in a Related Business. "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of 71 this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of the covenants in the Indenture, "Affiliate" shall also mean any beneficial owner of shares representing 10% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Voting Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof; provided that Donald N. Smith shall be deemed to be an "Affiliate" so long as he is the beneficial owner of shares representing 5% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Voting Stock (whether or not currently exercisable). "Asset Disposition" means any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) of shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares), property or other assets (including sales and other dispositions of tangible assets to franchisees and licensees and tangible assets at underperforming restaurants, but excluding sales, dispositions or licenses of trademarks, service marks, tradenames and other intangibles), including by way of a Sale/Leaseback Transaction (each referred to for the purposes of this definition as a "disposition"), by the Company or any of its Restricted Subsidiaries (including any disposition by means of a merger, consolidation or similar transaction) other than (i) a disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary, (ii) a disposition of property or assets in the ordinary course of business, (iii) dispositions of inventory in the ordinary course of business, (iv) for purposes of the "Limitation on Sales of Assets and Subsidiary Stock" covenant only, a disposition that constitutes a Restricted Payment permitted by the "Limitation on Restricted Payments" covenant, (v) the sale, lease, transfer or other disposition of all or substantially all the assets of the Company as permitted under the covenant "Merger and Consolidation", (vi) the grant of Liens permitted by the covenant "Limitation on Liens" and (vii) sales of obsolete or worn-out equipment. "Average Life" means, as of the date of determination, with respect to any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum of the product of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness or redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by (ii) the sum of all such payments. "Board of Directors" means the Board of Directors or equivalent governing body of a Person (or the general partner of such Person, as the case may be) or any committee thereof duly authorized to act on behalf of such Board or equivalent governing body. "Business Day" means a day other than a Saturday, Sunday or other day on which banking institutions in New York State are authorized or required by law to close. "Capitalized Lease Obligation" of a Person means an obligation of such Person that is required to be classified and accounted for on the balance sheet of such Person as a capitalized lease for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participation or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity. "Code" means the Internal Revenue Code of 1986, as amended. 72 "Commodity Agreement" means any commodity swap agreement, commodity future agreement, commodity hedge agreement or other similar agreement relating to commodities, in each case relating to those commodities used in the ordinary course of business of the Company and its Subsidiaries. "Common Stock Offering" means the offering to the public by the Company of 5,000,000 shares of its Common Stock concurrently with the offering of the Senior Notes, including any offering of shares pursuant to over-allotment options. "Consolidated Coverage Ratio" as of any date of determination means the ratio of (i) the aggregate amount of EBITDA for the period of the most recent four consecutive fiscal quarters for which internal financial information is available ending at least 45 days prior to the date of such determination to (ii) Consolidated Interest Expense for such four fiscal quarters; provided, however, that (1) if the Company or any Restricted Subsidiary has Incurred any Indebtedness since the beginning of such period that remains outstanding or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the first day of such period and the discharge of any other Indebtedness repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Indebtedness as if such discharge had occurred on the first day of such period, (2) if since the beginning of such period the Company or any Restricted Subsidiary shall have made any Asset Disposition or if the transaction giving rise to the need to calculate the Consolidated Coverage Ratio is an Asset Disposition, the EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the assets which are the subject of such Asset Disposition for such period, or increased by an amount equal to the EBITDA (if negative) directly attributable thereto for such period and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Company and its continuing Restricted Subsidiaries in connection with such Asset Disposition for such period (or, if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense for such period directly attributable to the Indebtedness of such Restricted Subsidiary to the extent the Company and its continuing Restricted Subsidiaries are no longer liable for such Indebtedness after such sale), (3) if since the beginning of such period the Company or any Restricted Subsidiary (by merger or otherwise) shall have made an Investment in any Restricted Subsidiary (or any Person which becomes a Restricted Subsidiary) or an acquisition of assets, including any acquisition of assets occurring in connection with a transaction causing a calculation to be made hereunder, which constitutes all or substantially all of an operating unit of a business, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence or retirement of any Indebtedness) as if such Investment or acquisition occurred on the first day of such period and (4) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Disposition or any Investment that would have required an adjustment pursuant to clause (2) or (3) above if made by the Company or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Disposition or Investment occurred on the first day of such period. For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness Incurred in connection therewith, the pro forma calculations shall be determined in good faith by a responsible financial or accounting officer of the Company. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest expense on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Indebtedness). 73 "Consolidated Interest Expense" means, for any period, the total interest expense of the Company and its consolidated Restricted Subsidiaries, plus, to the extent not included in such interest expense, (i) interest expense attributable to capital leases, (ii) amortization of debt discount and debt issuance cost, (iii) capitalized interest, (iv) non-cash interest expense, (v) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (vi) interest actually paid by the Company or any such Restricted Subsidiary under any Guarantee of Indebtedness or other obligation of any other Person, (vii) Preferred Stock dividends in respect of all Preferred Stock of the Company and its Subsidiaries held by Persons other than the Company or a Wholly Owned Subsidiary and (viii) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Company) in connection with Indebtedness Incurred by such plan or trust; PROVIDED, HOWEVER, that there shall be excluded therefrom any such interest expense of any Unrestricted Subsidiary to the extent the related Indebtedness is not Guaranteed or paid by the Company or any Restricted Subsidiary. "Consolidated Net Income" means, for any period, the net income (loss) of the Company and its consolidated Subsidiaries; PROVIDED, HOWEVER, that there shall not be included in such Consolidated Net Income: (i) any net income (loss) of any Person (other than the Company) if such Person is not a Restricted Subsidiary, except that (A), subject to the limitations contained in clause (iv) below, the Company's equity in the net income of any such Person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend or other distribution paid to a Restricted Subsidiary, to the limitations contained in clause (iii) below) and (B) the Company's equity in a net loss of any such Person (other than an Unrestricted Subsidiary) for such period shall be included in determining such Consolidated Net Income, (ii) any net income (but not loss) of any Person acquired by the Company or a Subsidiary in a pooling of interests transaction for any period prior to the date of such acquisition, (iii) any net income of any Restricted Subsidiary if such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions by such Restricted Subsidiary, directly or indirectly, to the Company, except that (A), subject to the exclusion contained in clause (iv) below, the Company's equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Restricted Subsidiary during such period to the Company or another Restricted Subsidiary as a dividend or other distribution (subject, in the case of a dividend paid to another Restricted Subsidiary, to the limitation contained in this clause) and (B) the Company's equity in a net loss of any such Restricted Subsidiary for such period shall be included in determining such Consolidated Net Income, (iv) any gain (but not loss) realized upon the sale or other disposition of any property, plant or equipment of the Company or its consolidated Subsidiaries (including pursuant to any Sale/Leaseback Transaction) which is not sold or otherwise disposed of in the ordinary course of business and any gain (but not loss) realized upon the sale or other disposition of any Capital Stock of any Person, (v) any extraordinary gain or loss, (vi) the cumulative effect of a change in accounting principles, (vii) foreign currency exchange gains and losses, and (xiii) any income (loss) from discontinued operations. 74 Notwithstanding the foregoing, for the purpose of the covenant described under "Certain Covenants--Limitation on Restricted Payments" only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted under such covenant pursuant to clause (a)(3)(D) thereof. "Consolidated Net Worth" means the total of the amounts shown on the balance sheet of the Company and its Restricted Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of the end of the most recent fiscal quarter of the Company ending at least 45 days prior to the taking of any action for the purpose of which the determination is being made, as (i) the par or stated value of all outstanding Capital Stock of the Company plus (ii) paid-in capital or capital surplus relating to such Capital Stock plus (iii) any retained earnings or earned surplus less (A) any accumulated deficit and (B) any amounts attributable to Disqualified Stock. "Currency Agreement" means in respect of a Person any foreign exchange contract, currency swap agreement or other similar agreement as to which such Person is a party or a beneficiary. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Disqualified Stock" means, with respect to any Person, any Capital Stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable) or upon the happening of any event (i) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or Disqualified Stock or (iii) is redeemable at the option of the holder thereof, in whole or in part, in each case on or prior to the Stated Maturity of the Senior Notes. "EBITDA" for any period means the Consolidated Net Income for such period, plus the following to the extent deducted in calculating such Consolidated Net Income: (i) income tax expense, (ii) Consolidated Interest Expense, (iii) depreciation expense, (iv) amortization expense and (v) non-cash charges, in each case for such period. Notwithstanding the foregoing, the income tax expense, depreciation expense and amortization expense of a Restricted Subsidiary of the Company shall be included in EBITDA only to the extent (and in the same proportion) that the net income of such Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be distributable to the Company by such Subsidiary as a dividend. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Foreign Subsidiary" means any Subsidiary which is incorporated or otherwise organized under the laws of any jurisdiction other than the United States of America, any state thereof or the District of Columbia. "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the date of the Indenture, including those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. All ratios and computations based on GAAP contained in the Indenture shall be computed in conformity with GAAP. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or 75 services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hedging Obligations" of any Person means the obligations of such Person to a counterparty (net of amounts receivable from such counterparty) pursuant to any Interest Rate Agreement, or Currency Agreement or Commodity Agreement. "Holder" or "Senior Noteholder" means the Person in whose name a Senior Note is registered on the Registrar's books. "Incur" means issue, assume, Guarantee, incur or otherwise become liable for; provided, however, that any Indebtedness or Disqualified Stock of a Person existing at the time such Person becomes a Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be incurred by such Subsidiary at the time it becomes a Subsidiary. "Indebtedness" means, with respect to any Person on any date of determination (without duplication), (i) the principal of and premium (if any) in respect of indebtedness of such Person for borrowed money, (ii) the principal of and premium (if any) in respect of obligations of such Person evidenced by bonds, debentures, Senior Notes or other similar instruments, (iii) all obligations of such Person in respect of unreimbursed drawings under letters of credit or other similar instruments (including reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred and unpaid purchase price of property or services (except Trade Payables and accrued expenses), which purchase price is due more that six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, (v) all Capitalized Lease Obligations of such Person, (vi) the amount of all non-contingent obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Restricted Subsidiary that is not a Subsidiary Guarantor, any Preferred Stock (but excluding, in each case, any accrued dividends), (vii) all Indebtedness of other Persons secured by a Lien on any asset of such Person, whether or not such Indebtedness is assumed by such Person; PROVIDED, HOWEVER, that the amount of such Indebtedness shall be the lesser of (A) the fair market value of such asset at such date of determination and (B) the amount of such Indebtedness of such other Person, (viii) all Indebtedness of other Persons to the extent Guaranteed by such Person, (ix) to the extent not otherwise included in this definition, Hedging Obligations and, (x) Acquired Indebtedness. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date. 76 "Interest Rate Agreement" means with respect to any Person any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement as to which such Person is party or a beneficiary. "Investment" in any Person means any direct or indirect advance, loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of such Person) or other extension of credit (including by way of Guarantee or similar arrangement) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by such Person. For purposes of the definition of "Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant, (i) "Investment" shall include the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary in an amount (if positive) equal to (x) the Company's "Investment" in such Subsidiary at the time of such redesignation less (y) the portion (proportionate to the Company's equity interest in such Subsidiary) of the fair market value of the net assets of such Subsidiary at the time that such Subsidiary is so re-designated a Restricted Subsidiary; and (ii) any property transferred to or from an Unrestricted Subsidiary shall be valued at its fair market value at the time of such transfer, in each case as determined in good faith by the Board of Directors and evidenced by a resolution of such Board of Directors certified in an Officers' Certificate to the Trustee. For the purposes of calculating the amount of other "Investments," including Permitted Investments, the amount of any Investment shall be the original cost of such Investment plus the cost of all additional Investments by the Company or any of its Restricted Subsidiaries, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment, reduced by the payment of dividends or distributions in connection with such Investment or any other amounts received in respect of such Investment; provided that no such payment of dividends or distributions or receipt of any such other amounts shall reduce the amount of any Investment if such payment of dividends or distributions or receipt of any such amounts would be included in Consolidated Net Income. "Issue Date" means the date on which the Senior Notes are originally issued. "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof). "Net Available Cash" from an Asset Disposition means cash payments received (including any cash payments received by way of deferred payment of principal pursuant to a Senior Note or installment receivable or otherwise, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Indebtedness or other obligations relating to such properties or assets or received in any other non cash form) therefrom, in each case net of (i) all legal, accounting, investment banking, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be paid or accrued as a liability under GAAP, as a consequence of such Asset Disposition, (ii) all payments made on any Indebtedness which is secured by any assets subject to such Asset Disposition, in accordance with the terms of any Lien upon such assets, or which must by its terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable law be repaid out of the proceeds from such Asset Disposition, (iii) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Disposition and (iv) the deduction of appropriate amounts to be provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the 77 assets disposed of in such Asset Disposition and retained by the Company or any Restricted Subsidiary after such Asset Disposition. "Net Cash Proceeds", with respect to any issuance or sale of Capital Stock, means the cash proceeds of such issuance or sale net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "New Credit Facility" means that certain credit facility to be entered into on the Issue Date among the Company, Societe Generale, and the lenders from time to time party thereto, including any collateral documents, instruments and agreements executed in connection therewith, and the term New Credit Facility shall also include any amendments, supplements, modifications, extensions, renewals, restatements or refundings thereof and any credit facilities that replace, refund or refinance any part of the loans, other credit facilities or commitments thereunder, including any such replacement, refunding or refinancing facility that increases the amount borrowable thereunder or alters the maturity thereof. "Non-Recourse Debt" means Indebtedness (i) as to which neither the Company nor any Restricted Subsidiary (a) provides any Guarantee or credit support of any kind (including any undertaking, Guarantee, indemnity, agreement or instrument that would constitute Indebtedness) or (b) is directly or indirectly liable (as a guarantor or otherwise) and (ii) no default with respect to which (including any rights that the holders thereof may have to take enforcement action against an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Indebtedness of the Company or any Restricted Subsidiary to declare a default under such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its stated maturity. "Permitted Holders" means Donald N. Smith, The Equitable Life Assurance Society of the U.S., the Company's existing senior management and their respective Affiliates. "Permitted Investment" means an Investment by the Company or any Restricted Subsidiary in (i) the Company, or a Restricted Subsidiary or a Person which will, upon the making of such Investment, become a Restricted Subsidiary; PROVIDED, HOWEVER, that the primary business of such Restricted Subsidiary is a Related Business; (ii) another Person if as a result of such Investment such other Person is merged or consolidated with or into, or transfers or conveys all or substantially all its assets to, the Company or a Restricted Subsidiary; provided, however, that such Person's primary business is a Related Business; (iii) Temporary Cash Investments; (iv) accounts and receivables owing to the Company or any Restricted Subsidiary, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; PROVIDED, HOWEVER, that such trade terms may include such concessionary trade terms as the Company or any such Restricted Subsidiary deems reasonable under the circumstances; (v) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (vi) loans or advances to employees made in the ordinary course of business; (vii) stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Company or any Restricted Subsidiary or in satisfaction of judgments and which are readily convertible into cash in U.S. dollars in an amount equal to the fair market value thereof as determined in good faith by the Board of Directors; (viii) franchisees of the Company in an amount at any one time outstanding not to exceed $10 million; (ix) Unrestricted Subsidiaries in an aggregate amount at any one time outstanding not to exceed $10 million; (x) Guarantees permitted to be made pursuant to the covenant "Limitation on Indebtedness and Preferred Stock"; (xi) securities of account debtors received in settlement of obligations or pursuant to any plan of reorganization or similar arrangement upon the bankruptcy of insolvency of any account debtors or customers, (xii) Currency Agreements, Interest Rate Agreements and Commodity Agreements entered into in the ordinary course of business; provided that such agreements are entered into for bona fide hedging purposes, are not for speculation or trading purposes and are designed to protect against fluctuations in interest rates, currency exchange rates or 78 commodity prices, as the case may be, and, in the case of Interest Rate Agreements, any such Interest Rate Agreement has a notional amount corresponding to the Indebtedness being hedged thereby, (xiii) accounts and notes receivable from franchisees, customers, suppliers and others in the ordinary course of business, (xiv) connection with an Asset Disposition made in compliance with the covenant "Limitation on Sales of Assets and Subsidiary Stock" and (xv) Friendly's International, Inc. or its United Kingdom subsidiaries represented by the transfer by the Company of the Company's interests in Shanghai Friendly Food Co., Ltd. "Permitted Liens" means, with respect to any Person, (a) pledges or deposits by such Person under workmen's compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Indebtedness) or leases to which such Person is a party, or deposits to secure public or statutory obligations of such Person or deposits or cash or United States government bonds to secure surety or appeal bonds to which such Person is a party, or deposits as security for contested taxes or import duties or for the payment of rent, in each case incurred in the ordinary course of business; (b) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens, in each case for sums not yet due or being contested in good faith by appropriate proceedings or other Liens arising out of judgments or awards against such Person with respect to which such Person shall then be proceeding with an appeal or other proceedings for review; (c) Liens for taxes, assessments, governmental charges or claims not yet subject to penalties for non-payment or which are being contested in good faith by appropriate proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit issued pursuant to the request of and for the account of such Person, and Liens to secure bankers' acceptances, in each case in the ordinary course of its business; (e) survey exceptions, encumbrances, easements or reservations of, or rights of others for, licenses, rights of way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of real properties or Liens incidental to the conduct of the business of such Person or to the ownership of its properties which were not incurred in connection with Indebtedness and which do not in the aggregate materially adversely affect the value of said properties or materially impair their use in the operation of the business of such Person; (f) Liens (A) securing obligations under Interest Rate Agreements so long as the related Indebtedness is, and is permitted to be under the Indenture, secured by a Lien on the same property securing such obligations and (B) securing obligations under Currency Agreements and Commodity Agreements, provided that such Liens shall not encumber any assets or property of the Company other than the underlying contracts and the rights thereunder; (g) Liens existing as of the date on which the Senior Notes are originally issued and Liens created by the Indenture; (h) Liens created solely for the purpose of securing the payment of all or a part of the purchase price of assets or property acquired or constructed in the ordinary course of business after the date on which the Senior Notes are originally issued; PROVIDED, HOWEVER, that (A) the aggregate principal amount of Indebtedness secured by such Liens shall not exceed the cost of the assets or property so acquired or constructed, (B) the Indebtedness secured by such Liens shall have otherwise been permitted to be issued under the Indenture and (C) such Liens shall not encumber any other assets or property of the Company or any of its Restricted Subsidiaries and shall attach to such assets or property within 90 days of the construction or acquisition of such assets or property; (i) Liens on the assets or property of a Restricted Subsidiary of the Company existing at the time such Restricted Subsidiary became a Subsidiary of the Company and not incurred as a result of (or in connection with or in anticipation of) such Restricted Subsidiary becoming a Subsidiary of the Company; PROVIDED, HOWEVER, that (A) any such Lien does not by its terms cover any categories of property or assets after the time such Restricted Subsidiary becomes a Subsidiary which were not covered immediately prior to such transaction, (B) the incurrence of the Indebtedness secured by such Lien shall have otherwise been permitted to be issued under the Indenture, and (C) such Liens do not extend to or cover any other categories of property or assets of the Company or any of its Restricted Subsidiaries; (j) Liens to secure Capitalized Lease Obligations permitted to be Incurred under the Indenture; (k) Liens securing Indebtedness outstanding under the New Credit Facility (including, without limitation, any Refinancing Indebtedness in respect thereof to the extent permitted under the covenant "Limitation on Indebtedness and 79 Preferred Stock"); (l) any interest or title of a lessor under any lease, whether or not characterized as an operating or capital lease; (m) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual or warranty requirements of the Company or any Restricted Subsidiary, including rights of set-off; (n) leases or subleases granted in the ordinary course of business; (o) Liens arising out of consignment or similar arrangements for the sale of goods; (p) rights of set-off arising under law by banks; (q) Liens in addition to the foregoing incurred in the ordinary course of business which are not incurred in connection with the borrowing of money or the obtaining of advances of credit; provided that the amount of the obligations of the Company and its Restricted Subsidiaries secured by such Liens does not exceed in the aggregate $2 million at any one time outstanding; and (r) Liens extending, renewing or replacing in whole or in part a Lien permitted by the Indenture; provided, however, that (A) such Liens do not extend beyond the property subject to the existing Lien and improvements and construction on such property and (B) the Indebtedness secured by the Lien may not exceed the Indebtedness secured at the time by the existing Lien. "Person" means any individual, corporation, partnership joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock", as applied to the Capital Stock of any corporation, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such corporation, over shares of Capital Stock of any other class of such corporation. "Qualified Equity Offering" means (i) an underwritten primary public offering (other than the Common Stock Offering) of common stock of the Company pursuant to an effective registration statement under the Securities Act or (ii) a private offering of common stock other than issuances of common stock pursuant to employee benefit plans or as compensation to employees. "Refinancing Indebtedness" means Indebtedness that refunds, refinances, replaces, renews, repays or extends (including pursuant to any defeasance or discharge mechanism) (collectively, "refinances," and "refinanced" shall have a correlative meaning) any Indebtedness existing on the date of the Indenture or Incurred in compliance with the Indenture (including Indebtedness of the Company that refinances Indebtedness of any Restricted Subsidiary and Indebtedness of any Restricted Subsidiary that refinances Indebtedness of another Restricted Subsidiary) including Indebtedness that refinances other Refinancing Indebtedness; provided, however, that (i) the Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being refinanced, (ii) the Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is Incurred that is equal to or greater than the Average Life of the Indebtedness being refinanced and (iii) such Refinancing Indebtedness is Incurred in an aggregate principal amount (or if issued with original issue discount, an aggregate issue price) that is equal to or less than the sum of the aggregate principal amount (or if issued with original issue discount, the aggregate accreted value) then outstanding of the Indebtedness being refinanced; provided further, however, that Refinancing Indebtedness shall not include (x) Indebtedness of a Restricted Subsidiary that refinances Indebtedness of the Company or (y) Indebtedness of the Company or a Restricted Subsidiary that refinances Indebtedness of an Unrestricted Subsidiary (unless such Unrestricted Subsidiary is concurrently redesignated a Restricted Subsidiary). "Related Business" means the businesses of the Company and the Restricted Subsidiaries on the date of the Indenture and any business related, ancillary or complementary thereto, in each case as determined by the Company in good faith. "Restricted Subsidiary" means any Subsidiary of the Company other than an Unrestricted Subsidiary. 80 "RIC" means Restaurant Insurance Corporation, the Company's insurance Subsidiary, and its successors. "Sale/Leaseback Transaction" means an arrangement relating to property now owned or hereafter acquired whereby the Company or a Restricted Subsidiary transfers such property to a Person and the Company or a Restricted Subsidiary leases it from such Person. "SEC" means the U.S. Securities and Exchange Commission. "Secured Indebtedness" means any Indebtedness of the Company secured by a Lien. "Senior Indebtedness" means all Indebtedness of the Company including interest thereon, whether outstanding on the Issue Date or thereafter Incurred, unless in the instrument creating or evidencing the same or pursuant to which the same is outstanding it is provided that such obligations are subordinated in right of payment to the Senior Notes; PROVIDED, HOWEVER, that Senior Indebtedness shall not include (1) any obligation of the Company to any Subsidiary, (2) any liability for Federal, state, local or other taxes owed or owing by the Company, (3) any accounts payable or other liability to trade creditors arising in the ordinary course of business (including Guarantees thereof or instruments evidencing such liabilities), (4) any Indebtedness, Guarantee or obligation of the Company which is subordinate or junior in any respect to any other Indebtedness, Guarantee or obligation of the Company, including any Subordinated Obligations, (5) any obligations with respect to any Capital Stock, (6) Indebtedness which, when Incurred and without respect to any election under Section 1111(b) of Title II, United States Code, is without recourse to the Company, or (7) any Indebtedness Incurred in violation of the Indenture. "Significant Subsidiary" means any Restricted Subsidiary that would be a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC. "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency beyond the control of the issuer unless such contingency has occurred). "Subordinated Obligation" means any Indebtedness of the Company (whether outstanding on the Issue Date or thereafter Incurred) which is subordinate or junior in right of payment to the Senior Notes pursuant to a written agreement. "Subsidiary" of any Person means any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such Person, (ii) such Person and one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person. "Subsidiary Guarantor" means Friendly's Restaurants Franchise, Inc. and each new Subsidiary (other than Foreign Subsidiaries and Unrestricted Subsidiaries) that guarantees the Company's obligations with respect to the Senior Notes. "Subsidiary Guaranty" means the Guaranty by a Subsidiary Guarantor of the Company's obligations with respect to the Senior Notes. "Temporary Cash Investments" means any of the following: (i) any investment in direct obligations of the United States of America or any agency thereof or obligations Guaranteed by the United States of America or any agency thereof, (ii) investments in time deposit accounts, certificates of deposit and money market deposits maturing within 360 days of the date of acquisition thereof issued by a bank or trust 81 company which is organized under the laws of the United States of America, any state thereof or any foreign country recognized by the United States of America having capital, surplus and undivided profits aggregating in excess of $250,000,000 (or the foreign currency equivalent thereof) and whose long-term debt is rated "A" (or such similar equivalent rating) or higher by at least one nationally recognized statistical rating organization (as defined in Rule 436 under the Securities Act), (iii) repurchase obligations with a term of not more than 60 days for underlying securities of the types described in clause (i) above entered into with a bank meeting the qualifications described in clause (ii) above, (iv) investments in commercial paper, maturing not more than 270 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America or any foreign country recognized by the United States of America with a rating at the time as of which any investment therein is made of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher) according to Standard & Poor's Ratings Group, (v) investments in securities with maturities of 12 months or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States of America, or by any political subdivision or taxing authority thereof, and rated at least "A" by Standard & Poor's Ratings Group or "A" by Moody's Investors Service, Inc. and (vi) investments in shares of money market funds registered under the Investment Company Act of 1940, as amended. "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. SectionSection 77aaa-77bbbb) as in effect on the date of the Indenture. "Trade Payables" means, with respect to any Person, any accounts payable or any indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person arising in the ordinary course of business in connection with the acquisition of goods or services. "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of the Company (including any newly acquired or newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; PROVIDED, HOWEVER, that either (A) the Subsidiary to be so designated has total consolidated assets of $1,000 or less or (B) if such Subsidiary has consolidated assets greater than $1,000, then such designation would be permitted under "Limitation on Restricted Payments." The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED, HOWEVER, that immediately after giving effect to such designation (x) the Company could Incur $1.00 of additional Indebtedness under clause (a) of "Limitation on Indebtedness and Preferred Stock" and (y) no Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option. "Voting Stock" of a corporation means all classes of Capital Stock of such corporation then outstanding and normally entitled to vote in the election of directors. "Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all the Capital Stock of which (other than directors' qualifying shares and, in the case of Foreign Subsidiaries, shares required to 82 be held by foreign nationals representing not more than 2% of such Capital Stock) is owned by the Company or another Wholly Owned Subsidiary. BOOK-ENTRY SYSTEM The Senior Notes will initially be issued in the form of one or more Global Securities (as defined in the Indenture) held in book-entry form. Accordingly, DTC or its nominee will initially be the sole registered holder of the Senior Notes for all purposes under the Indenture. Upon the issuance of a Global Security, DTC or its nominee will credit the accounts of persons holding through it with the respective principal amounts of the Senior Notes represented by such Global Security purchased by such persons in the Offering. Such accounts shall be designated by the Underwriters with respect to Senior Notes placed by the Underwriters for the Company. Ownership of beneficial interests in a Global Security will be limited to persons that have accounts with DTC ("participants") or persons that may hold interests through participants. Ownership of beneficial interests by participants in a Global Security will be shown on, and the transfer of that ownership interest will be effected only through, records maintained by DTC for such Global Security. Ownership of beneficial interests in such Global Security by persons that hold through participants will be shown on, and the transfer of that ownership interest within such participant will be effected only through, records maintained by such participant. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and such laws may impair the ability to transfer beneficial interests in a Global Security. Payment of principal and interest on Senior Notes represented by any such Global Security will be made to DTC or its nominee, as the case may be, as the sole registered owner and the sold holder of the Senior Notes represented thereby for all purposes under the Indenture. None of the Company, the Trustee, any agent of the Company, or the Underwriters will have any responsibility or liability for any aspect of DTC's records relating to or payments made on account of beneficial ownership interests in a Global Security representing any Senior Notes or for maintaining, supervising, or reviewing any of DTC's records relating to such beneficial ownership interests. The Company has been advised by DTC that upon receipt of any payment of principal of, or interest on, any Global Security, DTC will immediately credit, on its book-entry registration and transfer system, the accounts of participants with payments in amounts proportionate to their respective beneficial interests in the principal or face amount of such Global Security as shown on the records of DTC. Payments by participants to owners of beneficial interests in a Global Security held through such participants will be governed by standing instructions and customary practices as is now the case with securities held for customer accounts registered in "street name" and will be the sole responsibility of such participants. A Global Security may not be transferred except as a whole by DTC to a nominee of DTC or by a nominee of DTC to DTC. A Global Security is exchangeable for certificated Senior Notes only if (i) DTC notifies the Issuers that it is unwilling or unable to continue as a Depositary (as defined in the Indenture) for such Global Security or if at any time DTC ceases to be a clearing agency registered under the Exchange Act, (ii) the Company executes and delivers to the Trustee a notice that such Global Security shall be so transferable, registrable, and exchangeable, and such transfers shall be registrable, or (iii) there shall have occurred and be continuing an Event of Default or an event which, with the giving of notice or lapse of time or both, would constitute an Event of Default with respect to the Senior Notes represented by such Global Security. Any Global Security that is exchangeable for certificated Senior Notes pursuant to the preceding sentence will be transferred to, and registered and exchanged for, certificated Senior Notes in authorized denominations and registered in such names as the Depositary holding such Global Security may direct. Subject to the foregoing, a Global Security is not exchangeable, except for a Global Security of like denomination to be registered in the name of the Depositary or its nominee. In the event that a Global 83 Security becomes exchangeable for certificated Senior Notes, (i) certificated Senior Notes will be issued only in fully registered form in denominations of $1,000 or integral multiples thereof, (ii) payment of principal, any repurchase price, and interest on the certificated Senior Notes will be payable, and the transfer of the certificated Senior Notes will be registerable, at the office or agency of the Company maintained for such purposes, and (iii) no service charge will be made for any registration of transfer or exchange of the certificated Senior Notes, although the Company may require payment of a sum sufficient to cover any tax or governmental charge imposed in connection therewith. So long as the Depositary for a Global Security, or its nominee, is the registered owner of such Global Security, such Depositary or such nominee, as the case may be, will be considered the sole owner or holder of the Senior Notes represented by such Global Security for the purposes of receiving payment on the Senior Notes, receiving notices, and for all other purposes under the Indenture and the Senior Notes. Beneficial interests in Senior Notes will be evidenced only by, and transfers thereof will be effected only through, records maintained by the Depositary and its participants. Cede & Co. has been appointed as the nominee of DTC. Except as provided above, owners of beneficial interests in a Global Security will not be entitled to and will not be considered the holders thereon for any purposes under the Indenture. Accordingly, each person owning a beneficial interest in a Global Security must rely on the procedures of the Depositary, and, if such person is not a participant, on the procedures of the participant through which such person owns its interest, to exercise any rights of a holder under the Indenture. The Company understands that under existing industry practices, in the event that the Company requests any action of holders or that an owner of a beneficial interest in a Global Security desires to give or take any action which a holder is entitled to give or take under the Indenture, the Depositary would authorize the participants holding the relevant beneficial interest to give or take such action and such participants would authorize beneficial owners owning through such participants to give or take such action or would otherwise act upon the instructions of beneficial owners owning through them. DTC has advised the Company that DTC is a limited-purpose trust company organized under the Banking Law of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered under the Exchange Act. DTC was created to hold the securities of its participants and to facilitate the clearance and settlement of securities transactions among its participants in such securities through electronic book-entry changes in accounts of the participants, thereby eliminating the need for physical movement of securities certificates. DTC's participants include securities brokers and dealers (including the Underwriters), banks, trust companies, clearing corporations, and certain other organizations some of whom (and/or their representatives) own DTC. Access to DTC's book-entry system is also available to others, such as banks, brokers, dealers, and trust companies that clear through or maintain a custodial relationship with a participant, either direct or indirectly. SAME-DAY SETTLEMENT AND PAYMENT Settlement for the Senior Notes will be made in immediately available funds. All payments of principal and interest will be made by the Company in immediately available funds. The Senior Notes will trade in the Same-Day Funds Settlement System of DTC until maturity, and secondary market trading activity for the Senior Notes will therefore settle in immediately available funds. 84 UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement (the "Underwriting Agreement") among the Company and Societe Generale Securities Corporation, Donaldson, Lufkin & Jenrette Securities Corporation and NationsBanc Montgomery Securities, Inc. (the "Underwriters"), the Company has agreed to sell to the Underwriters, and the Underwriters have severally agreed to purchase from the Company, the following respective amounts of the Senior Notes:
PRINCIPAL AMOUNT OF UNDERWRITER SENIOR NOTES - ---------------------------------------------------------------------------------------- -------------- Societe Generale Securities Corporation................................................. $ Donaldson, Lufkin & Jenrette Securities Corporation..................................... NationsBanc Montgomery Securities, Inc.................................................. -------------- Total............................................................................. $ 175,000,000 -------------- --------------
In the Underwriting Agreement, the Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the Senior Notes offered hereby if any of the Senior Notes are purchased. The Company has been advised by the Underwriters that the Underwriters propose to offer the Senior Notes to the public initially at the public offering price set forth on the cover page of this Prospectus, and to certain dealers initially at such price less a discount not in excess of % of the principal amount of the Senior Notes. The Underwriters may allow, and such dealers may reallow, a concession to certain other dealers not in excess of % of the principal amount of the Senior Notes. After the initial offering of the Senior Notes to the public, the Underwriters may change the public offering price, the discount and the concession. The Senior Notes are a new issue of securities with no established trading market. The Company has been advised by the Underwriters that the Underwriters intend to make a market in the Senior Notes, as permitted by applicable laws and regulations. No assurance can be given, however, that the Underwriters will make a market in the Senior Notes, or as to the liquidity of, or the trading market for, the Senior Notes. The Company and the initial Subsidiary Guarantor have agreed to indemnify the Underwriters against certain civil liabilities, including liabilities under the Securities Act, and to contribute to payments which the Underwriters might be required to make in respect thereof. In connection with the offering, Societe Generale Securities Corporation, on behalf of the Underwriters, may engage in overallotment, stabilizing and syndicate covering transactions. Overallotment involves sales in excess of the offering size, which create a short position for the Underwriters. Stabilizing transactions involve bids to purchase the Senior Notes in the open market for the purpose of pegging, fixing or maintaining the price of the Senior Notes. Syndicate covering transactions involve purchases of the Senior Notes in the open market after the distribution has been completed in order to cover short positions. Such stabilizing transactions and syndicate covering transactions may cause the price of the Senior Notes to be higher than it would otherwise be in the absence of such transactions. Such activities, if commenced, may be discontinued at any time. Societe Generale, an affiliate of Societe Generale Securities Corporation, is to be a lender under the New Credit Facility and to act as arranger and administrative agent thereunder. Societe Generale Securities Corporation is providing certain advisory services in connection with the Recapitalization, for which it is receiving a fee. See "Description of New Credit Facility." 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 85 Securities Dealers, Inc. (the "NASD") and an Underwriter in the Senior Note Offering. As a result of the foregoing, the Senior Note 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 Senior Note Offering will conform with the requirements set forth in Section 2720. In particular, the price at which the Senior Notes are to be distributed to the public must be at a yield no lower 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, Societe Generale Securities Corporation will serve in such role and will recommend the public offering price in compliance with the requirements of Section 2720. Societe Generale Securities Corporation, 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. The Underwriters have informed the Company that they do not intend to make sales of Senior Notes offered by this Prospectus to accounts over which they exercise discretionary authority. CERTAIN UNITED STATES TAX CONSEQUENCES TO FOREIGN HOLDERS The following summary describes certain United States federal income and estate tax consequences of the ownership of Senior Notes as of the date hereof. It deals only with Senior Notes held as capital assets by Non-United States Holders. As used herein, the term "Non-United States Holder" means any person that is, as to the United States, a foreign corporation, a nonresident alien individual, a nonresident fiduciary of a foreign estate or trust or a foreign partnership one or more of the members of which is, as to the United States, a foreign corporation, a nonresident alien individual or a nonresident fiduciary of a foreign estate or trust. The discussion set forth below is based upon the provisions of the Code and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be repealed, revoked or modified so as to result in federal income tax consequences different from those discussed below. Persons considering the purchase, ownership or disposition of Senior Notes should consult their own tax advisors concerning the federal income tax consequences in light of their particular situations as well as any consequences arising under the laws of any other taxing jurisdiction. Under present United States federal income and estate tax law, and subject to the discussion below concerning backup withholding: (a) no withholding of United States federal income tax will be required with respect to the payment by the Company or any paying agent of principal or interest (which for purposes of this discussion includes original issue discount (the "OID")) on a Senior Note owned by a Non-United States Holder, provided (i) that the beneficial owner does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company entitled to vote within the meaning of section 871(h)(3) of the Code and the regulations thereunder, (ii) the beneficial owner is not a controlled foreign corporation that is related to the Company through stock ownership, (iii) the beneficial owner is not a bank whose receipt of interest on a Senior Note is described in section 881(c)(3)(A) of the Code and (iv) the beneficial owner satisfies the statement requirement (described generally below) set forth in section 871(h) and section 881(c) of the Code and the regulations thereunder; (b) no withholding of United States federal income tax will be required with respect to any gain or income realized by a Non-United States Holder upon the sale, exchange or retirement of a Senior Note; and (c) a Senior Note beneficially owned by an individual who at the time of death is a Non-United States Holder will not be subject to United States federal estate tax as a result of such individual's 86 death, provided that such individual does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company entitled to vote within the meaning of section 871(h)(3) of the Code and provided that the interest payments with respect to such Senior Note would not have been, if received at the time of such individual's death, effectively connected with the conduct of a United States trade or business by such individual. To satisfy the requirement referred to in (a)(iv) above, the beneficial owner of such Senior Note, or a financial institution holding the Senior Note on behalf of such owner, must provide, in accordance with specified procedures, a paying agent of the Company with a statement to the effect that the beneficial owner is not a U.S. person. Currently these requirements will be met if (1) the beneficial owner provides his name and address, and certifies, under penalties of perjury, that he is not a U.S. person (which certification may be made on an Internal Revenue Service ("IRS") Form W-8) or (2) a financial institution holding the Senior Note on behalf of the beneficial owner certifies, under penalties of perjury, that such statement has been received by it and furnishes a paying agent with a copy thereof. Under recently finalized Treasury regulations (the "Final Regulations"), the statement requirement referred to in (a)(iv) above may also be satisfied with other documentary evidence for interest paid after December 31, 1998 with respect to an offshore account or through certain foreign intermediaries. If a Non-United States Holder cannot satisfy the requirements of the "portfolio interest" exception described in (a) above, payments of premium, if any, and interest (including OID) made to such Non-United States Holder will be subject to a 30% withholding tax unless the beneficial owner of the Senior Note provides the Company or its paying agent, as the case may be, with a properly executed (1) Internal Revenue Code Form 1001 (or successor form) claiming an exemption from withholding under the benefit of a tax treaty or (2) Internal Revenue Code Form 4224 (or successor form) stating that interest paid on the Senior Note is not subject to withholding tax because it is effectively connected with the beneficial owner's conduct of a trade or business in the United States. Under the Final Regulations, Non-United States Holders will generally be required to provide IRS Form W-8 in lieu of IRS Form 1001 and IRS Form 4224, although alternative documentation may be applicable in certain situations. If a Non-United States Holder is engaged in a trade or business in the United States and premium, if any, or interest (including OID) on the Senior Note is effectively connected with the conduct of such trade or business, the Non-United States Holder, although exempt from the withholding tax discussed above, will be subject to United States federal income tax on such interest and OID on a net income basis in the same manner as if it were a United States Holder (i.e., Holders who are not Non-United States Holders). In addition, if such holder is a foreign corporation, it may be subject to a branch profits tax equal to 30% of its effectively connected earnings and profits for the taxable year, subject to adjustments. For this purpose, such premium, if any, and interest (including OID) on a Senior Note will be included in such foreign corporation's earnings and profits. Any gain or income realized upon the sale, exchange or retirement of a Senior Note generally will not be subject to United States federal income tax unless (i) such gain or income is effectively connected with a trade or business in the United States of the Non-United States Holder, or (ii) in the case of a Non-United States Holder who is an individual, such individual is present in the United States for 183 days or more in the taxable year of such sale, exchange or retirement, and certain other conditions are met. INFORMATION REPORTING AND BACKUP WITHHOLDING In general, information reporting requirements will apply to certain payments of principal, interest, OID and premium paid on Senior Notes and to the proceeds of sale of a Senior Note made to United States Holders other than certain exempt recipients (such as corporations). A 31% backup withholding tax will apply to such payments if the Unites States Holder fails to provide a taxpayer identification number or certification of foreign or other exempt status or fails to report, in full, dividend and interest income. 87 No information reporting or backup withholding will be required with respect to payments made by the Company or any paying agent to Non-United States Holders if a statement described in (a)(iv) under "Non-United States Holders" has been received and the payor does not have actual knowledge that the beneficial owner is a United States person. In addition, backup withholding and information reporting will not apply if payments of the principal, interest, OID or premium on a Senior Note are paid or collected by a foreign office of a custodian, nominee or other foreign agent on behalf of the beneficial owner of such Senior Note, or if a foreign office of a broker (as defined in applicable Treasury regulations) pays the proceeds of the sale of a Senior Note to the owner thereof. If, however, such nominee, custodian, agent or broker is, for United States federal income tax purposes, a U.S. person, a controlled foreign corporation or a foreign person that derives 50% or more of its gross income for certain periods from the conduct of a trade or business in the United States, such payments will not be subject to backup withholding but will be subject to information reporting, unless (1) such custodian, nominee, agent or broker has documentary evidence in its records that the beneficial owner is not a U.S. person and certain other conditions are met or (2) the beneficial owner otherwise establishes an exemption. Under the Final Regulation backup withholding will not apply to such payments absent actual knowledge that the payee is a United States person. Payments of principal, interest, OID and premium on a Senior Note paid to the beneficial owner of a Senior Note by a United States office of a custodian, nominee or agent, or the payment by the United States office of a broker of the proceeds of sale of a Senior Note, will be subject to both backup withholding and information reporting unless the beneficial owner provides the statement referred to in (a)(iv) above and the payor does not have actual knowledge that the beneficial owner is a United States person or otherwise establishes an exemption. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against such holder's U.S. federal income tax liability provided the required information is furnished to the IRS. LEGAL MATTERS The validity of the securities offered hereby will be passed upon for the Company by Mayer, Brown & Platt, Chicago, Illinois. Certain legal matters with respect to the securities offered hereby will be passed upon for the Underwriters by Simpson Thacher & Bartlett (a partnership which includes professional corporations), New York, New York. EXPERTS The financial statements included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. 88 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 Senior Notes, reference is hereby made to the Registration Statement and the exhibits and schedules filed as a part thereof. Statements made in this Prospectus as to the contents of any contract, agreement or other document are not necessarily complete and, in each instance, reference is made to the copy of such document, filed as an exhibit to the Registration Statement, for a more complete description of the matter involved and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement and the exhibits and schedules thereto filed by the Company with the Commission may be inspected, without charge, at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the following regional offices of the Commission: Seven World Trade Center, New York, New York 10048 and 500 West Madison Street, Chicago, Illinois 60661-2511. Copies of all or any portion of the Registration Statement may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees. The Company is not currently subject to the informational requirements of the Exchange Act. As a result of the Offerings, the Company will become subject to the informational requirements of the Exchange Act. 89 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 NINE FOR THE YEARS ENDED MONTHS ENDED ----------------------------------------- ------------- JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, 1995 1995 1996 1996 ----------- ------------- ------------- ------------- (UNAUDITED) REVENUES..................................................... $ 631,014 $ 649,149 $ 650,807 $ 491,819 COSTS AND EXPENSES: Cost of sales............................................ 179,793 192,600 191,956 143,388 Labor and benefits....................................... 211,838 214,625 209,260 159,502 Operating expenses....................................... 132,010 143,854 143,163 109,006 General and administrative expenses...................... 38,434 40,705 42,721 31,948 Debt restructuring expenses (Note 5)..................... -- 3,346 -- -- Write-down of property and equipment (Note 6)............ -- 4,006 227 -- Depreciation and amortization............................ 32,069 33,343 32,979 25,127 GAIN ON SALE OF RESTAURANT OPERATIONS (NOTE 16).............. -- -- -- -- ----------- ------------- ------------- ------------- OPERATING INCOME............................................. 36,870 16,670 30,501 22,848 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 Equity in net loss of joint venture.......................... -- -- -- -- ----------- ------------- ------------- ------------- 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) Benefit from (provision for) income taxes.................... 4,661 (33,419) 5,868 4,442 ----------- ------------- ------------- ------------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE....................................... (3,936) (58,653) (7,772) (5,794) Cumulative effect of change in accounting principle, net of income tax expense of $1,554 (Note 10)..................... -- -- -- -- ----------- ------------- ------------- ------------- NET INCOME (LOSS)............................................ $ (3,936) $ (58,653) $ (7,772) $ (5,794) ----------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- PRO FORMA NET INCOME (LOSS) PER SHARE (NOTE 17) (UNAUDITED): Income (loss) before cumulative effect of change in accounting principle................................... $ (1.09) $ (0.81) Cumulative effect of change in accounting principle, net of income tax expense.................................. -- -- ------------- ------------- Net income (loss)........................................ $ (1.09) $ (0.81) ------------- ------------- ------------- ------------- PRO FORMA AMOUNTS ASSUMING NEW PENSION METHOD IS RETROACTIVELY APPLIED: Net income (loss) (Note 10).............................. $ (3,506) $ (58,134) $ (7,214) $ (5,375) ----------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- Net income (loss) per share (unaudited).................. $ (1.01) $ (0.75) ------------- ------------- ------------- ------------- PRO FORMA SHARES USED IN NET INCOME (LOSS) PER SHARE CALCULATION (NOTE 17) (UNAUDITED).......................... 7,125 7,125 ------------- ------------- ------------- ------------- SEPTEMBER 28, 1997 ------------- (UNAUDITED) 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 Debt restructuring expenses (Note 5)..................... -- Write-down of property and equipment (Note 6)............ 607 Depreciation and amortization............................ 24,226 GAIN ON SALE OF RESTAURANT OPERATIONS (NOTE 16).............. 2,303 ------------- OPERATING INCOME............................................. 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.... 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.................................................. 215 Benefit from (provision for) income taxes.................... (88) ------------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE....................................... 127 Cumulative effect of change in accounting principle, net of income tax expense of $1,554 (Note 10)..................... 2,236 ------------- NET INCOME (LOSS)............................................ $ 2,363 ------------- ------------- PRO FORMA NET INCOME (LOSS) PER SHARE (NOTE 17) (UNAUDITED): Income (loss) before cumulative effect of change in accounting principle................................... $ 0.02 Cumulative effect of change in accounting principle, net of income tax expense.................................. 0.31 ------------- Net income (loss)........................................ $ 0.33 ------------- ------------- PRO FORMA AMOUNTS ASSUMING NEW PENSION METHOD IS RETROACTIVELY APPLIED: Net income (loss) (Note 10).............................. $ 127 ------------- ------------- Net income (loss) per share (unaudited).................. $ 0.02 ------------- ------------- PRO FORMA SHARES USED IN NET INCOME (LOSS) PER SHARE CALCULATION (NOTE 17) (UNAUDITED).......................... 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%, respectively, 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 estimate 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, DECEMBER 31, DECEMBER 29, SEPTEMBER 28, 1995 1995 1996 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 has 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 AND PRO FORMA INFORMATION (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 AND PRO FORMA INFORMATION (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 representations 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.................................... 14 Use of Proceeds................................. 19 Capitalization.................................. 20 Selected Consolidated Financial Information..... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 23 Business........................................ 33 Management...................................... 46 Ownership of Common Stock....................... 53 Certain Transactions............................ 54 Description of New Credit Facility.............. 56 Description of Senior Notes..................... 57 Underwriting.................................... 85 Certain United States Tax Consequences To Foreign Holders............................... 86 Legal Matters................................... 88 Experts......................................... 88 Available Information........................... 89 Index to Consolidated Financial Statements...... F-1
--------------------- Until , 1998 (90 days after the date of the Senior Note Offering), all dealers effecting transactions in the Senior Notes, 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. $175,000,000 [LOGO] FRIENDLY ICE CREAM CORPORATION % Senior Notes due 2007 ------------------- PROSPECTUS ------------------- SOCIETE GENERALE SECURITIES CORPORATION DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION NATIONSBANC MONTGOMERY SECURITIES, INC. , 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............................................. $ 60,607 NASD filing fee.................................................. 20,500 Printing and engraving........................................... 110,500 Legal fees and expenses.......................................... 552,600 Accounting fees and expenses..................................... 110,500 Trustee fees and expenses........................................ 15,000 Blue sky fees and expenses....................................... 7,500 Miscellaneous.................................................... 520,793 ---------- Total........................................................ $1,398,000 ---------- ----------
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 commit to provide indemnification to its directors and officers in specified circumstances. Generally, the Restated Articles of Organization provide that the Registrant shall indemnify directors, officers, employee or agents of the Registrant against liabilities and expenses arising out of legal proceedings brought against them by reason of their status as directors, officers, employees or agents of the Registrant or by reason of their agreeing to serve, at the request of the Registrant, as a director, officer, employee or agent of another organization. Under this provision, a director, officer, employee or agent 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, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Registrant, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. Any indemnification shall be made by the Registrant only upon a determination that indemnification is proper in the specific case as made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, (ii) if such quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. The Board of Directors may authorize advancing litigation expenses to a director, officer, employee or agent at his request upon receipt of an undertaking by any such director, officer, employee or agent to repay such expenses if it is ultimately determined that he is not entitled to indemnification for such expenses. 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 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 II-1 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 10 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. 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"). (Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1, No. 333-34633.) **3.2 Amended and Restated By-laws of the Company. (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1, No. 333-34633.) 3.3 Certificate of Incorporation of Friendly's Restaurant Franchise, Inc., as amended. 3.4 By-laws of Friendly's Restaurant Franchise, Inc. **4.1 Form of Senior Note Indenture between Friendly Ice Cream Corporation, Friendly's Restaurants Franchise, Inc. and The Bank of New York, as Trustee. **4.2 Stockholder and Registration Rights Agreement of the Company, as amended. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1, No. 333-34633.) 4.3 Registration Rights Agreement between the Company and Donald N. Smith (Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-1, No. 333-34633.) **4.4 Rights Agreement between the Company and the Bank of New York as Rights Agent. (Incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-1, No. 333-34633.) 5.1 Opinion and consent of Mayer, Brown & Platt, counsel for the Company regarding the validity of the offered securities.
II-2 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. **10.2 The Company's Stock Option Plan. (Incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1, No. 333-34633.) **10.3 The Company's Restricted Stock Plan. (Incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1, No. 333-34633.) **10.4 Form of Agreement relating to the Company's Limited Stock Compensation Program. (Incorporated by reference to Exhibit 10.5 to the Company's Registration Statement on Form S-1, No. 333-34633.) **10.5 Development Agreement between Friendly Ice Cream Corporation and FriendCo Restaurants, Inc. (Incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1, No. 333-34633.) **10.6 Franchise Agreement between Friendly's Restaurants Franchise, Inc. and FriendCo Restaurants, Inc. (Incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1, No. 333-34633.) **10.7 Management Agreement between Friendly Ice Cream Corporation and FriendCo Restaurants, Inc. (Incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1, No. 333-34633.) **10.8 Purchase and Sale Agreement between Friendly Ice Cream Corporation and FriendCo Restaurants, Inc. (Incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1, No. 333-34633.) **10.9 Software License Agreement between Friendly's Restaurants Franchise, Inc. and FriendCo Restaurants, Inc. (Incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1, No. 333-34633.) (Exhibits 10.5 through 10.9, collectively, the "DavCo Agreement") **10.10 Sublease between SSP Company, Inc. and the Company, as amended, for the Chicopee, Massachusetts Distribution Center. (Incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1, No. 333-34633.) **10.11 Master License and Distribution Agreement for the Territory of Korea between Friendly's International, Inc. and Hansung Enterprise Co., Ltd. (Incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1, No. 333-34633.) **10.12 TRC Management Contract between the Company and The Restaurant Company. (Incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1, No. 333-34633.) **10.13 License Agreement between the Company and Hershey Foods Corporation for the 1988 Non-Friendly marks. (Incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1, No. 333-34633.) **12.1 Schedule of Computation of Ratios of Earnings to Fixed Charges. **21.1 Subsidiaries of the Company. 23.1 Consent of Mayer, Brown & Platt (included in Exhibit 5.1). 23.2 Consent of Arthur Andersen LLP. **24.1 Power of attorney (included on Registration Statement signature page). **24.2 Power of Attorney of Charles A. Ledsinger, Jr. (Incorporated by reference to Exhibit 24.2 to the Company's Registration Statement on Form S-1, No. 333-34633.) **25.1 Form T-1 Statement of Eligibility of The Bank of New York, as Trustee for the Senior Notes. **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. 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 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'S RESTAURANTS FRANCHISE, INC. By: /s/ GEORGE G. ROLLER ----------------------------------------- Name: George G. Roller Title: Vice President, Finance 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 and * Chief Executive Officer - ------------------------------ (Principal Executive November 5, 1997 Donald N. Smith Officer and Director) Vice President, Chief /s/ GEORGE G. ROLLER Financial Officer and - ------------------------------ Treasurer (Principal November 5, 1997 George G. Roller Financial and Accounting Officer) * - ------------------------------ Director November 5, 1997 Joseph A. O'Shaughnessy * /s/ GEORGE G. ROLLER - ------------------------------ George G. Roller Attorney-in-Fact II-6 EX-3.3 2 EXHIBIT 3.3--CERTIFICATE OF AMENDMENT CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF FAMILY RESTAURANTS FRANCHISE, INC. Family Restaurants Franchise, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of Delaware (the "Corporation") DOES HEREBY CERTIFY: FIRST, That the Board of Directors of said Corporation adopted resolutions by Unanimous Written Consent setting forth a proposed amendment of the Corporation's Certificate of Incorporation, declaring said amendment to be advisable and calling a meeting of the stockholders of said corporation for consideration of such amendment. The resolution setting forth the proposed amendment declared it advisable to make the following amendment to Article I of the Certificate of Incorporation of said Corporation: 1. The name of the Corporation is FRIENDLY'S RESTAURANTS FRANCHISE, INC. SECOND, That thereafter pursuant to resolution of its Board of Directors, a special meeting of the stockholders of said Corporation was called and in lieu of such meeting, the written consent of the stockholders was obtained in accordance with Section 228(d) of Delaware Corporation Law in which consent the necessary number of shares as required by statute and the Corporation's By-Laws were voted in favor of the amendment. THIRD, That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware. FOURTH, That notice of the consent of the stockholders in lieu of a meeting adopting the amendment to the Certificate of Incorporation was sent to all stockholders of the Corporation who did not consent in writing to such amendment. IN WITNESS WHEREOF, said Corporation has caused this Certificate to be signed by George G. Roller, Vice President and Treasurer this 20TH day of MAY, 1996. By: --------------------------------- George G. Roler Its: Vice President and Treasurer CERTIFICATE OF INCORPORATION OF FAMILY RESTAURANTS FRANCHISE, INC. * * * * 1. The name of the corporation is FAMILY RESTAURANTS FRANCHISE, INC. 2. The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. 3. The nature of the business or purposes to be conducted or promoted is: To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. 4. The total number of shares of common stock which the corporation shall have authority to issue is One Thousand (1,000) and the par value of each of such share is One Dollar ($1.00) amounting in the aggregate to One Thousand Dollars ($1,000.00). 5. The name and mailing address of each incorporator is as follows: NAME MAILING ADDRESS ---- ---------------- D.A. Hampton Corporation Trust Center 1209 Orange Street Wilmington, Delaware 19801 J.A. Grodzicki Corporation Trust Center 1209 Orange Street Wilmington, Delaware 19801 K. Bowman Corporation Trust Center 1209 Orange Street Wilmington, Delaware 19801 6. The corporation is to have perpetual existence. 7. In furtherance and not in limitation of the powers conferred by statute, the board of directors is expressly authorized: To make, alter or repeal the by-laws of the corporation. 8. Elections of directors need not be by written ballot unless the by-laws of the corporation shall so provide. Meetings of stockholders may be held within or without the State of Delaware, as the by-laws may provide. The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the board of directors or in the by-laws of the corporation. 9. The corporation reserves the right to amend, alter, change or repeal any provision contained in this certificate of incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. WE, THE UNDERSIGNED, being each of the incorporators hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, do make this certificate, hereby declaring and certifying that this is our act and deed and the facts herein stated are true, and accordingly have hereunto set our hands this 20th day of June, 1986. ----------------------------- D.A. Hampton ----------------------------- J.A. Grodzicki ----------------------------- K. Bowman Received for Record June 23rd, A.D. 1986 Leo J. Dugan, Jr., Recorder STATE OF DELAWARE : : SS.: NEW CASTLE COUNTY : Recorded in the Recorder's Office at Wilmington, Vol. Page &c., the 23rd day of June, A. D. 1986. Witness my hand and official seal. Leo J. Dugan, Jr. Recorder. """"""""""""""""""""""""""""""" " Recorders Office " " New Castle Co. Del. " " Mercy Justice " """"""""""""""""""""""""""""""" EX-3.4 3 EXHIBIT 3.4--BYLAWS FAMILY RESTAURANTS FRANCHISE, INC. BY-LAWS INDEX PAGE ---- SECTION 1 - OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.1. Registered Office . . . . . . . . . . . . . . . . . . . . . 1 Section 1.2. Other Offices . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2 - STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 2.1. Time and Place of Meetings. . . . . . . . . . . . . . . . . 1 Section 2.2. Annual Meetings . . . . . . . . . . . . . . . . . . . . . . 1 Section 2.3. Special Meetings. . . . . . . . . . . . . . . . . . . . . . 1 Section 2.4. Notice of Meetings. . . . . . . . . . . . . . . . . . . . . 1 Section 2.5. Quorum; Adjournment of Meeting. . . . . . . . . . . . . . . 2 Section 2.6. Voting. . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 2.7. Informal Action by Stockholders . . . . . . . . . . . . . . 2 Section 2.8. Significant Stockholder Actions . . . . . . . . . . . . . . 2 Section 2.9. One Share One Vote. . . . . . . . . . . . . . . . . . . . . 3 SECTION 3 - DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 3.1. General Powers. . . . . . . . . . . . . . . . . . . . . . . 3 Section 3.2. Number, Qualification and Tenure. . . . . . . . . . . . . . 3 Section 3.3. Vacancies; Resignations.. . . . . . . . . . . . . . . . . . 3 Section 3.4. Place of Meetings . . . . . . . . . . . . . . . . . . . . . 3 Section 3.5. Newly-Elected Board . . . . . . . . . . . . . . . . . . . . 3 Section 3.6. Regular Meetings. . . . . . . . . . . . . . . . . . . . . . 4 Section 3.7. Special Meetings. . . . . . . . . . . . . . . . . . . . . . 4 Section 3.8. Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 3.9. Organization. . . . . . . . . . . . . . . . . . . . . . . . 4 Section 3.10. Committees. . . . . . . . . . . . . . . . . . . . . . . . . 4 Section 3.11. Action without Meeting. . . . . . . . . . . . . . . . . . . 4 Section 3.12. Attendance by Telephone . . . . . . . . . . . . . . . . . . 4 Section 3.13. Compensation. . . . . . . . . . . . . . . . . . . . . . . . 5 SECTION 4 - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 4.1. Enumeration . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 4.2. Salaries. . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 4.3. Term of Office. . . . . . . . . . . . . . . . . . . . . . . 5 i Section 4.4. Chairman. . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 4.5. President . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 4.6. Vice President. . . . . . . . . . . . . . . . . . . . . . . 5 Section 4.7. Secretary . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 4.8. Assistant Secretary.. . . . . . . . . . . . . . . . . . . . 6 Section 4.9. Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 4.10. Assistant Treasurer.. . . . . . . . . . . . . . . . . . . . 6 Section 4.11. Other Duties. . . . . . . . . . . . . . . . . . . . . . . . 6 SECTION 5 - CERTIFICATE OF STOCK AND OTHER STOCKHOLDER MATTERS . . . . . . . . 6 Section 5.1. Form. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Section 5.2. Replacement.. . . . . . . . . . . . . . . . . . . . . . . . 7 Section 5.3. Transfer. . . . . . . . . . . . . . . . . . . . . . . . . . 7 Section 5.4. Stockholders Entitled to Notice or to Vote. . . . . . . . . 7 Section 5.5. Stock Ledger Determinative of Dividend Distributions and Voting Entitlements . . . . . . . . . . . . . . . . . . . . 7 SECTION 6 - INDEMNIFICATION OF DIRECTORS AND OFFICERS. . . . . . . . . . . . . 8 Section 6.1. Good Faith Requirement. . . . . . . . . . . . . . . . . . . 8 Section 6.2. Expenses Indemnified. . . . . . . . . . . . . . . . . . . . 8 Section 6.3. Determination of Indemnification. . . . . . . . . . . . . . 8 Section 6.4. Expenses Paid in Advance of Determination of Indemnification . . . . . . . . . . . . . . . . . . . . . . 8 Section 6.5. Indemnification Provisions Not Exclusive. . . . . . . . . . 9 Section 6.6. Directors and officers Liability Insurance. . . . . . . . . 9 SECTION 7 - DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 7.1. Declaration of Dividends. . . . . . . . . . . . . . . . . . 9 Section 7.2. Reserves for Dividends. . . . . . . . . . . . . . . . . . . 9 SECTION 8 - GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 8.1. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 8.2. Corporate Seal. . . . . . . . . . . . . . . . . . . . . . .10 Section 8.3. Form of Notice. . . . . . . . . . . . . . . . . . . . . . .10 Section 8.4. Waiver of Notice. . . . . . . . . . . . . . . . . . . . . .10 Section 8.5. Corporation Checks. . . . . . . . . . . . . . . . . . . . .10 Section 8.6. Protection of Corporate Books . . . . . . . . . . . . . . .10 SECTION 9 - AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . .10 Section 9.1. Amendments of By-Laws . . . . . . . . . . . . . . . . . . .10 ii B Y - L A W S OF FAMILY RESTAURANTS FRANCHISE INC. SECTION 1. OFFICES SECTION a.. REGISTERED OFFICE. The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. SECTION b.. OTHER OFFICES. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors ("Board") may from time to time determine or the business of the corporation may require. SECTION 2. STOCKHOLDERS SECTION a.. TIME AND PLACE OF MEETINGS. All meetings of the stockholders for the election of directors or for any other purpose shall be held at such time and place, within or without the State of Delaware, as shall be designated, from time to time, by the Board. In the absence of any such designation by the Board, each such meeting shall be held at the principal office of the corporation in Wilmington, Delaware. SECTION b.. ANNUAL MEETINGS. An annual meeting of stockholders shall be held for the purpose of electing directors to serve on the Board and transacting such other business as may properly be brought before the meeting. The date of the annual meeting shall be determined by the Board. SECTION c.. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by law, may be called by the Chairman or the President and shall be called by the Secretary or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. SECTION d.. NOTICE OF MEETINGS. Written notice of each meeting of the stockholders stating the place, date and time of the meeting shall be given not less than ten (10) nor more than sixty days (60) before the date of the meeting, to each stockholder entitled to vote at such meeting. The notice of any special meeting of stockholders shall state the purpose or purposes for which the meeting is called. SECTION e.. QUORUM; ADJOURNMENT OF MEETING. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by law. If a quorum is not present or represented, the holders of the stock present in person or represented by proxy at the meeting and entitled to vote thereat shall have the power, by the affirmative vote of the holders of a majority of such stock, to adjourn the meeting to another time and/or place, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting, at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION f.. VOTING. At all meetings of the stockholders, each stockholder shall be entitled to vote, in person or by proxy, the shares of voting stock owned by such stockholder of record on the record date for the meeting. When a quorum is present or represented at any meeting, the vote of the holders of a majority of the stock having voting power present In person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of law or of the Certificate of Incorporation or of these By-Laws, a different vote is required, in which case such express provision shall govern and control the voting. SECTION g.. INFORMAL ACTION BY STOCKHOLDERS. Any action required to be taken at a meeting of the stockholders or any other action which may be taken at a meeting of the stockholders, may be taken without a meeting if a consent in writing, setting forth the action so taken, - shall be signed by all of the stockholders entitled to vote with respect to the subject matter thereof. SECTION h.. SIGNIFICANT STOCKHOLDER ACTIONS. The affirmative vote of ninety-five (95) percent (or eighty-five (85) percent if Donald N. Smith ceases for any reason to be the Chairman of the corporation) of the issued and outstanding capital stock of the corporation shall be required for any of the following "Significant Stockholder Actions": i. the amendment or repeal of the corporation's Certificate of Incorporation or By-Laws or the adoption of a new or restated Certificate of Incorporation or new By-Laws; ii. any merger or consolidation to which the corporation or any subsidiary of the corporation is a constituent corporation; iii. any sale, lease or exchange of all or substantially all of the property and assets of the corporation; and iv. dissolution or liquidation of the corporation. SECTION i.. ONE SHARE ONE VOTE. Each stockholder shall at every meeting of the stockholders 2 be entitled to one vote in person or by proxy for each share of stock having voting power held by such stockholder, but no proxy shall be voted after three (3) years from its date unless the proxy provides for a longer period. SECTION 3. DIRECTORS SECTION a.. GENERAL POWERS. The business and affairs of the corporation shall be managed and controlled by or under the direction of the Board, which may exercise all such powers of the corporation and do all such lawful acts and things as are not by law or by Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. SECTION b.. NUMBER, QUALIFICATION AND TENURE. The Board of Directors shall consist of up to five (5) members (Directors). The Directors shall be elected at the annual meeting of the stockholders, except as provided in Section 3.3 and each Director elected shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Directors need not be stockholders. SECTION c.. VACANCIES; RESIGNATIONS. Vacancies and newly created directorships resulting from any increase in the number of Directors may be filled by a majority of the Directors then in office though less than a quorum, and each Director so chosen shall hold office until his successor is elected and qualified or until his earlier resignation or removal. If there are no Directors in office, then an election of Directors may be held in the manner provided by law. Any director may resign at any time and such resignation may be made contingent upon the occurrence of a future event. such resignation shall be made in writing and shall take effect at the later of the date designated in the written resignation and the time of its receipt by the Chairman or the Secretary of the corporation. Acceptance of a resignation shall not be necessary to make it effective. SECTION d.. PLACE OF MEETINGS. The Board may hold meetings, both regular and special, either within or without the State of Delaware. SECTION e.. NEWLY-ELECTED BOARD. The first meeting of each newly-elected Board shall be held at such time and place as shall be fixed by the stockholders at the annual meeting, and no notice of such meeting shall be necessary to the newly elected Directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time and place of such first meeting of the newly elected Board, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board. SECTION f.. REGULAR MEETINGS. The Board shall hold a regular meeting, to be known as the annual meeting, immediately following each annual meeting of the stockholders. Other regular meetings of the Board shall be held at such time and at such place as shall from time to time be 3 determined by the Board. No notice of regular meetings need be given. SECTION g.. SPECIAL MEETINGS. Special meetings of the Board may be called by the Chairman or the President. Special meetings shall also be called by the Secretary on written request of any Director. No notice of special meetings need be given. SECTION h.. QUORUM. At all meetings of the Board, a majority of the total number of Directors shall constitute a quorum for the transaction of business and the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board except as may be otherwise specifically provided by these By-Laws, the -Certificate of Incorporation or by ' law. If a quorum shall not be present at any meeting of the Board, the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. SECTION i.. ORGANIZATION. The Chairman, if elected, shall act as chairman at all meetings of the Board. If the Chairman is not elected or, if elected, is not present, the President or, in the absence of the President, a Vice Chairman (who is also a member of the Board and, if more than one, in order designated by the Board or, in the absence of such designation, in order of their election), If any, or if no such Vice Chairman is present, a Director chosen by a majority of the Directors present, shall act as chairman at meetings of the Board. SECTION j.. COMMITTEES. The Board may, by resolution adopted by a majority of the whole Board, appoint one or more of its members to constitute one or more committees and such committees shall have such powers and duties (without further approval of the Board) as the Board shall prescribe, as such powers and duties may be limited by General Corporation Law of the State of Delaware. SECTION k.. ACTION WITHOUT MEETING. Unless otherwise restricted by the certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board or any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. SECTION l.. ATTENDANCE BY TELEPHONE. Members of the Board, or of any committee designated by the Board, may participate in a meeting of the Board, or any committee, by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. SECTION m.. COMPENSATION. The Board shall have the authority to fix the compensation of Directors, which may include their expenses, if any, of attendance at each meeting of the Board or of a committee. SECTION 4. 4 OFFICERS SECTION a.. ENUMERATION. The officers of the corporation shall be chosen by the Board and shall be a Chairman, President, a Secretary, and a Treasurer. The Board may also elect one or more Vice Chairmen, one or more Vice Presidents, one or more Assistant Secretaries and Assistant Treasurers and such other officers and agents as it shall deem appropriate. Any-number of offices may be held by the same person. SECTION b.. SALARIES. The salaries of all officers of the corporation shall be fixed by the Board. SECTION c.. TERM OF OFFICE. The officers of the corporation shall be elected at the annual meeting of the Board and shall hold office until their successors are elected and qualified or until their earlier resignation, removal or death. Any officer elected or appointed by the Board may be removed at any time by the Board. Any vacancy occurring In any office of the corporation required by this section shall be filled by the Board, and any vacancy in any other office may be filled by the Board. SECTION d.. CHAIRMAN. The Chairman shall preside, when present, at each meeting of the Board and shall perform such other duties and the Board and shall perform such other duties and have such powers as the Board may from time to time prescribe. The Chairman shall have general supervision, direction and control of the business and affairs of the corporation, subject to the control of the Board, shall preside at meetings of stockholders and shall have such other functions, authority and duties as customarily appertain to the office of the chief executive of a business corporation or as may be prescribed by the Board. SECTION e.. PRESIDENT. During any period when there shall be an office of Chairman, the President shall have such functions, authority and duties as may be prescribed by the Board or the chairman. During any period when there shall not be an office of chairman, the President shall have the functions, authority and duties provided for the Chairman. SECTION f.. VICE PRESIDENT. The Vice President shall perform, such duties and have such other powers as may from time to time be prescribed by the Board, the Chairman or the President. SECTION g.. SECRETARY. The Secretary shall keep a record of all proceedings of the stockholders of the corporation and of the Board, and shall perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice, if any, of all meetings of the stockholders and shall perform such other duties as may be prescribed by the Board, the Chairman or the President. The Secretary shall have custody of the corporate seal of the corporation and the Secretary or in the absence of the Secretary any Assistant Secretary, shall have the authority to affix the same to any Instrument requiring it, and when so affixed it may be attested by the signature of the Secretary or an Assistant Secretary. The Board may give general authority to any other officer to affix the seal of the corporation and to attest such affixing of the seal. 5 SECTION h.. ASSISTANT SECRETARY. The Assistant Secretary or if there be more than one, the Assistant Secretaries in the order determined by the Board (or if there be no such determination, then in order of their election), shall, in the absence of the secretary or in the event of the Secretary's inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties as may from time to time be prescribed by the Board, the Chairman, or the President. SECTION i.. TREASURER. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable assets in the name and to the credit of the corporation in such depositories as may be designated by the Board. The Treasurer shall disburse the funds of the corporation as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the Chairman, the President and the Board, at its regular meetings or when the Board so requires, an account of all transactions as Treasurer and of the financial condition of the corporation. The Treasurer shall perform such other duties as may from time to time be prescribed by the Board, the Chairman, or the President. SECTION j.. ASSISTANT TREASURER. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board (or if there be no such determination, then in order of their election), shall, in absence of the Treasurer or in the event of the Treasurer's Inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board, the Chairman., the President, or the Treasurer. SECTION k.. OTHER DUTIES. Any officer who is elected or appointed from time to time BY the Board and whose duties are not specified in these By-Laws shall perform such duties and have such powers as may be prescribed from time to time by the Board, the Chairman or the President. SECTION 5. CERTIFICATE OF STOCK AND OTHER STOCKHOLDER MATTERS SECTION a.. FORM. The shares of the corporation shall be represented by certificates; provided, however, that the Board may provide by resolution or resolutions that some or all of any or all classes or series of the corporation's stock shall be uncertificated shares. Certificates of stock in the corporation, if any, shall be signed by or in the name of the corporation by the Chairman or the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant secretary of the corporation. Where a certificate is countersigned by a transfer agent, other than the corporation or an employee of the corporation, or by a registrar, the signatures of the Chairman, the President or a ' Vice President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary may be facsimiles. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, the certificate may be issued by the corporation with the same effect as if such officer, transfer agent or registrar were such 6 officer, transfer agent or registrar at the date of its issue. SECTION b.. REPLACEMENT. In case of the loss, destruction or theft of a certificate for any stock of the corporation, a new certificate of stock or uncertificated shares in place of any certificate therefor issued by the corporation may be issued upon satisfactory proof of such loss, destruction or theft and upon such terms as the Board may prescribe. The Board may in its discretion require the owner of the lost, destroyed or stolen certificate, or his legal representative, to give the corporation a bond, in such sum and in such form and with such -surety or sureties as it may direct, to indemnify the corporation against any claim that may be made against it with respect to a certificate alleged to have been lost, destroyed or stolen. SECTION c.. TRANSFER. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate of stock or uncertificated shares in place of any certificate therefor Assured by the corporation to the person entitled thereto, cancel the old certificate and record the transaction on its books. SECTION d.. STOCKHOLDERS ENTITLED TO NOTICE OR TO VOTE. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of the stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any lawful action, the Board may fix in advance, a record date which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. SECTION e.. STOCK LEDGER DETERMINATIVE OF DIVIDEND DISTRIBUTIONS AND VOTING ENTITLEMENTS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and other distributions, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to, or interest in, such share or shares on the part of any other person, whether or not it shall have express or either notice thereof, except as otherwise provided by the laws of the State of Delaware. SECTION 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS SECTION a.. GOOD FAITH REQUIREMENT. The corporation shall indemnify any person who was or is a party or is threatened to be made party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, 7 employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit - or proceeding by judgment, order, settlement, conviction or upon a plea of NOLO CONTENDERS or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. SECTION b.. EXPENSES INDEMNIFIED. To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 6.1 of these By-Laws, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. SECTION c.. DETERMINATION OF INDEMNIFICATION. Any indemnification under Section 6.1 of these By-Laws (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that Indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in section 6.1 of these By-Laws. Such determination shall be made (1) by the Board by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. SECTION d.. EXPENSES PAID IN ADVANCE OF DETERMINATION OF INDEMNIFICATION. Expenses incurred in defending a civil or criminal action suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board in the manner provided in section 6.3 of these By-Laws upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he or she is entitled to be Indemnified by the corporation under these By-Laws. SECTION e.. INDEMNIFICATION PROVISIONS NOT EXCLUSIVE. The Indemnification provided by the By-Laws shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-Law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION f.. DIRECTORS AND OFFICERS LIABILITY INSURANCE. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any 8 liability asserted against him and Incurred by him in any such capacity, or arising out of his status a such, whether or not he would be entitled to indemnity against such liability under the provisions of these By-Laws. SECTION 7. DIVIDENDS SECTION a.. DECLARATION OF DIVIDENDS. Dividends may be declared by the Board at any regular or special meeting, pursuant to law and in accordance with the voting requirements stated in these By-Laws. Dividends may be paid in cash, in property or in shares of the corporation's capital stock. SECTION b.. RESERVES FOR DIVIDENDS. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board from time to time, in its absolute discretion, deems proper as a reserve or reserve to meet contingencies, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board determine promotes the interest of the corporation and the Board may modify or abolish any such reserve in the manner in which it was created. SECTION 8. GENERAL PROVISIONS SECTION a.. FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board. SECTION b.. CORPORATE SEAL. The corporate seal shall be in such form as may be approved from time to time by the Board. The seal. may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. SECTION c.. FORM OF NOTICE. Whenever, under the provisions of the applicable statutes or of the Certificate of Incorporation or of these By-Laws, notice is required to be given to any director or stockholder, personal notice is not required; any notice shall be given in writing either in person, by air courier service, or mail addressed to such director or stockholder at his address as it appears on the records of the corporation, with postage thereon prepaid if sent by air courier service or mail, and such notice shall be deemed to be given when handed to such director or stockholder, one (1) business day after being delivered to an air courier service, or two (2) business days after being deposited in the United States mail. SECTION d.. WAIVER OF NOTICE. Whenever any notice is required to be given under law or the provisions of the Certificate of Incorporation or these By- Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of 9 notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Neither the business to be transacted at nor the purpose of, any regular or special meeting of the stockholders or directors need to be specified in any written waiver of notice. SECTION e.. CORPORATION CHECKS. All checks or other orders for the payment of money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board my from time to time designate. SECTION f.. PROTECTION OF CORPORATE BOOKS. As provided under applicable laws of the State of Delaware, or any successor laws the corporation shall make available to the stockholders the books and records of the corporation, including without limitation, periodic financial statements of the corporation. SECTION 9. AMENDMENTS SECTION a.. AMENDMENTS OF BY-LAWS. These By-Laws may be altered, amended new By-Laws may be adopted by the Board. The fact that the alter, repeal or adopt the By-Laws has been conferred upon the divest stockholders of same powers. 10 EX-5.1 4 EXHIBIT 5.1--OPINION AND CONSENT Exhibit 5.1 [Mayer, Brown & Platt Letterhead] November 5, 1997 Friendly Ice Cream Corporation 1855 Boston Road Wilbraham, Massachusetts 01095 Ladies and Gentlemen: We have acted as counsel to Friendly Ice Cream Corporation, a Massachusetts corporation (the "Corporation") and Friendly's Restaurant Franchise, Inc., a Delaware corporation (the "Subsidiary"), in connection with the corporate proceedings (the "Proceedings") taken and to be taken relating to the public offering of $175,000,000 of the Company's Senior Notes due 2007 (the "Notes"), as unconditionally guaranteed by the Subsidiary (such guarantee being the "Guarantees"). The Notes and the Guarantees are to be issued pursuant to an Indenture between the Company, the Subsidiary and The Bank of New York, as Trustee (the "Indenture"). In this connection, we have examined such corporate and other records, instruments, certificates and documents as we considered necessary to enable us to express this opinion. Based on the foregoing, it is our opinion that, upon completion of the Proceedings, the Notes and the Guarantees will have been duly authorized for issuance and, when the Indenture has been duly executed and delivered by the parties thereto and when the Notes and the Guarantees are duly executed, authenticated, issued and delivered, the Notes and the Guarantees will constitute valid and legally binding obligations of the Company and the Subsidiary, respectively, entitled to the benefits of the Indenture, subject to bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles (whether considered in a proceeding at law or in equity). We consent to the filing of this opinion as an exhibit to the registration statement relating to the Notes and the Guarantees and to the reference to us under the caption "Legal Matters" therein. Very truly yours, /s/ Mayer Brown & Platt MAYER, BROWN & PLATT MAC:dpz EX-10.1 5 EXHIBIT 10.1--FORM OF CREDIT AGREEMENT Exhibit 10.1 ================================================================================ $175,000,000 CREDIT AGREEMENT among FRIENDLY ICE CREAM CORPORATION, as Borrower, The Several Lenders from Time to Time Parties Hereto and SOCIETE GENERALE, as Arranger and Administrative Agent and Dated as of _____________, 1997 ================================================================================ TABLE OF CONTENTS ----------------- Page ---- SECTION 1. DEFINITIONS.................................................... 1 1.1 Defined Terms.................................................... 1 1.2 Other Definitional Provisions.................................... 23 SECTION 2. AMOUNT AND TERMS OF COMMITMENTS................................ 23 2.1 Term Loan Commitments............................................ 24 2.2 Procedure for Term Loan Borrowing................................ 24 2.3 Repayment of Term Loans.......................................... 24 2.4 Revolving Credit Commitments..................................... 26 2.5 Procedure for Revolving Credit Borrowing......................... 27 2.6 Repayment of Loans; Evidence of Debt............................. 27 2.7 Commitment Fees, etc. ........................................... 28 2.8 Termination or Reduction of Revolving Credit Commitments......... 28 2.9 Optional Prepayments............................................. 28 2.10 Mandatory Prepayments and Commitment Reductions................. 29 2.11 Conversion and Continuation Options............................. 30 2.12 Minimum Amounts and Maximum Number of Eurodollar Tranches....... 30 2.13 Interest Rates and Payment Dates................................ 31 2.14 Computation of Interest and Fees................................ 31 2.15 Inability to Determine Interest Rate............................ 32 2.16 Pro Rata Treatment and Payments................................. 32 2.17 Requirements of Law............................................. 34 2.18 Taxes........................................................... 35 2.19 Indemnity....................................................... 37 2.20 Change of Lending Office........................................ 37 2.21 Replacement of Lenders under Certain Circumstances.............. 38 SECTION 3. LETTERS OF CREDIT.............................................. 38 3.1 L/C Commitment................................................... 38 3.2 Procedure for Issuance of Letter of Credit....................... 39 3.3 Commissions, Fees and Other Charges.............................. 39 3.4 L/C Participations............................................... 39 3.5 Reimbursement Obligation of the Borrower......................... 40 3.6 Obligations Absolute............................................. 41 3.7 Letter of Credit Payments........................................ 41 3.8 Applications..................................................... 41 SECTION 4. REPRESENTATIONS AND WARRANTIES................................. 41 4.1 Financial Condition.............................................. 41 4.2 No Change........................................................ 42 4.3 Corporate Existence; Compliance with Law......................... 42 4.4 Corporate Power; Authorization; Enforceable Obligations.......... 42 4.5 No Legal Bar..................................................... 43 4.6 No Material Litigation........................................... 43 -i- Page ---- 4.7 No Default....................................................... 43 4.8 Ownership of Property; Liens..................................... 43 4.9 Intellectual Property............................................ 44 4.10 Taxes........................................................... 44 4.11 Federal Regulations............................................. 44 4.12 Labor Matters................................................... 44 4.13 ERISA........................................................... 44 4.14 Investment Company Act; Other Regulations....................... 45 4.15 Subsidiaries.................................................... 45 4.16 Use of Proceeds................................................. 45 4.17 Environmental Matters........................................... 45 4.18 Accuracy of Information, etc.................................... 46 4.19 Security Documents.............................................. 47 4.20 Solvency........................................................ 47 4.21 Regulation H.................................................... 47 4.22 Material Contracts.............................................. 47 SECTION 5. CONDITIONS PRECEDENT........................................... 48 5.1 Conditions to Initial Extension of Credit........................ 48 5.2 Conditions to Each Extension of Credit........................... 51 SECTION 6. AFFIRMATIVE COVENANTS.......................................... 52 6.1 Financial Statements............................................. 52 6.2 Certificates; Other Information.................................. 52 6.3 Payment of Obligations........................................... 54 6.4 Conduct of Business and Maintenance of Existence, etc. .......... 54 6.5 Maintenance of Property; Insurance............................... 54 6.6 Inspection of Property; Books and Records; Discussions........... 55 6.7 Notices.......................................................... 55 6.8 Environmental Laws............................................... 56 6.9 Interest Rate Protection......................................... 56 6.10 Additional Collateral, etc...................................... 56 6.11 Mortgage Recording Taxes........................................ 57 SECTION 7. NEGATIVE COVENANTS............................................. 58 7.1 Financial Condition Covenants.................................... 58 7.2 Limitation on Indebtedness....................................... 60 7.3 Limitation on Liens.............................................. 62 7.4 Limitation on Fundamental Changes................................ 63 7.5 Limitation on Sale of Assets..................................... 64 7.6 Limitation on Dividends.......................................... 64 7.7 Limitation on Capital Expenditures............................... 65 7.8 Limitation on Investments, Loans and Advances.................... 65 7.9 Limitation on Optional Payments and Modifications of Debt Instruments, etc................................................. 66 7.10 Limitation on Transactions with Affiliates...................... 67 7.11 Limitation on Sales and Leasebacks.............................. 67 7.12 Limitation on Changes in Fiscal Periods......................... 67 7.13 Limitation on Negative Pledge Clauses........................... 67 7.14 Limitation on Restrictions on Subsidiary Distributions.......... 67 7.15 Limitation on Lines of Business................................. 69 -ii- Page ---- SECTION 8. EVENTS OF DEFAULT.............................................. 69 SECTION 9. THE AGENT...................................................... 72 9.1 Appointment...................................................... 72 9.2 Delegation of Duties............................................. 72 9.3 Exculpatory Provisions........................................... 72 9.4 Reliance by Agent................................................ 73 9.5 Notice of Default................................................ 73 9.6 Non-Reliance on Agent and Other Lenders.......................... 73 9.7 Indemnification.................................................. 74 9.8 Agent in Its Individual Capacity................................. 74 9.9 Successor Agent.................................................. 75 9.10 Authorization to Release Liens.................................. 75 SECTION 10. MISCELLANEOUS................................................. 75 10.1 Amendments and Waivers.......................................... 75 10.2 Notices......................................................... 76 10.3 No Waiver; Cumulative Remedies.................................. 77 10.4 Survival of Representations and Warranties...................... 77 10.5 Payment of Expenses............................................. 77 10.6 Successors and Assigns; Participations and Assignments.......... 78 10.7 Adjustments; Set-off............................................ 80 10.8 Counterparts.................................................... 81 10.9 Severability.................................................... 81 10.10 Integration.................................................... 81 10.11 GOVERNING LAW.................................................. 81 10.12 Submission To Jurisdiction; Waivers............................ 81 10.13 Acknowledgements............................................... 82 10.14 WAIVERS OF JURY TRIAL.......................................... 82 10.15 Confidentiality................................................ 82 -iii- ANNEXES: A Pricing Grid B ECF Percentage Grid C Permitted Capital Expenditure Grid SCHEDULES: 1.1A Commitments 1.1B Mortgaged Properties 1.1C Management Permitted Holders 4.4 Consents, Authorizations, Filings and Notices 4.15 Subsidiaries 4.19(a) UCC Filing Jurisdictions 4.19(b) Mortgage Filing Jurisdictions 4.22 Material Contracts 5.1(p) Plant and Headquarters Properties 7.1 Financial Covenant Calculations 7.2(e) Existing Indebtedness 7.3(f) Existing Liens 7.8(h) Existing Investments EXHIBITS: A Form of Guarantee and Collateral Agreement B Form of Compliance Certificate C Form of Closing Certificate D-1 Form of Mortgage (Leasehold) D-2 Form of Mortgage (Fee) E Form of Assignment and Acceptance F-1 Form of Legal Opinion of Mayer, Brown & Platt F-2 Form of Legal Opinion of Larry W. Browne, Esq. G-1 Form of Term Note G-2 Form of Revolving Credit Note H Form of Prepayment Option Notice I Form of Exemption Certificate -iv- CREDIT AGREEMENT, dated as of _____________, 1997, among FRIENDLY ICE CREAM CORPORATION, a Massachusetts corporation (the "BORROWER"), the several banks and other financial institutions or entities from time to time parties to this Agreement (the "LENDERS") and SOCIETE GENERALE, as arranger and administrative agent for the Lenders hereunder. W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Borrower, certain subsidiaries of the Borrower, the financial institutions party thereto and BankBoston, N.A. (formerly known as The First National Bank of Boston), as administrative agent, collateral agent and issuing bank, are parties to the Second Amended and Restated Revolving Credit and Term Loan Agreement, dated as of January 1, 1996 and as amended, supplemented or otherwise modified (the "EXISTING CREDIT FACILITY"); WHEREAS, the Borrower desires to refinance the indebtedness outstanding under the Existing Credit Facility; WHEREAS, concurrently with the initial extension of credit under this Agreement the Borrower is offering to the public (a) $175,000,000 aggregate principal amount of its unsecured senior notes due 2007 (the "SENIOR NOTE OFFERING"), and (b) 5,000,000 shares of its common stock (the "COMMON STOCK OFFERING" and, together with the Senior Note Offering, the "OFFERINGS"); WHEREAS, the Borrower has requested that the Lenders make credit facilities available to it in an aggregate principal amount of up to $175,000,000 consisting of (a) a $55,000,000 five-year revolving credit facility, (b) a $15,000,000 five-year letter of credit facility (to be implemented together with the Revolving Credit Facility), (c) a $40,000,000 five-year term loan facility, (d) a $40,000,000 seven-year term loan facility and (e) a $25,000,000 eight-year term loan facility (collectively, the "CREDIT FACILITIES" and, together with the Offerings and the application of the net proceeds hereunder and thereunder, the "RECAPITALIZATION"); and WHEREAS, the Lenders are willing to make the Credit Facilities available upon and subject to the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the agreements hereinafter set forth, the parties hereto hereby agree as follows: SECTION 1. DEFINITIONS 1.1 DEFINED TERMS. As used in this Agreement, the terms listed in this Section 1.1 shall have the respective meanings set forth in this Section 1.1. 2 "ABR": for any day, a rate per annum (rounded upwards, if necessary, to the next 1/100 of 1%) equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof: "PRIME RATE" shall mean the rate of interest per annum publicly announced from time to time by the Reference Lender as its prime rate in effect at its principal office in New York City (the Prime Rate not being intended to be the lowest rate of interest charged by the Reference Lender in connection with extensions of credit to debtors). Any change in the ABR due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "ABR LOANS": Loans the rate of interest applicable to which is based upon the ABR. "ADJUSTMENT DATE": as defined in the Pricing Grid. "AFFILIATE": as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" of a Person means the power, directly or indirectly, either to (a) vote 10% or more of the securities having ordinary voting power for the election of directors (or persons performing similar functions) of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "AGENT": Societe Generale, together with its affiliates, as the arranger of the Commitments and as the administrative agent for the Lenders under this Agreement and the other Loan Documents. "AGREEMENT": this Credit Agreement, as amended, supplemented or otherwise modified from time to time. "APPLICABLE MARGIN": for each Type of Loan, the rate per annum set forth under the relevant column heading below: Eurodollar ABR Loans Loans ---------- ----- Revolving Credit Loans 2.25% 0.75% Tranche A Term Loans 2.25% 0.75% Tranche B Term Loans 2.50% 1.00% Tranche C Term Loans 2.75% 1.25% ; PROVIDED, that on and after the first Adjustment Date occurring after the completion of four full fiscal quarters of the Borrower after the Closing Date, the Applicable Margin with respect to Revolving Credit Loans and Tranche A Term Loans will be determined pursuant to the Pricing Grid. 3 "APPLICATION": an application, in such form as the Issuing Lender may specify from time to time, requesting the Issuing Lender to open a Letter of Credit, and specifying the date on which such Letter of Credit is to be issued, the expiration date of such Letter of Credit, the name and address of the beneficiary of such Letter of Credit, whether such Letter of Credit is to be a Trade Letter of Credit or a Standby Letter of Credit and such other information as may be necessary or desirable to complete such Letter of Credit. "ASSET SALE": any Disposition of Property or series of related Dispositions of Property (excluding any such Disposition permitted by clause (a), (b), (c), (d) or (g) of Section 7.5) which yields gross proceeds to the Borrower or any of its Subsidiaries (valued at the initial principal amount thereof in the case of non-cash proceeds consisting of notes or other debt securities and valued at fair market value in the case of other non-cash proceeds) in excess of $100,000. "ASSIGNEE": as defined in Section 10.6(c). "ASSIGNOR": as defined in Section 10.6(c). "AUTHORIZED SIGNATORY": the chief executive officer, president, chief administrative officer or chief financial officer of the Borrower, or their respective designees notified to the Agent in writing, but in any event, with respect to financial matters, the chief financial officer of the Borrower. "AVAILABLE REVOLVING CREDIT COMMITMENT": as to any Revolving Credit Lender at any time, an amount equal to the excess, if any, of (a) such Lender's Revolving Credit Commitment OVER (b) such Lender's Revolving Extensions of Credit. "BOARD": the Board of Governors of the Federal Reserve System of the United States (or any successor). "BORROWING DATE": any Business Day specified by the Borrower as a date on which the Borrower requests the relevant Lenders to make Loans hereunder. "BUSINESS": as defined in Section 4.17. "BUSINESS DAY": (a) for all purposes other than as covered by clause (b) below, a day other than a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close and (b) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day which is a Business Day described in clause (a) and which is also a day for trading by and between banks in Dollar deposits in the interbank eurodollar market. "BUSINESS-SUSTAINING CAPITAL EXPENDITURES": for any period of four consecutive fiscal quarters, Capital Expenditures during such period in an amount equal to $15,000,000, constituting the amount of Capital Expenditures necessary to maintain the 4 then existing Property of the Borrower and its Subsidiaries in good working order and condition (excluding payments in respect of the principal amount of Indebtedness incurred in connection with such expenditures). "CAPITAL EXPENDITURES": for any period, with respect to any Person, the aggregate of all expenditures by such Person and its Subsidiaries for the acquisition or leasing (pursuant to a capital lease) of fixed or capital assets or additions to equipment (including replacements, capitalized repairs and improvements during such period) which should be capitalized under GAAP on a consolidated balance sheet of such Person and its Subsidiaries. "CAPITAL LEASE OBLIGATIONS": as to any Person, the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP. "CAPITAL STOCK": any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants, rights or options to purchase any of the foregoing. "CASH EQUIVALENTS": (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition; (b) certificates of deposit, time deposits, eurodollar time deposits or overnight bank deposits having maturities of six months or less from the date of acquisition issued by any Lender or by any commercial bank organized under the laws of the United States of America or any state thereof having combined capital and surplus of not less than $500,000,000; (c) commercial paper of an issuer rated at least A-1 by Standard & Poor's Ratings Services ("S&P") or P-1 by Moody's Investors Service, Inc. ("MOODY'S"), or carrying an equivalent rating by a nationally recognized rating agency, if both of the two named rating agencies cease publishing ratings of commercial paper issuers generally, and maturing within nine months from the date of acquisition; (d) repurchase obligations of any Lender or of any commercial bank satisfying the requirements of clause (b) of this definition, having a term of not more than 30 days with respect to securities issued or fully guaranteed or insured by the United States government; (e) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, by any political subdivision or taxing authority of any such state, commonwealth or territory or by any foreign government, the securities of which state, commonwealth, territory, political subdivision, taxing authority or foreign government (as the case may be) are rated at least A by S&P or A by Moody's; (f) securities with maturities of six months or less from the date of acquisition backed by standby letters of credit issued by any 5 Lender or any commercial bank satisfying the requirements of clause (b) of this definition; or (g) shares of money market mutual or similar funds which invest exclusively in assets satisfying the requirements of clauses (a) through (f) of this definition or which comply with the risk limiting conditions of Rule 2a-7 or any successor rule of the Securities and Exchange Commission under the Investment Company Act of 1940. "CLOSING DATE": the date on which the conditions precedent set forth in Section 5.1 shall have been satisfied. "CODE": the Internal Revenue Code of 1986, as amended from time to time. "COLLATERAL": all Property of the Loan Parties, now owned or hereafter acquired, upon which a Lien is purported to be created by any Security Document. "COMMITMENT": as to any Lender, the sum of the Tranche A Term Loan Commitment, the Tranche B Term Loan Commitment, the Tranche C Term Loan Commitment and the Revolving Credit Commitment of such Lender. "COMMITMENT FEE RATE": 1/2 of 1% per annum; PROVIDED, that on and after the first Adjustment Date occurring after the completion of four full fiscal quarters of the Borrower after the Closing Date, the Commitment Fee Rate will be determined pursuant to the Pricing Grid. "COMMONLY CONTROLLED ENTITY": an entity, whether or not incorporated, which is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group which includes the Borrower and which is treated as a single employer under Section 414 of the Code. "COMMON STOCK": the Borrower's common stock, par value $0.01 per share. "COMMON STOCK OFFERING": as defined in the recitals to this Agreement. "COMPLIANCE CERTIFICATE": a certificate duly executed by a Authorized Signatory substantially in the form of Exhibit B. "CONSOLIDATED CASH INTEREST EXPENSE": for any period, total cash interest expense (including that attributable to Capital Lease Obligations) of the Borrower and its Subsidiaries for such period with respect to all outstanding Indebtedness of the Borrower and its Subsidiaries (including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate Protection Agreements to the extent such net costs are allocable to such period in accordance with GAAP); PROVIDED that for purposes of calculating Consolidated Cash Interest Expense of the Borrower and its Subsidiaries for the fourth fiscal quarter of the Borrower's 1997 fiscal year, cash interest expense with respect to Indebtedness created in connection with the Recapitalization shall be included on a PRO FORMA basis for such fiscal quarter 6 (assuming that the consummation of the Recapitalization and the incurrence of such Indebtedness occurred on the first day of such fiscal quarter and that the rate applicable to any floating rate Indebtedness from the first day of such fiscal quarter to the Closing Date is the 30-day Eurodollar Rate in effect on the Closing Date). "CONSOLIDATED EBITDA": for any period, Consolidated Net Income for such period PLUS, without duplication and to the extent reflected as a charge in the statement of such Consolidated Net Income for such period, the sum of (a) income tax expense, (b) interest expense, amortization or writeoff of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with Indebtedness (including the Loans), (c) depreciation and amortization expense, (d) amortization of intangibles (including, but not limited to, goodwill) and organization costs, (e) any extraordinary, unusual or non-recurring expenses or losses (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, losses on sales of assets outside of the ordinary course of business) and (f) any other non-cash charges, and MINUS, to the extent included in the statement of such Consolidated Net Income for such period, the sum of (a) interest income, (b) any extraordinary, unusual or non-recurring income or gains (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, gains on the sales of assets outside of the ordinary course of business (it being understood that sales of restaurants in an aggregate amount up to $2,500,000 in any fiscal year are deemed to be in the ordinary course of business)) and (c) any other non-cash income, all as determined on a consolidated basis. "CONSOLIDATED FIXED CHARGE COVERAGE RATIO": for any period, the ratio of (a) Consolidated EBITDA for such period MINUS (i) Business-Sustaining Capital Expenditures for such period and (ii) cash income taxes for such period to (b) Consolidated Fixed Charges for such period. "CONSOLIDATED FIXED CHARGES": for any period, the sum (without duplication) of (a) Consolidated Cash Interest Expense for such period, (b) scheduled payments made during such period on account of principal of Indebtedness of the Borrower or any of its Subsidiaries (including scheduled principal payments in respect of the Term Loans) and (c) scheduled payments (excluding interest expense attributable to such Capital Lease Obligations) made during such period on account of Capital Lease Obligations. "CONSOLIDATED INTEREST COVERAGE RATIO": for any period, the ratio of (a) Consolidated EBITDA MINUS (i) Business-Sustaining Capital Expenditures for such period and (ii) cash income taxes for such period to (b) Consolidated Cash Interest Expense for such period. "CONSOLIDATED LEVERAGE RATIO": as at the last day of any period, the ratio of (a) Consolidated Total Debt on such day to (b) Consolidated EBITDA for such period; PROVIDED that for purposes of calculating Consolidated EBITDA of the Borrower and its Subsidiaries for any period, the Consolidated EBITDA of any Person acquired by 7 the Borrower or its Subsidiaries during such period shall be included on a PRO FORMA basis for such period (assuming the consummation of each such acquisition and the incurrence or assumption of any Indebtedness in connection therewith occurred on the first day of such period) if the consolidated balance sheet of such acquired Person and its consolidated Subsidiaries as at the end of the period preceding the acquisition of such Person and the related consolidated statements of income and stockholders' equity and of cash flows for the period in respect of which Consolidated EBITDA is to be calculated (i) have been previously provided to the Agent and the Lenders and (ii) either (A) have been reported on without a qualification arising out of the scope of the audit or a "going concern" or like qualification or exception by independent certified public accountants of nationally recognized standing or (B) have been found acceptable by the Agent. "CONSOLIDATED NET INCOME": for any period, the consolidated net income (or loss) of the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with GAAP; PROVIDED that there shall be excluded (a) the income (or deficit) of any Person accrued prior to the date it becomes a Subsidiary of the Borrower or is merged into or consolidated with the Borrower or any of its Subsidiaries, (b) the income (or deficit) of any Person (other than a Subsidiary of the Borrower) in which the Borrower or any of its Subsidiaries has an ownership interest, except to the extent that any such income is actually received by the Borrower or such Subsidiary in the form of dividends or similar distributions and (c) the undistributed earnings of any Subsidiary of the Borrower to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary is not at the time permitted by the terms of any Contractual Obligation (other than under any Loan Document) or Requirement of Law applicable to such Subsidiary. "CONSOLIDATED NET WORTH": at any date, all amounts which would, in conformity with GAAP, be included on a consolidated balance sheet of the Borrower and its Subsidiaries under stockholders' equity at such date. "CONSOLIDATED TOTAL DEBT": at any date, the aggregate principal amount of all Indebtedness of the Borrower and its Subsidiaries at such date, determined on a consolidated basis in accordance with GAAP. "CONTINUING DIRECTORS": the directors of the Borrower on the Closing Date, after giving effect to the Recapitalization and the other transactions contemplated hereby, and each other director, if, in each case, such other director's nomination for election to the board of directors of the Borrower is recommended by at least a majority of the then Continuing Directors or such other director receives the vote of the Permitted Holders in his or her election by the shareholders of the Borrower. "CONTRACTUAL OBLIGATION": as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its Property is bound. 8 "DEFAULT": any of the events specified in Section 8, whether or not any requirement for the giving of notice, the lapse of time, or both, has been satisfied. "DISPOSITION": with respect to any Property, any sale, lease, sale and leaseback, assignment, conveyance, transfer or other disposition thereof; and the terms "DISPOSE" and "DISPOSED OF" shall have correlative meanings. "DISQUALIFIED STOCK": means, with respect to any Person, any Capital Stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable) or upon the happening or any event (a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (b) is convertible or exchangeable for Indebtedness or Disqualified Stock or (c) is redeemable at the option of the holder thereof, in whole or in part, in each case prior to the Tranche C Maturity Date. "DOLLARS" and "$": dollars in lawful currency of the United States of America. "DOMESTIC SUBSIDIARY": any Subsidiary of the Borrower organized under the laws of any jurisdiction within the United States of America. "ECF PERCENTAGE": 80%; PROVIDED, that on and after the first ECF Percentage Adjustment Date occurring after the completion of four fiscal quarters of the Borrower after the Closing Date, the ECF Percentage will be determined pursuant to the ECF Percentage Grid. "ECF PERCENTAGE ADJUSTMENT DATE": as defined in the ECF Percentage Grid. "ECF PERCENTAGE GRID": the Grid attached hereto as Annex B. "ENVIRONMENTAL LAWS": any and all foreign, federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other Requirements of Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time hereafter be in effect. "ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time. "EUROCURRENCY RESERVE REQUIREMENTS": for any day as applied to a Eurodollar Loan, the aggregate (without duplication) of the maximum rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board) maintained by a member bank of the Federal Reserve System. 9 "EURODOLLAR BASE RATE": with respect to each day during each Interest Period pertaining to a Eurodollar Loan, the rate per annum determined on the basis of the rate for deposits in Dollars for a period equal to such Interest Period commencing on the first day of such Interest Period appearing on Page 3750 of the Telerate screen as of 11:00 A.M., London time, two Business Days prior to the beginning of such Interest Period. In the event that such rate does not appear on Page 3750 of the Telerate Service (or otherwise on such service), the "EURODOLLAR BASE RATE" for purposes of this definition shall be determined by reference to such other comparable publicly available service for displaying eurodollar rates as may be selected by the Agent or, in the absence of such availability, by reference to the rate at which the Agent is offered Dollar deposits at or about 11:00 A.M., New York City time, two Business Days prior to the beginning of such Interest Period in the interbank eurodollar market where its eurodollar and foreign currency and exchange operations are then being conducted for delivery on the first day of such Interest Period for the number of days comprised therein. "EURODOLLAR LOANS": Loans the rate of interest applicable to which is based upon the Eurodollar Rate. "EURODOLLAR RATE": with respect to each day during each Interest Period pertaining to a Eurodollar Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward, if necessary, to the nearest 1/100th of 1%): Eurodollar Base Rate --------------------------------------- 1.00 - Eurocurrency Reserve Requirements "EURODOLLAR TRANCHE": the collective reference to Eurodollar Loans the then current Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such Loans shall originally have been made on the same day). "EVENT OF DEFAULT": any of the events specified in Section 8, PROVIDED that any requirement for the giving of notice, the lapse of time, or both, has been satisfied. "EXCESS CASH FLOW": for any fiscal year of the Borrower, the excess, if any, of (a) Consolidated EBITDA for such fiscal year, over (b) the sum, without duplication, of (i) the aggregate amount actually paid by the Borrower and its Subsidiaries in cash during such fiscal year on account of Capital Expenditures (excluding the principal amount of Indebtedness incurred in connection with such expenditures and any such expenditures financed with the proceeds of any Reinvestment Deferred Amount), (ii) the aggregate amount of all prepayments of Revolving Credit Loans during such fiscal year to the extent accompanying permanent optional reductions of the Revolving Credit Commitments and all optional prepayments of the Term Loans during such fiscal year, (iii) the aggregate amount of all regularly scheduled principal payments of Funded Debt (including, without limitation, the Term Loans) of the Borrower and its Subsidiaries made during such fiscal year (other than in respect of any revolving credit 10 facility to the extent there is not an equivalent permanent reduction in commitments thereunder) and (iv) the aggregate amount actually paid by the Borrower and its Subsidiaries in cash during such fiscal year on account of income taxes. "EXCLUDED FOREIGN SUBSIDIARIES": any Foreign Subsidiary the pledge of all of whose Capital Stock as Collateral would, in the good faith judgment of the Borrower, result in adverse tax consequences to the Borrower. "EXISTING CREDIT FACILITY": as defined in the recitals to this Agreement. "FACILITY": each of (a) the Tranche A Term Loan Commitments and the Tranche A Term Loans made thereunder (the "TRANCHE A TERM LOAN FACILITY"), (b) the Tranche B Term Loan Commitments and the Tranche B Term Loans made thereunder (the "TRANCHE B TERM LOAN FACILITY"), (c) the Tranche C Term Loan Commitments and the Tranche C Term Loans made thereunder (the "TRANCHE TERM LOAN FACILITY") and (d) the Revolving Credit Commitments and the extensions of credit made thereunder (the "REVOLVING CREDIT FACILITY"). "FEDERAL FUNDS EFFECTIVE RATE"; for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Reference Lender from three federal funds brokers of recognized standing selected by it. "FOREIGN SUBSIDIARY": any Subsidiary of the Borrower that is not a Domestic Subsidiary. "FUNDED DEBT": as to any Person, all Indebtedness of such Person that matures more than one year from the date of its creation or matures within one year from such date but is renewable or extendible, at the option of such Person, to a date more than one year from such date or arises under a revolving credit or similar agreement that obligates the lender or lenders to extend credit during a period of more than one year from such date, including, without limitation, all current maturities and current sinking fund payments in respect of such Indebtedness whether or not required to be paid within one year from the date of its creation and, in the case of the Borrower, Indebtedness in respect of the Loans. "FUNDING OFFICE": the office of the Agent set forth in Section 10.2. "GAAP": generally accepted accounting principles in the United States of America as in effect from time to time set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board and the rules and regulations of the Securities and Exchange Commission, or in such other statements by such other entity as may be in general use 11 by significant segments of the accounting profession, which are applicable to the circumstances of the Borrower as of the date of determination, except that for purposes of Section 7.1, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the preparation of the most recent audited financial statements delivered pursuant to Section 4.1(b). "GOVERNMENTAL AUTHORITY": any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "GUARANTEE AND COLLATERAL AGREEMENT": the Guarantee and Collateral Agreement to be executed and delivered by the Borrower and each Guarantor, substantially in the form of Exhibit A, as the same may be amended, supplemented or otherwise modified from time to time. "GUARANTEE OBLIGATION": as to any Person (the "GUARANTEEING PERSON"), any obligation of (a) the guaranteeing person or (b) another Person (including, without limitation, any bank under any letter of credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "PRIMARY OBLIGATIONS") of any other third Person (the "PRIMARY OBLIGOR") in any manner, whether directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any Property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase Property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; PROVIDED, HOWEVER, that the term Guarantee Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person's maximum reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. "GUARANTORS": each Subsidiary of the Borrower other than any Excluded Foreign Subsidiary and other than RIC. "INCUR": as defined in Section 7.2. 12 "INDEBTEDNESS": of any Person at any date, without duplication, (a) all indebtedness of such Person for borrowed money, (b) all obligations of such Person for the deferred purchase price of Property or services (other than current trade payables incurred in the ordinary course of such Person's business), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all indebtedness created or arising under any conditional sale or other title retention agreement with respect to Property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such Property), (e) all Capital Lease Obligations of such Person, (f) all obligations of such Person, contingent or otherwise, as an account party under acceptance facilities and all obligations of such Person in respect of unreimbursed drawings under any letter of credit facility, (g) all obligations of such Person, contingent or otherwise, to purchase, redeem, retire or otherwise acquire for value any Capital Stock (other than common stock) of such Person, (h) all Guarantee Obligations of such Person in respect of obligations of the kind referred to in clauses (a) through (g) above; (i) all obligations of the kind referred to in clauses (a) through (h) above secured by (or for which the holder of such obligation has an existing right, contingent or otherwise, to be secured by) any Lien on Property (including, without limitation, accounts and contract rights) owned by such Person, whether or not such Person has assumed or become liable for the payment of such obligation, and (j) for the purposes of Sections 7.2 and 8(e) only, all obligations of such Person in respect of Interest Rate Protection Agreements. "INSOLVENCY": with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA. "INSOLVENT": pertaining to a condition of Insolvency. "INTELLECTUAL PROPERTY": the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including, without limitation, copyrights, copyright licenses, patents, patent licenses, trademarks, trademark licenses, technology, know-how and processes, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom. "INTEREST PAYMENT DATE": (a) as to any ABR Loan, the fifteenth day of each January, April, July and October to occur while such Loan is outstanding and the final maturity date of such Loan, (b) as to any Eurodollar Loan having an Interest Period of three months or less, the last day of such Interest Period, (c) as to any Eurodollar Loan having an Interest Period longer than three months, each day which is three months, or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period and (d) as to any Loan (other than any Revolving Credit Loan that is an ABR Loan), the date of any repayment or prepayment made in respect thereof, but only to the extent of the portion prepaid or repaid. 13 "INTEREST PERIOD": as to any Eurodollar Loan, (a) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Borrower in its notice of borrowing or notice of conversion, as the case may be, given with respect thereto; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one, two, three or six months thereafter, as selected by the Borrower by irrevocable notice to the Agent not less than three Business Days prior to the last day of the then current Interest Period with respect thereto; PROVIDED that, all of the foregoing provisions relating to Interest Periods are subject to the following: (i) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period that would otherwise extend beyond the Revolving Credit Termination Date or beyond the date final payment is due on the Tranche A Term Loans, the Tranche B Term Loans or the Tranche C Term Loans, as the case may be, shall end on the Revolving Credit Termination Date or such due date, as applicable; (iii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and (iv) the Borrower shall select Interest Periods so as not to require a payment or prepayment of any Eurodollar Loan during an Interest Period for such Loan. "INTEREST RATE PROTECTION AGREEMENT": any interest rate protection agreement, interest rate futures contract, interest rate option, interest rate cap or other interest rate hedge arrangement, to or under which the Borrower or any of its Subsidiaries is a party or a beneficiary on the date hereof or becomes a party or a beneficiary after the date hereof. "ISSUING LENDER": Societe Generale, in its capacity as issuer of any Letter of Credit. "L/C COMMITMENT": $25,000,000. "L/C FEE PAYMENT DATE": the fifteenth day of each January, April, July and October and the last day of the Revolving Credit Commitment Period. 14 "L/C OBLIGATIONS": at any time, an amount equal to the sum of (a) the aggregate then undrawn and unexpired amount of the then outstanding Letters of Credit and (b) the aggregate amount of drawings under Letters of Credit which have not then been reimbursed pursuant to Section 3.5. "L/C PARTICIPANTS": the collective reference to all the Revolving Credit Lenders other than the Issuing Lender. "LETTERS OF CREDIT": any Standby Letter of Credit or Trade Letter of Credit issued pursuant to Section 3. "LIEN": any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any capital lease having substantially the same economic effect as any of the foregoing). "LOAN": any loan made by any Lender pursuant to this Agreement. "LOAN DOCUMENTS": this Agreement, the Notes, the Guarantee and Collateral Agreement and each other Security Document. "LOAN PARTIES": the Borrower and each Subsidiary of the Borrower which is a party to a Loan Document. "MAJORITY FACILITY LENDERS": with respect to any Facility, the holders of more than 50% of the aggregate unpaid principal amount of the Term Loans or the Total Revolving Extensions of Credit, as the case may be, outstanding under such Facility (or, in the case of the Revolving Credit Facility, prior to any termination of the Revolving Credit Commitments, the holders of more than 50% of the Total Revolving Credit Commitments). "MAJORITY REVOLVING CREDIT FACILITY LENDERS": the Majority Facility Lenders in respect of the Revolving Credit Facility. "MAJOR MORTGAGED PROPERTIES": as defined in Section 5.1(p). "MATERIAL ADVERSE EFFECT": a material adverse effect on (a) the Recapitalization, (b) the business, assets, property, condition (financial or otherwise), operations, performance or prospects of the Borrower and its Subsidiaries taken as a whole or (c) the validity or enforceability of this Agreement or any of the other Loan Documents against the Borrower or any Guarantor party thereto or the rights or remedies of the Agent or the Lenders hereunder or thereunder. 15 "MATERIAL ENVIRONMENTAL AMOUNT": an amount payable by the Borrower and/or its Subsidiaries in excess of $5,000,000 for remedial costs, compliance costs, compensatory damages, punitive damages, fines, penalties or any combination thereof. "MATERIALS OF ENVIRONMENTAL CONCERN": any gasoline or petroleum (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Law, including, without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation. "MORTGAGED PROPERTIES": the real properties listed on Schedule 1.1B, as to which the Agent for the benefit of the Lenders shall be granted a Lien pursuant to the Mortgages. "MORTGAGES": each of the mortgages and deeds of trust made by any Loan Party in favor of, or for the benefit of, the Agent for the benefit of the Lenders, substantially in the form of Exhibit D (with such changes thereto as shall be advisable under the law of the jurisdiction in which such mortgage or deed of trust is to be recorded), as the same may be amended, supplemented or otherwise modified from time to time. "MULTIEMPLOYER PLAN": a Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NET CASH PROCEEDS": (a) in connection with any Asset Sale or any Recovery Event, the proceeds thereof in the form of cash and Cash Equivalents (including any such proceeds received by way of deferred payment of principal pursuant to a note or installment receivable or purchase price adjustment receivable or otherwise, but only as and when received) of such Asset Sale or Recovery Event, net of (i) attorneys' fees, accountants' fees, investment banking fees, amounts required to be applied to the repayment of Indebtedness secured by a Lien expressly permitted hereunder on any asset which is the subject of such Asset Sale or Recovery Event (other than any Lien pursuant to a Security Document) and other customary fees and expenses actually incurred in connection therewith, (ii) taxes paid or reasonably estimated to be payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements) and (iii) appropriate amounts to be provided by the Borrower or any Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against any liabilities associated with such Asset Sale and retained by the Borrower or any Subsidiary, as the case may be, after such Asset Sale, including pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale (provided that, if and to the extent that such reserves are no longer required to be maintained in accordance with GAAP, such amounts shall constitute Net Cash Proceeds) and (b) in connection with any issuance or sale of equity securities or debt securities or instruments or the incurrence of loans, the cash proceeds received from such issuance or incurrence, net of attorneys' fees, investment 16 banking fees, accountants' fees, underwriting discounts and commissions and other customary fees and expenses actually incurred in connection therewith. "NON-EXCLUDED TAXES": as defined in Section 2.18(a). "NON-U.S. LENDER": as defined in Section 2.18(d). "NOTES": the collective reference to any promissory note evidencing Loans. "OBLIGATIONS": the unpaid principal of and interest on (including, without limitation, interest accruing after the maturity of the Loans and Reimbursement Obligations and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Loans and all other obligations and liabilities of the Borrower to the Agent or to any Lender (or, in the case of Interest Rate Protection Agreements, any affiliate of any Lender), whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, any other Loan Document, the Letters of Credit, any Interest Rate Protection Agreement entered into with any Lender or any affiliate of any Lender or any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all reasonable fees, charges and disbursements of counsel to the Agent or to any Lender that are required to be paid by the Borrower pursuant hereto) or otherwise. "OFFERINGS": as defined in the recitals to this Agreement. "OTHER TAXES": any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement. "PARTICIPANT": as defined in Section 10.6(b). "PAYMENT OFFICE": the office of the Agent set forth in Section 10.2. "PBGC": the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA (or any successor). "PERMITTED CAPITAL EXPENDITURE ADJUSTMENT DATE": as defined in the Permitted Capital Expenditure Grid. "PERMITTED CAPITAL EXPENDITURE AMOUNT": with respect to any fiscal year, the amount set forth opposite such fiscal year under the caption "Capital Expenditure Amount" on the Permitted Capital Expenditure Grid; PROVIDED that on and after the first Permitted Capital Expenditure Adjustment Date occurring after the Closing Date, 17 the Permitted Capital Expenditure Amount with respect to the Borrower's 1999 fiscal year and each subsequent fiscal year shall be an amount equal to the product of (a) the Capital Expenditure Amount otherwise applicable for such fiscal year and (b) the relevant Permitted Capital Expenditure Percentage from the Permitted Capital Expenditure Grid. "PERMITTED CAPITAL EXPENDITURE GRID": the grid attached hereto as Annex C. "PERMITTED HOLDERS": the collective reference to Donald N. Smith, Harrah's Operating Company, Inc., The Equitable Life Assurance Society of the U.S., the members of the Borrower's existing senior management listed on Schedule 1.1C and their respective Affiliates. "PERSON": an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. "PLAN": at a particular time, any employee benefit plan which is covered by ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "PRICING GRID": the pricing grid attached hereto as Annex A. "PRO FORMA BALANCE SHEET": as defined in Section 4.1(a). "PROJECTIONS": as defined in Section 6.2(c). "PROPERTIES": as defined in Section 4.17. "PROPERTY": any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible, including, without limitation, Capital Stock. "RATIO OF CONSOLIDATED EBITDA TO CONSOLIDATED EBITDA TARGET": as at the last day of any period of four consecutive fiscal quarters, the ratio of (a) Consolidated EBITDA for such period to (b) the "Consolidated EBITDA Target" set forth for such period on the Permitted Capital Expenditure Grid. "REAL PROPERTY": all real property owned or leased by the Borrower or any of its Subsidiaries and all improvements thereon. "RECAPITALIZATION": as defined in the recitals to this Agreement. "RECOVERY EVENT": any settlement of or payment in respect of any property or casualty insurance claim or any condemnation proceeding relating to any asset of the 18 Borrower or any of its Subsidiaries which yields gross proceeds to the Borrower or any of its Subsidiaries in excess of $100,000. "REFERENCE LENDER": Societe Generale. "REGISTER": as defined in Section 10.6(d). "REGULATION G": Regulation G of the Board as in effect from time to time. "REGULATION U": Regulation U of the Board as in effect from time to time. "REIMBURSEMENT OBLIGATION": the obligation of the Borrower to reimburse the Issuing Lender pursuant to Section 3.5 for amounts drawn under Letters of Credit. "REINVESTMENT DEFERRED AMOUNT": with respect to any Reinvestment Event, the aggregate Net Cash Proceeds received by the Borrower or any of its Subsidiaries in connection therewith which are not applied to prepay the Term Loans or reduce the Revolving Credit Commitments pursuant to Section 2.10(b) as a result of the delivery of a Reinvestment Notice. "REINVESTMENT EVENT": any Asset Sale or Recovery Event in respect of which the Borrower has delivered a Reinvestment Notice. "REINVESTMENT NOTICE": a written notice executed by an Authorized Signatory stating that no Event of Default has occurred and is continuing and that the Borrower (directly or indirectly through a Subsidiary) intends and expects to use all or a specified portion of the Net Cash Proceeds of an Asset Sale or Recovery Event to acquire assets useful in its business. "REINVESTMENT PREPAYMENT AMOUNT": with respect to any Reinvestment Event, the Reinvestment Deferred Amount relating thereto less any amount expended prior to the relevant Reinvestment Prepayment Date to acquire assets useful in the Borrower's business. "REINVESTMENT PREPAYMENT DATE": with respect to any Reinvestment Event, the earlier of (a) the date occurring 180 days after such Reinvestment Event and (b) the date on which the Borrower shall have determined not to, or shall have otherwise ceased to, acquire assets useful in the Borrower's business with all or any portion of the relevant Reinvestment Deferred Amount. "REORGANIZATION": with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "REPORTABLE EVENT": any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty day notice period is waived under subsection .22, .23, .25, .27 or .28 of PBGC Reg. Section 4043. 19 "REQUIRED LENDERS": the holders of more than 50% of (a) until the Closing Date, the Commitments and (b) thereafter, the sum of (i) the aggregate unpaid principal amount of the Term Loans and (ii) the Total Revolving Credit Commitments or, if the Revolving Credit Commitments have been terminated, the Total Revolving Extensions of Credit. "REQUIRED PREPAYMENT LENDERS": the Majority Facility Lenders in respect of each Facility. "REQUIREMENT OF LAW": as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its Property or to which such Person or any of its Property is subject. "RIC": Restaurant Insurance Corporation, a Vermont corporation, and its successors. "REVOLVING CREDIT COMMITMENT": as to any Lender, the obligation of such Lender, if any, to make Revolving Credit Loans and participate in Letters of Credit, in an aggregate principal and/or face amount not to exceed the amount set forth under the heading "Revolving Credit Commitment" opposite such Lender's name on Schedule 1.1A, as the same may be changed from time to time pursuant to the terms hereof. The original amount of the Total Revolving Credit Commitments is $70,000,000. "REVOLVING CREDIT COMMITMENT PERIOD": the period from and including the Closing Date to the Revolving Credit Termination Date. "REVOLVING CREDIT LENDER": each Lender which has a Revolving Credit Commitment or which has made Revolving Credit Loans. "REVOLVING CREDIT LOANS": as defined in Section 2.4. "REVOLVING CREDIT PERCENTAGE": as to any Revolving Credit Lender at any time, the percentage which such Lender's Revolving Credit Commitment then constitutes of the Total Revolving Credit Commitments (or, at any time after the Revolving Credit Commitments shall have expired or terminated, the percentage which the aggregate principal amount of such Lender's Revolving Credit Loans then outstanding constitutes of the aggregate principal amount of the Revolving Credit Loans then outstanding). "REVOLVING CREDIT TERMINATION DATE": November 15, 2002. "REVOLVING EXTENSIONS OF CREDIT": as to any Revolving Credit Lender at any time, an amount equal to the sum of (a) the aggregate principal amount of all Revolving Credit Loans made by such Lender then outstanding and (b) such Lender's Revolving Credit Percentage of the L/C Obligations then outstanding. 20 "SALE/LEASEBACK TRANSACTION": an arrangement relating to property now owned or hereafter acquired whereby the Borrower or any of its Subsidiaries transfers such property to a Person and the Borrower or any of its Subsidiaries leases it from such Person. "SECURITY DOCUMENTS": the collective reference to the Guarantee and Collateral Agreement, the Mortgages and all other security documents hereafter delivered to the Agent granting a Lien on any Property of any Person to secure the obligations and liabilities of any Loan Party under any Loan Document. "SENIOR NOTE INDENTURE": the Indenture entered into by the Borrower, Friendly's Restaurants Franchise, Inc., the Borrower's franchise Subsidiary, and The Bank of New York, as Trustee, in connection with the issuance of the Senior Notes, together with all instruments and other agreements entered into by the Borrower or such Subsidiary in connection therewith, as the same may be amended, supplemented or otherwise modified from time to time in accordance with Section 7.9. "SENIOR NOTE OFFERING": as defined in the recitals to this Agreement. "SENIOR NOTES": the senior notes due 2007 of the Borrower issued on the Closing Date pursuant to the Senior Note Indenture. "SINGLE EMPLOYER PLAN": any Plan which is covered by Title IV of ERISA, but which is not a Multiemployer Plan. "SOLVENT": when used with respect to any Person, means that, as of any date of determination, (a) the amount of the "present fair saleable value" of the assets of such Person will, as of such date, exceed the amount of all "liabilities of such Person, contingent or otherwise", as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b) the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the liability of such Person on its debts as such debts become absolute and matured, (c) such Person will not have, as of such date, an unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able to pay its debts as they mature. For purposes of this definition, (i) "debt" means liability on a "claim", and (ii) "claim" means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured. "STANDBY LETTER OF CREDIT": an irrevocable letter of credit (other than a Trade Letter of Credit) for the account of the Borrower and for the benefit of any holder of obligations of the Borrower or any Subsidiary. 21 "SUBSIDIARY": as to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. "TERM LOAN LENDERS": the collective reference to the Tranche A Term Loan Lenders, the Tranche B Term Loan Lenders and the Tranche C Term Loan Lenders. "TERM LOANS": the collective reference to the Tranche A Term Loans, Tranche B Term Loans and the Tranche C Term Loans. "TOTAL REVOLVING CREDIT COMMITMENTS": at any time, the aggregate amount of the Revolving Credit Commitments at such time. "TOTAL REVOLVING EXTENSIONS OF CREDIT": at any time, the aggregate amount of the Revolving Extensions of Credit of all the Revolving Credit Lenders at such time. "TRADE LETTER OF CREDIT": a documentary, trade or commercial letter of credit in respect of the purchase of goods or services issued for the account of the Borrower and for the benefit of any holder of obligations of the Borrower or any Subsidiary incurred in the ordinary course of business. "TRANCHE A MATURITY DATE": November 15, 2002. "TRANCHE A TERM LOAN": as defined in Section 2.1. "TRANCHE A TERM LOAN COMMITMENT": as to any Lender, the obligation of such Lender, if any, to make a Tranche A Term Loan to the Borrower hereunder in a principal amount not to exceed the amount set forth under the heading "Tranche A Term Loan Commitment" opposite such Lender's name on Schedule 1.1A. The original aggregate amount of the Tranche A Term Loan Commitments is $40,000,000. "TRANCHE A TERM LOAN LENDER": each Lender which has a Tranche A Term Loan Commitment or which has made a Tranche A Term Loan. "TRANCHE A TERM LOAN PERCENTAGE": as to any Lender at any time, the percentage which such Lender's Tranche A Term Loan Commitment then constitutes of the aggregate Tranche A Term Loan Commitments (or, at any time after the Closing Date, the percentage which the aggregate principal amount of such Lender's Tranche A Term Loans then outstanding constitutes of the aggregate principal amount of the Tranche A Term Loans then outstanding). 22 "TRANCHE B MATURITY DATE": November 15, 2004. "TRANCHE B TERM LOAN": as defined in Section 2.1. "TRANCHE B TERM LOAN COMMITMENT": as to any Lender, the obligation of such Lender, if any, to make a Tranche B Term Loan to the Borrower hereunder in a principal amount not to exceed the amount set forth under the heading "Tranche B Term Loan Commitment" opposite such Lender's name on Schedule 1.1A. The original aggregate amount of the Tranche B Term Loan Commitments is $40,000,000. "TRANCHE B TERM LOAN LENDER": each Lender which has a Tranche B Term Loan Commitment or which has made a Tranche B Term Loan. "TRANCHE B TERM LOAN PERCENTAGE": as to any Lender at any time, the percentage which such Lender's Tranche B Term Loan Commitment then constitutes of the aggregate Tranche B Term Loan Commitments (or, at any time after the Closing Date, the percentage which the aggregate principal amount of such Lender's Tranche B Term Loans then outstanding constitutes of the aggregate principal amount of the Tranche B Term Loans then outstanding); PROVIDED, that solely for purposes of calculating the amount of each installment of Tranche B Term Loans (other than the last installment) payable to a Term Loan Lender pursuant to Section 2.3(b), such Term Loan Lender's Tranche B Term Loan Percentage shall be calculated without giving effect to any portion of any prior mandatory or optional prepayment attributable to such Term Loan Lender's Tranche B Term Loans which shall have been declined by such Term Loan Lender (or, in the case of any Term Loan Lender which shall have acquired its Tranche B Term Loans by assignment from another Person, by such other Person). "TRANCHE C MATURITY DATE": November 15, 2005. "TRANCHE C TERM LOAN": as defined in Section 2.1. "TRANCHE C TERM LOAN COMMITMENT": as to any Lender, the obligation of such Lender, if any, to make a Tranche C Term Loan to the Borrower hereunder in a principal amount not to exceed the amount set forth under the heading "Tranche C Term Loan Commitment" opposite such Lender's name on Schedule 1.1A. The original aggregate amount of the Tranche C Term Loan Commitments is $25,000,000. "TRANCHE C TERM LOAN LENDER": each Lender which has a Tranche C Term Loan Commitment or which has made a Tranche C Term Loan. "TRANCHE C TERM LOAN PERCENTAGE": as to any Lender at any time, the percentage which such Lender's Tranche C Term Loan Commitment then constitutes of the aggregate Tranche C Term Loan Commitments (or, at any time after the Closing Date, the percentage which the aggregate principal amount of such Lender's Tranche C Term Loans then outstanding constitutes of the aggregate principal amount of the Tranche C Term Loans then outstanding); PROVIDED, that solely for purposes of 23 calculating the amount of each installment of Tranche C Term Loans (other than the last installment) payable to a Term Loan Lender pursuant to Section 2.3(c), such Term Loan Lender's Tranche C Term Loan Percentage shall be calculated without giving effect to any portion of any prior mandatory or optional prepayment attributable to such Term Loan Lender's Tranche C Term Loans which shall have been declined by such Term Loan Lender (or, in the case of any Term Loan Lender which shall have acquired its Tranche C Term Loans by assignment from another Person, by such other Person). "TRANSFEREE": as defined in Section 10.15. "TYPE": as to any Loan, its nature as an ABR Loan or a Eurodollar Loan. "UNIFORM CUSTOMS": the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, as the same may be amended from time to time. "WHOLLY OWNED SUBSIDIARY": as to any Person, any other Person all of the Capital Stock of which (other than directors' qualifying shares required by law or shares required by law to be held by foreign nationals representing not more than 2% of such Capital Stock) is owned by such Person directly and/or through other Wholly Owned Subsidiaries. "WHOLLY OWNED SUBSIDIARY GUARANTOR": any Guarantor that is a Wholly Owned Subsidiary of the Borrower. 1.2 OTHER DEFINITIONAL PROVISIONS. (a) Unless otherwise specified therein, all terms defined in this Agreement shall have the defined meanings when used in the other Loan Documents or any certificate or other document made or delivered pursuant hereto or thereto. (b) As used herein and in the other Loan Documents, and any certificate or other document made or delivered pursuant hereto or thereto, accounting terms relating to the Borrower and its Subsidiaries not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. SECTION 2. AMOUNT AND TERMS OF COMMITMENTS 24 2.1 TERM LOAN COMMITMENTS. Subject to the terms and conditions hereof, (a) each Tranche A Term Loan Lender severally agrees to make a term loan (a "TRANCHE A TERM LOAN") to the Borrower on the Closing Date in an amount not to exceed the amount of the Tranche A Term Loan Commitment of such Lender, (b) each Tranche B Term Loan Lender severally agrees to make a term loan (a "TRANCHE B TERM LOAN") to the Borrower on the Closing Date in an amount not to exceed the amount of the Tranche B Term Loan Commitment of such Lender and (c) each Tranche C Term Loan Lender severally agrees to make a term loan (a "TRANCHE C TERM LOAN") to the Borrower on the Closing Date in an amount not to exceed the amount of the Tranche C Term Loan Commitment of such Lender. The Term Loans may from time to time be Eurodollar Loans or ABR Loans, as determined by the Borrower and notified to the Agent in accordance with Sections 2.2 and 2.11. 2.2 PROCEDURE FOR TERM LOAN BORROWING. The Borrower shall give the Agent irrevocable notice (which notice must be received by the Agent prior to 10:00 A.M., New York City time, (a) three Business Days prior to the anticipated Closing Date if all or any part of the Term Loans are to be initially Eurodollar Loans or (b) one Business Day prior to the anticipated Closing Date otherwise) requesting that the Term Loan Lenders make the Term Loans on the Closing Date and specifying (i) the amount to be borrowed, (ii) whether the Term Loans are to be initially Eurodollar Loans, ABR Loans or a combination thereof and (iii) if the Term Loans are to be entirely or partly Eurodollar Loans, the amount thereof. The Term Loans made on the Closing Date shall initially be ABR Loans, and no Term Loan may be converted into or continued as a Eurodollar Loan having an Interest Period in excess of one month prior to the date which is 60 days after the Closing Date. Upon receipt of such notice the Agent shall promptly notify each Term Loan Lender thereof. Not later than 12:00 Noon, New York City time, on the Closing Date each Term Loan Lender shall make available to the Agent at the Funding Office an amount in immediately available funds equal to the Term Loan or Term Loans to be made by such Lender. The Agent shall make available to the Borrower the aggregate of the amounts made available to the Agent by the Term Loan Lenders in immediately available funds. 2.3 REPAYMENT OF TERM LOANS. (a) The Tranche A Term Loan of each Tranche A Lender shall mature in 15 consecutive quarterly installments, commencing on April 15, 1999, to be followed by a final installment on the Tranche A Maturity Date, each of which shall be in an amount equal to such Lender's Tranche A Term Loan Percentage multiplied by the amount set forth below opposite such installment: INSTALLMENT PRINCIPAL AMOUNT ----------- ---------------- April 15, 1999 $1,333,333.33 July 15, 1999 1,333,333.33 October 15, 1999 1,333,333.34 January 15, 2000 2,500,000.00 April 15, 2000 2,500,000.00 July 15, 2000 2,500,000.00 October 15, 2000 2,500,000.00 January 15, 2001 3,000,000.00 April 15, 2001 3,000,000.00 25 July 15, 2001 3,000,000.00 October 15, 2001 3,000,000.00 January 15, 2002 3,500,000.00 April 15, 2002 3,500,000.00 July 15, 2002 3,500,000.00 Tranche A Maturity Date 3,500,000.00 (b) The Tranche B Term Loan of each Tranche B Lender shall mature in 23 consecutive quarterly installments, commencing on April 15, 1999, to be followed by a final installment on the Tranche B Maturity Date, each of which shall be in an amount equal to such Lender's Tranche B Term Loan Percentage multiplied by the amount set forth below opposite such installment: INSTALLMENT PRINCIPAL AMOUNT ----------- ---------------- April 15, 1999 $133,333.33 July 15, 1999 133,333.33 October 15, 1999 133,333.34 January 15, 2000 100,000.00 April 15, 2000 100,000.00 July 15, 2000 100,000.00 October 15, 2000 100,000.00 January 15, 2001 100,000.00 April 15, 2001 100,000.00 July 15, 2001 100,000.00 October 15, 2001 100,000.00 January 15, 2002 100,000.00 April 15, 2002 100,000.00 July 15, 2002 100,000.00 October 15, 2002 100,000.00 January 15, 2003 4,600,000.00 April 15, 2003 4,600,000.00 July 15, 2003 4,600,000.00 October 15, 2003 4,600,000.00 January 15, 2004 5,000,000.00 April 15, 2004 5,000,000.00 July 15, 2004 5,000,000.00 Tranche B Maturity Date 5,000,000.00 (c) The Tranche C Term Loan of each Tranche C Lender shall mature in 27 consecutive quarterly installments, commencing on April 15, 1999, to be followed by a final installment on the Tranche C Maturity Date, each of which shall be in an amount equal to such Lender's Tranche C Term Loan Percentage multiplied by the amount set forth below opposite such installment: INSTALLMENT PRINCIPAL AMOUNT ----------- ---------------- 26 April 15, 1999 $83,333.33 July 15, 1999 83,333.33 October 15, 1999 83,333.34 January 15, 2000 62,500.00 April 15, 2000 62,500.00 July 15, 2000 62,500.00 October 15, 2000 62,500.00 January 15, 2001 62,500.00 April 15, 2001 62,500.00 July 15, 2001 62,500.00 October 15, 2001 62,500.00 January 15, 2002 62,500.00 April 15, 2002 62,500.00 July 15, 2002 62,500.00 October 15, 2002 62,500.00 January 15, 2003 62,500.00 April 15, 2003 62,500.00 July 15, 2003 62,500.00 October 15, 2003 62,500.00 January 15, 2004 62,500.00 April 15, 2004 62,500.00 July 15, 2004 62,500.00 October 15, 2004 62,500.00 January 15, 2005 5,875,000.00 April 15, 2005 5,875,000.00 July 15, 2005 5,875,000.00 Tranche C Maturity Date 5,875,000.00 2.4 REVOLVING CREDIT COMMITMENTS. (a) Subject to the terms and conditions hereof, each Revolving Credit Lender severally agrees to make revolving credit loans ("REVOLVING CREDIT LOANS") to the Borrower from time to time during the Revolving Credit Commitment Period in an aggregate principal amount at any one time outstanding which, when added to such Lender's Revolving Credit Percentage of the L/C Obligations then outstanding does not exceed the amount of such Lender's Revolving Credit Commitment; PROVIDED, HOWEVER, that in no event shall the aggregate principal amount of Revolving Credit Loans exceed $55,000,000 less the amount of any reduction in the Revolving Credit Commitments pursuant to Sections 2.8 and 2.10. During the Revolving Credit Commitment Period the Borrower may use the Revolving Credit Commitments by borrowing, prepaying the Revolving Credit Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. The Revolving Credit Loans may from time to time be Eurodollar Loans or ABR Loans, as determined by the Borrower and notified to the Agent in accordance with Sections 2.5 and 2.13, PROVIDED that no Revolving Credit Loan shall be made as a Eurodollar Loan after the day that is one month prior to the Revolving Credit Termination Date. (b) The Borrower shall repay all outstanding Revolving Credit Loans on the Revolving Credit Termination Date. 27 2.5 PROCEDURE FOR REVOLVING CREDIT BORROWING. The Borrower may borrow under the Revolving Credit Commitments during the Revolving Credit Commitment Period on any Business Day, PROVIDED that the Borrower shall give the Agent irrevocable notice (which notice must be received by the Agent prior to 12:00 Noon, New York City time, (a) three Business Days prior to the requested Borrowing Date, in the case of Eurodollar Loans, or (b) one Business Day prior to the requested Borrowing Date, in the case of ABR Loans), specifying (i) the amount and Type of Revolving Credit Loans to be borrowed, (ii) the requested Borrowing Date and (iii) in the case of Eurodollar Loans, the respective amounts of each such Type of Loan and the respective lengths of the initial Interest Period therefor. Any Revolving Credit Loans made on the Closing Date shall initially be ABR Loans, and no Revolving Credit Loan may be made as, converted into or continued as a Eurodollar Loan having an Interest Period in excess of one month prior to the date which is 60 days after the Closing Date. Each borrowing under the Revolving Credit Commitments shall be in an amount equal to (x) in the case of ABR Loans, $1,000,000 or a whole multiple thereof (or, if the then aggregate Available Revolving Credit Commitments are less than $1,000,000, such lesser amount) and (y) in the case of Eurodollar Loans, $5,000,000 or a whole multiple of $1,000,000 in excess thereof. Upon receipt of any such notice from the Borrower, the Agent shall promptly notify each Revolving Credit Lender thereof. Each Revolving Credit Lender will make the amount of its pro rata share of each borrowing available to the Agent for the account of the Borrower at the Funding Office prior to 12:00 Noon, New York City time, on the Borrowing Date requested by the Borrower in funds immediately available to the Agent. Such borrowing will then be made available to the Borrower by the Agent crediting the account of the Borrower on the books of the Funding Office with the aggregate of the amounts made available to the Agent by the Revolving Credit Lenders and in like funds as received by the Agent. 2.6 REPAYMENT OF LOANS; EVIDENCE OF DEBT. (a) The Borrower hereby unconditionally promises to pay to the Agent for the account of the appropriate Revolving Credit Lender or Term Loan Lender, as the case may be, (i) the then unpaid principal amount of each Revolving Credit Loan of such Revolving Credit Lender on the Revolving Credit Termination Date (or such earlier date on which the Loans become due and payable pursuant to Section 8) and (ii) the principal amount of each Term Loan of such Term Loan Lender in installments according to the amortization schedules set forth in Section 2.3 (or on such earlier date on which the Loans become due and payable pursuant to Section 8). The Borrower hereby further agrees to pay interest on the unpaid principal amount of the Loans from time to time outstanding from the date hereof until payment in full thereof at the rates per annum, and on the dates, set forth in Section 2.13. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing indebtedness of the Borrower to such Lender resulting from each Loan of such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement. (c) The Agent, on behalf of the Borrower, shall maintain the Register pursuant to Section 10.6(e), and a subaccount therein for each Lender, in which shall be recorded (i) the amount of each Loan made hereunder and any Note evidencing such Loan, the Type thereof and each Interest Period applicable thereto, (ii) the amount of any principal or interest 28 due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) both the amount of any sum received by the Agent hereunder from the Borrower and each Lender's share thereof. (d) The entries made in the Register and the accounts of each Lender maintained pursuant to Section 2.6(b) shall, to the extent permitted by applicable law, be PRIMA FACIE evidence of the existence and amounts of the obligations of the Borrower therein recorded; PROVIDED, HOWEVER, that the failure of any Lender or the Agent to maintain the Register or any such account, or any error therein, shall not in any manner affect the obligation of the Borrower to repay (with applicable interest) the Loans made to such Borrower by such Lender in accordance with the terms of this Agreement. (e) The Borrower agrees that, upon the request to the Agent by any Lender, the Borrower will execute and deliver to such Lender a promissory note of the Borrower evidencing any Term Loans or Revolving Credit Loans, as the case may be, of such Lender, substantially in the forms of Exhibit G-1 or G-2, respectively, with appropriate insertions as to date and principal amount. 2.7 COMMITMENT FEES, ETC. (a) The Borrower agrees to pay to the Agent for the account of each Revolving Credit Lender a commitment fee for the period from and including the Closing Date to the last day of the Revolving Credit Commitment Period, computed at the Commitment Fee Rate on the average daily amount of the Available Revolving Credit Commitment of such Lender during the period for which payment is made, payable quarterly in arrears on the fifteenth day of each January, April, July and October and on the Revolving Credit Termination Date, commencing on the first of such dates to occur after the date hereof. (b) The Borrower agrees to pay to the Agent the fees in the amounts and on the dates previously agreed to, and from time to time agreed to, in writing by the Borrower and the Agent. 2.8 TERMINATION OR REDUCTION OF REVOLVING CREDIT COMMITMENTS. The Borrower shall have the right, upon not less than three Business Days' notice to the Agent, to terminate the Revolving Credit Commitments or, from time to time, to reduce the amount of the Revolving Credit Commitments; PROVIDED that no such termination or reduction of Revolving Credit Commitments shall be permitted if, after giving effect thereto and to any prepayments of the Revolving Credit Loans made on the effective date thereof, the Total Revolving Extensions of Credit would exceed the Total Revolving Credit Commitments. Any such reduction shall be in an amount equal to $1,000,000, or a whole multiple thereof, and shall reduce permanently the Revolving Credit Commitments then in effect. 2.9 OPTIONAL PREPAYMENTS. The Borrower may at any time and from time to time prepay the Loans, in whole or in part, without premium or penalty, upon irrevocable notice delivered to the Agent at least three Business Days prior thereto in the case of Eurodollar Loans and at least one Business Day prior thereto in the case of ABR Loans, which notice shall specify the date and amount of prepayment and whether the prepayment is of Eurodollar Loans or ABR Loans; PROVIDED, that if a Eurodollar Loan is prepaid on any day 29 other than the last day of the Interest Period applicable thereto, the Borrower shall also pay any amounts owing pursuant to Section 2.19. Upon receipt of any such notice the Agent shall promptly notify each relevant Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with (except in the case of Revolving Credit Loans which are ABR Loans) accrued interest to such date on the amount prepaid. Partial prepayments of Term Loans and Revolving Credit Loans shall be in an aggregate principal amount of $1,000,000 or a whole multiple thereof. 2.10 MANDATORY PREPAYMENTS AND COMMITMENT REDUCTIONS. (a) Unless the Required Prepayment Lenders shall otherwise agree, if any Indebtedness shall be issued or Incurred by the Borrower or any of its Subsidiaries (excluding any Indebtedness Incurred in accordance with Section 7.2 as in effect on the date of this Agreement), an amount equal to 100% of the Net Cash Proceeds thereof shall be applied on the date of such issuance or Incurrence toward the prepayment of the Term Loans and the reduction of the Revolving Credit Commitments as set forth in Section 2.10(d); PROVIDED, HOWEVER, that if any such subordinated Indebtedness in an aggregate principal amount not to exceed $100,000,000 shall be issued or Incurred by the Borrower on terms and conditions (including, without limitation, terms of subordination) satisfactory to the Required Lenders, as evidenced by their prior written consent, which consent shall not be unreasonably withheld, an amount equal to 50% of the Net Cash Proceeds thereof shall be applied on the date of such issuance or Incurrence toward the prepayment of the Term Loans and the reduction of the Revolving Credit Commitments as set forth in Section 2.10(d). (b) Unless the Required Prepayment Lenders shall otherwise agree, if on any date, the Borrower or any of its Subsidiaries shall receive Net Cash Proceeds from any Asset Sale or Recovery Event then, unless a Reinvestment Notice shall be delivered in respect thereof, such Net Cash Proceeds shall be applied on such date toward the prepayment of the Term Loans and the reduction of the Revolving Credit Commitments as set forth in Section 2.10(d); PROVIDED that, notwithstanding the foregoing, (i) the Borrower may exclude from the requirements of this paragraph the first $7,500,000 of aggregate Net Cash Proceeds from Asset Sales and Recovery Events and (ii) on each Reinvestment Prepayment Date, an amount equal to the Reinvestment Prepayment Amount with respect to the relevant Reinvestment Event shall be applied toward the prepayment of the Term Loans and the reduction of the Revolving Credit Commitments as set forth in Section 2.10(d). (c) Unless the Required Prepayment Lenders shall otherwise agree, if, for any fiscal year of the Borrower commencing with the fiscal year ending December 31, 1998, there shall be Excess Cash Flow, the Borrower shall apply the ECF Percentage of such Excess Cash Flow toward the prepayment of the Term Loans as set forth in Section 2.10(d) on a date no later than five days after the earlier of (i) the date on which the financial statements of the Borrower referred to in Section 6.1(a), for the fiscal year with respect to which such prepayment is made, are required to be delivered to the Lenders and (ii) the date such financial statements are actually delivered. (d) Amounts to be applied in connection with prepayments and Commitment reductions made pursuant to Section 2.10 shall be applied, FIRST, to the prepayment of the Term Loans and, SECOND, to reduce permanently the Revolving Credit Commitments; PROVIDED 30 that no Excess Cash Flow shall be applied to reduce the Revolving Credit Commitments. Any such reduction of the Revolving Credit Commitments shall be accompanied by prepayment of the Revolving Credit Loans to the extent, if any, that the Total Revolving Extensions of Credit exceed the amount of the Total Revolving Credit Commitments as so reduced, PROVIDED that if the aggregate principal amount of Revolving Credit Loans then outstanding is less than the amount of such excess (because L/C Obligations constitute a portion thereof), the Borrower shall, to the extent of the balance of such excess, replace outstanding Letters of Credit and/or deposit an amount in cash in a cash collateral account established with the Agent for the benefit of the Lenders on terms and conditions satisfactory to the Agent. The application of any prepayment pursuant to Section 2.10 shall be made first to ABR Loans and second to Eurodollar Loans. Each prepayment of the Loans under Section 2.10 (except in the case of Revolving Credit Loans that are ABR Loans) shall be accompanied by accrued interest to the date of such prepayment on the amount prepaid. 2.11 CONVERSION AND CONTINUATION OPTIONS.(a) The Borrower may elect from time to time to convert Eurodollar Loans to ABR Loans by giving the Agent at least two Business Days' prior irrevocable notice of such election, PROVIDED that any such conversion of Eurodollar Loans may only be made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert ABR Loans to Eurodollar Loans by giving the Agent at least three Business Days' prior irrevocable notice of such election (which notice shall specify the length of the initial Interest Period therefor), PROVIDED that no ABR Loan under a particular Facility may be converted into a Eurodollar Loan (i) when any Event of Default has occurred and is continuing and the Agent has or the Majority Facility Lenders in respect of such Facility have determined in its or their sole discretion not to permit such conversions or (ii) after the date that is one month prior to the final scheduled termination or maturity date of such Facility. Upon receipt of any such notice the Agent shall promptly notify each relevant Lender thereof. (b) Any Eurodollar Loan may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving irrevocable notice to the Agent, in accordance with the applicable provisions of the term "Interest Period" set forth in Section 1.1, of the length of the next Interest Period to be applicable to such Loans, PROVIDED that no Eurodollar Loan under a particular Facility may be continued as such (i) when any Event of Default has occurred and is continuing and the Agent has or the Majority Facility Lenders in respect of such Facility have determined in its or their sole discretion not to permit such continuations or (ii) after the date that is one month prior to the final scheduled termination or maturity date of such Facility, and PROVIDED, FURTHER, that if the Borrower shall fail to give any required notice as described above in this paragraph or if such continuation is not permitted pursuant to the preceding proviso such Loans shall be automatically converted to ABR Loans on the last day of such then expiring Interest Period. Upon receipt of any such notice the Agent shall promptly notify each relevant Lender thereof. 2.12 MINIMUM AMOUNTS AND MAXIMUM NUMBER OF EURODOLLAR TRANCHES. Notwithstanding anything to the contrary in this Agreement, all borrowings, conversions, continuations and optional prepayments of Eurodollar Loans hereunder and all selections of Interest Periods hereunder shall be in such amounts and be made pursuant to such elections so that, (a) after giving effect thereto, the aggregate principal amount of the Eurodollar Loans 31 comprising each Eurodollar Tranche shall be equal to $5,000,000 or a whole multiple of $1,000,000 in excess thereof and (b) no more than ten Eurodollar Tranches shall be outstanding at any one time. 2.13 INTEREST RATES AND PAYMENT DATES. (a) Each Eurodollar Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate determined for such day plus the Applicable Margin. (b) Each ABR Loan shall bear interest at a rate per annum equal to the ABR plus the Applicable Margin. (c) (i) If all or a portion of the principal amount of any Loan or Reimbursement Obligation shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), all outstanding Loans and Reimbursement Obligations (whether or not overdue) shall bear interest at a rate per annum which is equal to (x) in the case of the Loans, the rate applicable to ABR Loans under the relevant Facility PLUS 2% or (y) in the case of Reimbursement Obligations, the rate applicable to ABR Loans under the Revolving Credit Facility PLUS 2%, and (ii) if all or a portion of any interest payable on any Loan or Reimbursement Obligation or any commitment fee or other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum equal to the rate applicable to ABR Loans under the relevant Facility PLUS 2% (or, in the case of any such other amounts that do not relate to a particular Facility, the ABR PLUS 2.75%), in each case, with respect to clauses (i) and (ii) above, from the date of such non-payment until such amount is paid in full (as well after as before judgment). (d) Interest shall be payable in arrears on each Interest Payment Date, PROVIDED that interest accruing pursuant to paragraph (c) of this Section 2.13 shall be payable from time to time on demand. 2.14 COMPUTATION OF INTEREST AND FEES. (a) Interest, fees and commissions payable pursuant hereto shall be calculated on the basis of a 360-day year for the actual days elapsed, except that, with respect to ABR Loans the rate of interest on which is calculated on the basis of the Prime Rate, the interest thereon shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed. The Agent shall as soon as practicable notify the Borrower and the relevant Lenders of each determination of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from a change in the ABR or the Eurocurrency Reserve Requirements shall become effective as of the opening of business on the day on which such change becomes effective. The Agent shall as soon as practicable notify the Borrower and the relevant Lenders of the effective date and the amount of each such change in interest rate. (b) Each determination of an interest rate by the Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. The Agent shall, at the request of the Borrower, deliver to the Borrower a statement showing the quotations used by the Agent in determining any interest rate pursuant to Section 2.13(a). 32 2.15 INABILITY TO DETERMINE INTEREST RATE. If prior to the first day of any Interest Period: (a) the Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, or (b) the Agent shall have received notice from the Majority Facility Lenders in respect of the relevant Facility that the Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the actual cost to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Loans during such Interest Period, the Agent shall give telecopy or telephonic notice thereof to the Borrower and the relevant Lenders as soon as practicable thereafter. If such notice is given (x) any Eurodollar Loans under the relevant Facility requested to be made on the first day of such Interest Period shall be made as ABR Loans, (y) any Loans under the relevant Facility that were to have been converted on the first day of such Interest Period to Eurodollar Loans shall be continued as ABR Loans and (z) any outstanding Eurodollar Loans under the relevant Facility shall be converted, on the first day of such Interest Period, to ABR Loans. Until such notice has been withdrawn by the Agent, no further Eurodollar Loans under the relevant Facility shall be made or continued as such, nor shall the Borrower have the right to convert Loans under the relevant Facility to Eurodollar Loans. 2.16 PRO RATA TREATMENT AND PAYMENTS. (a) Each borrowing by the Borrower from the Lenders hereunder, each payment by the Borrower on account of any commitment fee and any reduction of the Commitments of the Lenders shall be made pro rata according to the respective Tranche A Term Loan Percentages, Tranche B Term Loan Percentages, Tranche C Term Loan Percentages or Revolving Credit Percentages, as the case may be, of the relevant Lenders. (b) Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Term Loans shall be made pro rata according to the respective outstanding principal amounts of the Term Loans then held by the Term Loan Lenders (except as otherwise provided in Section 2.16(d)). The amount of each principal prepayment of the Term Loans shall be applied to reduce the then remaining installments of the Tranche A Term Loans, Tranche B Term Loans and Tranche C Term Loans, as the case may be, in the inverse order of maturity. Amounts prepaid on account of the Term Loans may not be reborrowed. (c) Each payment (including each prepayment) by the Borrower on account of principal of and interest on the Revolving Credit Loans shall be made pro rata according to the respective outstanding principal amounts of the Revolving Credit Loans then held by the Revolving Credit Lenders. 33 (d) Notwithstanding anything to the contrary in Section 2.10 or elsewhere in this Section 2.16, so long as any Tranche A Term Loans are outstanding, each Tranche B Term Loan Lender and each Tranche C Term Loan Lender may, at its option, decline the portion of any optional prepayment or mandatory payment applicable to the Tranche B Term Loans or, as the case may be, Tranche C Term Loans of such Lender; accordingly, with respect to the amount of any mandatory prepayment described in Section 2.10 that is allocated to Tranche B Term Loans or, as the case may be, Tranche C Term Loans (such amount, the "TRANCHE B PREPAYMENT AMOUNT" or, as the case may be, the "TRANCHE C PREPAYMENT AMOUNT"), at any time when Tranche A Term Loans remain outstanding, the Borrower will, in lieu of applying such amount to the prepayment of Tranche B Term Loans or, as the case may be, Tranche C Term Loans, as provided in paragraph Section 2.10(d), on the date specified in Section 2.10 for such prepayment, give the Agent telephonic notice (promptly confirmed in writing) requesting that the Agent prepare and provide to each Tranche B Term Loan Lender and each Tranche C Term Loan Lender a notice (each, a "PREPAYMENT OPTION NOTICE") as described below. As promptly as practicable after receiving such notice from the Borrower, the Agent will send to each Tranche B Term Loan Lender and each Tranche C Term Loan Lender a Prepayment Option Notice, which shall be in the form of Exhibit H, and shall include an offer by the Borrower to prepay on the date (each, a "PREPAYMENT DATE") that is 10 Business Days after the date of the Prepayment Option Notice, the Tranche B Term Loans or, as the case may be, Tranche C Term Loans of such Lender by an amount equal to the Tranche B Prepayment Amount or, as the case may be, Tranche C Prepayment Amount indicated in such Lender's Prepayment Option Notice. On the Prepayment Date, (A) the Borrower shall pay to the Agent the aggregate amount necessary to prepay that portion of the outstanding Tranche B Term Loans and Tranche C Term Loans in respect of which Tranche B Term Loan Lenders and Tranche C Term Loan Lenders have accepted prepayment as described above (such Lenders, the "ACCEPTING LENDERS"), and such amount shall be applied to reduce the Tranche B Prepayment Amounts and the Tranche C Prepayment Amounts, respectively, with respect to each Accepting Lender and (B) the Borrower shall pay to the Agent an amount equal to the portion of the Tranche B Prepayment Amount and the Tranche C Prepayment Amount not accepted by the Accepting Lenders, and such amount shall be applied to the prepayment of the Tranche A Term Loans. (e) All payments (including prepayments) to be made by the Borrower hereunder, whether on account of principal, interest, fees or otherwise, shall be made without setoff or counterclaim and shall be made prior to 12:00 Noon, New York City time, on the due date thereof to the Agent, for the account of the Lenders, at the Payment Office, in Dollars and in immediately available funds. The Agent shall distribute such payments to the Lenders promptly upon receipt in like funds as received. If any payment hereunder (other than payments on the Eurodollar Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day. If any payment on a Eurodollar Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day. In the case of any extension of any payment of principal pursuant to the preceding two sentences, interest thereon shall be payable at the then applicable rate during such extension. 34 (f) Unless the Agent shall have been notified in writing by any Lender prior to a borrowing that such Lender will not make the amount that would constitute its share of such borrowing available to the Agent, the Agent may assume that such Lender is making such amount available to the Agent, and the Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Agent, on demand, such amount with interest thereon at a rate equal to the daily average Federal Funds Effective Rate for the period until such Lender makes such amount immediately available to the Agent. A certificate of the Agent submitted to any Lender with respect to any amounts owing under this Section 2.16(f) shall be conclusive in the absence of manifest error. If such Lender's share of such borrowing is not made available to the Agent by such Lender within three Business Days of such Borrowing Date, the Agent shall also be entitled to recover such amount with interest thereon at the rate per annum applicable to ABR Loans under the relevant Facility, on demand, from the Borrower. (g) Unless the Agent shall have been notified in writing by the Borrower prior to the date of any payment being made hereunder that the Borrower will not make such payment to the Agent, the Agent may assume that the Borrower is making such payment, and the Agent may, but shall not be required to, in reliance upon such assumption, make available to the Lenders their respective PRO RATA shares of a corresponding amount. If such payment is not made to the Agent by the Borrower within three Business Days of such required date, the Agent shall be entitled to recover, on demand, from each Lender to which any amount which was made available pursuant to the preceding sentence, such amount with interest thereon at the rate per annum equal to the daily average Federal Funds Effective Rate. Nothing herein shall be deemed to limit the rights of the Agent or any Lender against the Borrower. 2.17 REQUIREMENTS OF LAW. (a) If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof: (i) shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement, any Letter of Credit, any Application or any Eurodollar Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for Non-Excluded Taxes covered by Section 2.18 and changes in the rate of tax on the overall net income of such Lender); (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of the Eurodollar Rate hereunder; or (iii) shall impose on such Lender any other condition; and the result of any of the foregoing is to increase the actual cost to such Lender, by an amount which such Lender deems to be material, of making, converting into, continuing or 35 maintaining Eurodollar Loans or issuing or participating in Letters of Credit, or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Borrower shall promptly pay such Lender, within 15 days of demand, any additional amounts necessary to compensate such Lender for such increased cost or reduced amount receivable; PROVIDED that the Borrower shall not be required to compensate a Lender pursuant to this paragraph for any amounts incurred more than six months prior to the date that such Lender notifies the Borrower of such Lender's intention to claim compensation therefor; and PROVIDED FURTHER that, if the circumstances giving rise to such claim have a retroactive effect, then such six-month period shall be extended to include the period of such retroactive effect. If any Lender becomes entitled to claim any additional amounts pursuant to this Section 2.17, it shall promptly notify the Borrower (with a copy to the Agent) of the event by reason of which it has become so entitled. (b) If any Lender shall have determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder or under or in respect of any Letter of Credit to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, after submission by such Lender to the Borrower (with a copy to the Agent) of a written request therefor, the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction; PROVIDED that the Borrower shall not be required to compensate a Lender pursuant to this paragraph for any amounts incurred more than six months prior to the date that such Lender notifies the Borrower of such Lender's intention to claim compensation therefor; and PROVIDED FURTHER that, if the circumstances giving rise to such claim have a retroactive effect, then such six-month period shall be extended to include the period of such retroactive effect. (c) Any Lender claiming reimbursement or compensation under this Section 2.17 shall deliver to the Borrower a certificate (with a copy to the Agent) setting forth in reasonable detail the basis for such claim and a calculation of the amount payable to such Lender in connection therewith. Such certificate shall be conclusive in the absence of manifest error. The obligations of the Borrower pursuant to this Section 2.17 shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 2.18 TAXES. (a) All payments made by the Borrower under this Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding net income taxes and franchise taxes (imposed in lieu of net income taxes) imposed on the Agent or any Lender as a result of a present or former connection between the Agent or such Lender and the jurisdiction of the 36 Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Agent or such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any other Loan Document). If any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or withholdings ("NON-EXCLUDED TAXES") or Other Taxes are required to be withheld from any amounts payable to the Agent or any Lender hereunder, the amounts so payable to the Agent or such Lender shall be increased to the extent necessary to yield to the Agent or such Lender (after payment of all Non-Excluded Taxes and Other Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement, PROVIDED, HOWEVER, that the Borrower shall not be required to increase any such amounts payable to any Lender with respect to any Non-Excluded Taxes (i) that are attributable to such Lender's failure to comply with the requirements of paragraph (d) or (e) of this Section 2.18 or (ii) that are United States withholding taxes imposed on amounts payable to such Lender at the time the Lender becomes a party to this Agreement, except to the extent that such Lender's assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrower with respect to such Non-Excluded Taxes pursuant to this Section 2.18(a). (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) Whenever any Non-Excluded Taxes or Other Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send to the Agent for the account of the Agent or relevant Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. If the Borrower fails to pay any Non-Excluded Taxes or Other Taxes when due to the appropriate taxing authority or fails to remit to the Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by the Agent or any Lender as a result of any such failure. The agreements in this Section 2.18 shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. (d) Each Lender (or Transferee) that is not a citizen or resident of the United States of America, a corporation, partnership or other entity created or organized in or under the laws of the United States of America (or any jurisdiction thereof), or any estate or trust that is subject to federal income taxation regardless of the source of its income (a "NON-U.S. LENDER") shall deliver to the Borrower and the Agent (or, in the case of a Participant, to the Lender from which the related participation shall have been purchased) two copies of either U.S. Internal Revenue Service Form 1001 or Form 4224, or, in the case of a Non-U.S. Lender claiming exemption from U.S. federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of "portfolio interest" a statement substantially in the form of Exhibit I and a Form W-8, or any subsequent versions thereof or successors thereto properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or a reduced rate of, U.S. federal withholding tax on all payments by the Borrower under this Agreement and the other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or, in the case of any Participant, on or before the date such Participant purchases the related participation). In 37 addition, each Non-U.S. Lender shall deliver such forms or successors thereto promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Each Non-U.S. Lender shall promptly notify the Borrower at any time it determines that it is no longer in a position to provide any previously delivered certificate to the Borrower (or any other form of certification adopted by the U.S. taxing authorities for such purpose). Notwithstanding any other provision of this Section 2.18(d), a Non-U.S. Lender shall not be required to deliver any form pursuant to this Section 2.18(d) that such Non-U.S. Lender is not legally able to deliver. (e) A Lender that is entitled to an exemption from or reduction of non-U.S. withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Agent), at the time or times prescribed by applicable law or reasonably requested by the Borrower, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate, PROVIDED that such Lender is legally entitled to complete, execute and deliver such documentation and in such Lender's reasonable judgment such completion, execution or submission would not materially prejudice the legal position of such Lender. 2.19 INDEMNITY. The Borrower agrees to indemnify each Lender and to hold each Lender harmless from any loss or expense which such Lender may sustain or incur as a consequence of (a) default by the Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Borrower in making any prepayment after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the making of a prepayment of Eurodollar Loans on a day which is not the last day of an Interest Period with respect thereto. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of such Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein (excluding, however, the Applicable Margin included therein, if any) OVER (ii) the amount of interest (as reasonably determined by such Lender) which would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. A certificate as to any amounts payable pursuant to this Section 2.21 submitted to the Borrower by the Lender shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 2.20 CHANGE OF LENDING OFFICE. Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Section 2.17 or 2.18(a) with respect to such Lender, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Loans affected by such event with the object of avoiding the consequences of such event; PROVIDED that such 38 designation is made on terms that, in the sole judgment of such Lender, cause such Lender and its lending office(s) to suffer no economic, legal or regulatory disadvantage, and PROVIDED, FURTHER, that nothing in this Section 2.20 shall affect or postpone any of the obligations of any Borrower or the rights of any Lender pursuant to Section 2.17 or 2.18(a). 2.21 REPLACEMENT OF LENDERS UNDER CERTAIN CIRCUMSTANCES. The Borrower shall be permitted to replace any Lender which requests reimbursement for amounts owing pursuant to Section 2.17 or 2.18 with a replacement financial institution; PROVIDED that (a) such replacement does not conflict with any Requirement of Law, (b) no Event of Default shall have occurred and be continuing at the time of such replacement, (c) prior to any such replacement, such Lender shall have taken no action under Section 2.20 so as to eliminate the continued need for payment of amounts owing pursuant to Section 2.17 or 2.18, (d) the replacement financial institution shall purchase, at par, all Loans and other amounts owing to such replaced Lender on or prior to the date of replacement, (e) the Borrower shall be liable to such replaced Lender under Section 2.19 if any Eurodollar Loan owing to such replaced Lender shall be purchased other than on the last day of the Interest Period relating thereto, (f) the replacement financial institution, if not already a Lender, shall be reasonably satisfactory to the Agent, (g) the replaced Lender shall be obligated to make such replacement in accordance with the provisions of Section 10.6 (provided that the Borrower shall be obligated to pay the registration and processing fee referred to therein), (h) until such time as such replacement shall be consummated, the Borrower shall pay all additional amounts (if any) required pursuant to Section 2.17 or 2.18, as the case may be, and (i) any such replacement shall not be deemed to be a waiver of any rights which the Borrower, the Agent or any other Lender shall have against the replaced Lender. SECTION 3. LETTERS OF CREDIT 3.1 L/C COMMITMENT. (a) Subject to the terms and conditions hereof, the Issuing Lender, in reliance on the agreements of the other Revolving Credit Lenders set forth in Section 3.4(a), agrees to issue Letters of Credit for the account of the Borrower on any Business Day during the Revolving Credit Commitment Period in such form as may be approved from time to time by the Issuing Lender; PROVIDED that the Issuing Lender shall have no obligation to issue any Letter of Credit if, after giving effect to such issuance, (i) the L/C Obligations would exceed the L/C Commitment, (ii) the L/C Obligations in respect of all Standby Letters of Credit would exceed $20,000,000, (iii) the L/C Obligations in respect of all Trade Letters of Credit would exceed $5,000,000 or (iv) the aggregate amount of the Available Revolving Credit Commitments would be less than zero. Each Letter of Credit shall (i) be denominated in Dollars and (ii) expire no later than the earlier of (x) the first anniversary of its date of issuance and (y) the date which is 30 days prior to the Revolving Credit Termination Date, PROVIDED that any Standby Letter of Credit with a one-year term may provide for the renewal thereof for additional one-year periods (which shall in no event extend beyond the date referred to in clause (y) above). (b) Each Letter of Credit shall be subject to the Uniform Customs and, to the extent not inconsistent therewith, the laws of the State of New York. 39 (c) The Issuing Lender shall not at any time be obligated to issue any Letter of Credit hereunder if such issuance would conflict with, or cause the Issuing Lender or any L/C Participant to exceed any limits imposed by, any applicable Requirement of Law. 3.2 PROCEDURE FOR ISSUANCE OF LETTER OF CREDIT. The Borrower may from time to time request that the Issuing Lender issue a Letter of Credit by delivering to the Issuing Lender at its address for notices specified herein an Application therefor, completed to the satisfaction of the Issuing Lender, and such other certificates, documents and other papers and information as the Issuing Lender may request. Upon receipt of any Application, the Issuing Lender will process such Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby (but in no event shall the Issuing Lender be required to issue any Letter of Credit earlier than three Business Days after its receipt of the Application therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed to by the Issuing Lender and the Borrower. The Issuing Lender shall furnish a copy of such Letter of Credit to the Borrower promptly following the issuance thereof. The Issuing Lender shall promptly furnish to the Agent, which shall in turn promptly furnish to the Lenders, notice of the issuance of each Letter of Credit (including the amount thereof). 3.3 COMMISSIONS, FEES AND OTHER CHARGES. (a) The Borrower will pay a commission on the undrawn amount of all outstanding Letters of Credit at a per annum rate equal to the Applicable Margin then in effect with respect to Eurodollar Loans under the Revolving Credit Facility, shared ratably among the Revolving Credit Lenders and payable quarterly in arrears on each L/C Fee Payment Date after the issuance date. In addition, the Borrower shall pay to the Issuing Lender for its own account a fronting fee of 1/4 of 1% per annum, payable quarterly in arrears on each L/C Fee Payment Date after the Issuance Date. (b) In addition to the foregoing fees and commissions, the Borrower shall pay or reimburse the Issuing Lender for such normal and customary costs and expenses as are incurred or charged by the Issuing Lender in issuing, negotiating, effecting payment under, amending or otherwise administering any Letter of Credit. 3.4 L/C PARTICIPATIONS. (a) The Issuing Lender irrevocably agrees to grant and hereby grants to each L/C Participant, and, to induce the Issuing Lender to issue Letters of Credit hereunder, each L/C Participant irrevocably agrees to accept and purchase and hereby accepts and purchases from the Issuing Lender, on the terms and conditions hereinafter stated, for such L/C Participant's own account and risk an undivided interest equal to such L/C Participant's Revolving Credit Percentage in the Issuing Lender's obligations and rights under each Letter of Credit issued hereunder and the amount of each draft paid by the Issuing Lender thereunder. Each L/C Participant unconditionally and irrevocably agrees with the Issuing Lender that, if a draft is paid under any Letter of Credit for which the Issuing Lender is not reimbursed in full by the Borrower in accordance with the terms of this Agreement, such L/C Participant shall pay to the Issuing Lender upon demand at the Issuing Lender's address for notices specified herein an amount equal to such L/C Participant's Revolving 40 Credit Percentage of the amount of such draft, or any part thereof, which is not so reimbursed. (b) If any amount required to be paid by any L/C Participant to the Issuing Lender pursuant to Section 3.4(a) in respect of any unreimbursed portion of any payment made by the Issuing Lender under any Letter of Credit is paid to the Issuing Lender within three Business Days after the date such payment is due, such L/C Participant shall pay to the Issuing Lender on demand an amount equal to the product of (i) such amount, times (ii)the daily average Federal Funds Effective Rate during the period from and including the date such payment is required to the date on which such payment is immediately available to the Issuing Lender, times (iii) a fraction the numerator of which is the number of days that elapse during such period and the denominator of which is 360. If any such amount required to be paid by any L/C Participant pursuant to Section 3.4(a) is not made available to the Issuing Lender by such L/C Participant within three Business Days after the date such payment is due, the Issuing Lender shall be entitled to recover from such L/C Participant, on demand, such amount with interest thereon calculated from such due date at the rate per annum applicable to ABR Loans under the Revolving Credit Facility. A certificate of the Issuing Lender submitted to any L/C Participant with respect to any amounts owing under this Section shall be conclusive in the absence of manifest error. (c) Whenever, at any time after the Issuing Lender has made payment under any Letter of Credit and has received from any L/C Participant its PRO RATA share of such payment in accordance with Section 3.4(a), the Issuing Lender receives any payment related to such Letter of Credit (whether directly from the Borrower or otherwise, including proceeds of collateral applied thereto by the Issuing Lender), or any payment of interest on account thereof, the Issuing Lender will distribute to such L/C Participant its PRO RATA share thereof; PROVIDED, HOWEVER, that in the event that any such payment received by the Issuing Lender shall be required to be returned by the Issuing Lender, such L/C Participant shall return to the Issuing Lender the portion thereof previously distributed by the Issuing Lender to it. 3.5 REIMBURSEMENT OBLIGATION OF THE BORROWER. The Borrower agrees to reimburse the Issuing Lender on each date on which the Issuing Lender notifies the Borrower of the date and amount of a draft presented under any Letter of Credit and paid by the Issuing Lender for the amount of (a) such draft so paid and (b) any taxes, fees, charges or other costs or expenses incurred by the Issuing Lender in connection with such payment. Each such payment shall be made to the Issuing Lender at its address for notices specified herein in lawful money of the United States of America and in immediately available funds. Interest shall be payable on any and all amounts remaining unpaid by the Borrower under this Section from the date such amounts become payable (whether at stated maturity, by acceleration or otherwise) until the date that is two Business Days after such draft is so paid at the rate set forth in Section 2.13(b) and thereafter until payment in full at the rate set forth in Section 2.13(c). Each drawing under any Letter of Credit shall (unless an event of the type described in clause (i) or (ii) of Section 8(f) shall have occurred and be continuing with respect to the Borrower, in which case the procedures specified in Section 3.4 for funding by L/C Participants shall apply) constitute a request by the Borrower to the Agent for a borrowing pursuant to Section 2.5 of ABR Loans in the amount of such drawing. The Borrowing Date with respect to such borrowing shall be the date of such drawing. 41 3.6 OBLIGATIONS ABSOLUTE. The Borrower's obligations under this Section 3 shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower may have or have had against the Issuing Lender, any beneficiary of a Letter of Credit or any other Person. The Borrower also agrees with the Issuing Lender that the Issuing Lender shall not be responsible for, and the Borrower's Reimbursement Obligations under Section 3.5 shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or any dispute between or among the Borrower and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or any claims whatsoever of the Borrower against any beneficiary of such Letter of Credit or any such transferee. The Issuing Lender shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions that resulted from the gross negligence or willful misconduct of the Issuing Lender. The Borrower agrees that any action taken or omitted by the Issuing Lender under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross negligence or willful misconduct and in accordance with the standards of care specified in the Uniform Commercial Code of the State of New York, shall be binding on the Borrower and shall not result in any liability of the Issuing Lender to the Borrower. 3.7 LETTER OF CREDIT PAYMENTS. If any draft shall be presented for payment under any Letter of Credit, the Issuing Lender shall promptly notify the Borrower of the date and amount thereof. The responsibility of the Issuing Lender to the Borrower in connection with any draft presented for payment under any Letter of Credit shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in connection with such presentment are substantially in conformity with such Letter of Credit. 3.8 APPLICATIONS. To the extent that any provision of any Application related to any Letter of Credit is inconsistent with the provisions of this Section 3, the provisions of this Section 3 shall apply. SECTION 4. REPRESENTATIONS AND WARRANTIES To induce the Agent and the Lenders to enter into this Agreement and to make the Loans and issue or participate in the Letters of Credit, the Borrower hereby represents and warrants to the Agent and each Lender that: 4.1 FINANCIAL CONDITION. (a) The unaudited PRO FORMA consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at September 28, 1997 (including the notes thereto) (the "PRO FORMA BALANCE SHEET"), copies of which have heretofore been furnished to each Lender, has been prepared giving effect (as if such events had occurred on such date) to (i) the consummation of the Recapitalization, (ii) the use of proceeds of the Loans to be made, and the Senior Notes and Common Stock to be issued, on the Closing Date and (iii) the payment of fees and expenses in connection with the foregoing. The Pro 42 Forma Balance Sheet has been prepared based on the best information available to the Borrower as of the date of delivery thereof, and presents fairly on a PRO FORMA basis the estimated financial position of Borrower and its consolidated Subsidiaries as at September 28, 1997, assuming that the events specified in the preceding sentence had actually occurred at such date. (b) The audited consolidated balance sheets of the Borrower and its consolidated Subsidiaries as at January 1, 1995, December 31, 1995 and December 29, 1996, and the related consolidated statements of income and of cash flows for the fiscal years ended on such dates, reported on by and accompanied by an unqualified report from Arthur Andersen LLP, present fairly the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such dates, and the consolidated results of its operations and its consolidated cash flows for the respective fiscal years then ended. The unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at September 28, 1997, and the related unaudited consolidated statements of income and cash flows for the nine-month period ended on such date, present fairly the consolidated financial condition of the Borrower and its consolidated Subsidiaries as at such date, and the consolidated results of its operations and its consolidated cash flows for the nine-month period then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by the aforementioned firm of accountants and disclosed therein). The Borrower and its Subsidiaries do not have any material Guarantee Obligations, contingent liabilities and liabilities for taxes, or any long-term leases or unusual forward or long-term commitments, including, without limitation, any interest rate or foreign currency swap or exchange transaction or other obligation in respect of derivatives, which are not reflected in the most recent financial statements referred to in this paragraph (b). During the period from December 29, 1996 to and including the date hereof there has been no Disposition by the Borrower or any of its consolidated Subsidiaries of any material part of its business or Property, other than its sale of Properties to DavCo Restaurants, Inc. on July 14, 1997. 4.2 NO CHANGE. Since September 28, 1997 there has been no development or event which has had or could reasonably be expected to have a Material Adverse Effect. 4.3 CORPORATE EXISTENCE; COMPLIANCE WITH LAW. Each of the Borrower and its Subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has the corporate power and authority, and the legal right, to own and operate its Property, to lease the Property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership, lease or operation of Property or the conduct of its business requires such qualification and (d) is in compliance with all Requirements of Law, except, in the case of clauses (b), (c) and (d), to the extent that the failure to do so could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 4.4 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. Each Loan Party has the corporate power and authority, and the legal right, to make, deliver and perform 43 the Loan Documents to which it is a party and, in the case of the Borrower, to borrow hereunder. Each Loan Party has taken all necessary corporate action to authorize the execution, delivery and performance of the Loan Documents to which it is a party and, in the case of the Borrower, to authorize the borrowings on the terms and conditions of this Agreement. No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required in connection with the Recapitalization and the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement or any of the Loan Documents, except (i) consents, authorizations, filings and notices described in Schedule 4.4, which consents, authorizations, filings and notices have been obtained or made and are in full force and effect and (ii) the filings referred to in Section 4.19. Each Loan Document has been duly executed and delivered on behalf of each Loan Party thereto. This Agreement constitutes, and each other Loan Document upon execution will constitute, a legal, valid and binding obligation of each Loan Party thereto, enforceable against each such Loan Party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 4.5 NO LEGAL BAR. The execution, delivery and performance of this Agreement and the other Loan Documents, the issuance of Letters of Credit, the borrowings hereunder and the use of the proceeds thereof will not violate any Requirement of Law or any Contractual Obligation of the Borrower or any of its Subsidiaries and will not result in, or require, the creation or imposition of any Lien on any of their respective properties or revenues pursuant to any Requirement of Law or any such Contractual Obligation (other than the Liens created by the Security Documents). No Requirement of Law or Contractual Obligation applicable to the Borrower or any of its Subsidiaries could reasonably be expected to have a Material Adverse Effect. 4.6 NO MATERIAL LITIGATION. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower, threatened by or against the Borrower or any of its Subsidiaries or against any of their respective properties or revenues (a) with respect to any of the Loan Documents or any of the transactions contemplated hereby or thereby or (b) as to which there is a reasonable possibility of an adverse determination and which could reasonably be expected to have a Material Adverse Effect. 4.7 NO DEFAULT. Neither the Borrower nor any of its Subsidiaries is in default under or with respect to any of its Contractual Obligations in any respect which could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 4.8 OWNERSHIP OF PROPERTY; LIENS. Each of the Borrower and each of its Subsidiaries has title in fee simple to, or a valid leasehold interest in, all its Real Property, and good title to, or a valid leasehold interest in, all its other Property, except for such defects in title as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, and none of such Property is subject to any Lien except as permitted 44 by Section 7.3. The Borrower has previously furnished to the Agent a list of all Real Property and such list, and the information set forth thereon, is true and complete in all material respects. 4.9 INTELLECTUAL PROPERTY. Each of the Borrower and each of its Subsidiaries owns, or is licensed to use, all Intellectual Property necessary for the conduct of its business as currently conducted, except for such Intellectual Property the failure to so own or be licensed to use could not reasonably be expected to have a Material Adverse Effect. To the Borrower's knowledge, no material claim has been asserted and is pending by any Person challenging or questioning the use of any Intellectual Property or the validity or effectiveness of any Intellectual Property, nor does Borrower know of any valid basis for any such claim. To the Borrower's knowledge, the use of Intellectual Property by the Borrower and its Subsidiaries does not infringe on the rights of any Person in any material respect. 4.10 TAXES. Each of the Borrower and each of its Subsidiaries has filed or caused to be filed all federal, state and other material tax returns which are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its Property and all other taxes, fees or other charges imposed on it or any of its Property by any Governmental Authority (other than any the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrower or its Subsidiaries, as the case may be); no tax Lien has been filed, and, to the knowledge of the Borrower, no claim is being asserted, with respect to any such tax, fee or other charge. 4.11 FEDERAL REGULATIONS. No part of the proceeds of any Loans will be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation G or Regulation U as now and from time to time hereafter in effect or for any purpose which violates the provisions of such Regulations of the Board. If requested by any Lender or the Agent, the Borrower will furnish to the Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1 referred to in Regulation G or Regulation U, as the case may be. 4.12 LABOR MATTERS. There are no strikes or other labor disputes against the Borrower or any of its Subsidiaries pending or, to the knowledge of the Borrower, threatened that (individually or in the aggregate) could reasonably be expected to have a Material Adverse Effect. Hours worked by and payment made to employees of the Borrower and its Subsidiaries have not been in violation of the Fair Labor Standards Act or any other applicable Requirement of Law dealing with such matters that (individually or in the aggregate) could reasonably be expected to have a Material Adverse Effect. All payments due from the Borrower or any of its Subsidiaries on account of employee health and welfare insurance that (individually or in the aggregate) could reasonably be expected to have a Material Adverse Effect if not paid have been paid or accrued as a liability on the books of the Borrower or the relevant Subsidiary. 4.13 ERISA. Neither a Reportable Event nor an "accumulated funding deficiency" (within the meaning of Section 412 of the Code or Section 302 of ERISA) has 45 occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan has occurred, and no Lien in favor of the PBGC or a Plan has arisen, during such five-year period. The present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits by a material amount. Neither the Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan which has resulted or could reasonably be expected to result in a material liability under ERISA, and neither the Borrower nor any Commonly Controlled Entity would become subject to any material liability under ERISA if the Borrower or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No such Multiemployer Plan is in Reorganization or Insolvent. 4.14 INVESTMENT COMPANY ACT; OTHER REGULATIONS. No Loan Party is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. No Loan Party is subject to regulation under any Requirement of Law (other than Regulation X of the Board) which limits its ability to incur Indebtedness. 4.15 SUBSIDIARIES. The Subsidiaries listed on Schedule 4.15 constitute all the Subsidiaries of the Borrower at the date hereof. 4.16 USE OF PROCEEDS. The proceeds of the Term Loans, together with the proceeds of the Offerings, shall be used to repay all outstanding obligations under, and terminate, the Existing Credit Facility and to pay related fees and expenses. The proceeds of the Revolving Credit Loans and the Letters of Credit shall be used for general corporate purposes. 4.17 ENVIRONMENTAL MATTERS. (a) The facilities and properties owned, leased or operated by the Borrower or any of its Subsidiaries (the "PROPERTIES") do not contain, and to the Borrower's knowledge have not previously contained, any Materials of Environmental Concern in amounts or concentrations or under circumstances which (i) constitute or constituted a violation of, or (ii) could give rise to liability under, any Environmental Law, except in either case insofar as such violation or liability, or any aggregation thereof, could not reasonably be expected to result in the payment of a Material Environmental Amount. (b) The Properties and all operations at the Properties are in material compliance, and have to the Borrower's knowledge in the last five years been in material compliance, with all applicable Environmental Laws, and to the Borrower's knowledge there is no contamination at, under or about the Properties or violation of any Environmental Law with respect to the Properties or the business operated by the Borrower or any of its Subsidiaries (the "BUSINESS") which to the Borrower's knowledge could materially interfere 46 with the continued operation of the Properties or materially impair the fair saleable value thereof. Neither the Borrower nor any of its Subsidiaries has assumed any material liability of any other Person under Environmental Laws. (c) Neither the Borrower nor any of its Subsidiaries has received or is aware of any written notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Properties or the Business, nor does the Borrower have knowledge or reason to believe that any such notice will be received or is being threatened, except insofar as such notice or threatened notice, or any aggregation thereof, does not involve a matter or matters that could reasonably be expected to result in the payment of a Material Environmental Amount. (d) Materials of Environmental Concern have not to the Borrower's knowledge been transported or disposed of from the Properties in violation of, or in a manner or to a location which could give rise to liability under, any Environmental Law, nor to the Borrower's knowledge have any Materials of Environmental Concern been generated, treated, stored or disposed of at, on or under any of the Properties in violation of, or in a manner that could give rise to liability under, any applicable Environmental Law, except insofar as any such violation or liability referred to in this paragraph, or any aggregation thereof, could not reasonably be expected to result in the payment of a Material Environmental Amount. (e) No judicial proceeding or governmental or administrative action is pending or, to the knowledge of the Borrower, threatened, under any Environmental Law to which the Borrower or any Subsidiary is or will be named as a party with respect to the Properties or the Business, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Properties or the Business, except insofar as such proceeding, action, decree, order or other requirement, or any aggregation thereof, could not reasonably be expected to result in the payment of a Material Environmental Amount. (f) To the Borrower's knowledge, there has been no release or threat of release of Materials of Environmental Concern at or from the Properties, or arising from or related to the operations of the Borrower or any Subsidiary in connection with the Properties or otherwise in connection with the Business, in violation of or in amounts or in a manner that could give rise to liability under Environmental Laws, except insofar as any such violation or liability referred to in this paragraph, or any aggregation thereof, could not reasonably be expected to result in the payment of a Material Environmental Amount. 4.18 ACCURACY OF INFORMATION, ETC. No statement or information contained in this Agreement, any other Loan Document or any other document, certificate or statement furnished to the Agent or the Lenders or any of them, by or on behalf of any Loan Party for use in connection with the transactions contemplated by this Agreement or the other Loan Documents, contained as of the date such statement, information, document or certificate was so furnished, considering each in the context in which it was made and taken as a whole with all other statements and information provided, any untrue statement of a material fact or 47 omitted to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances in which made, not misleading; PROVIDED that the Borrower's representation and warranty as to the projections and PRO FORMA financial information contained in the materials referenced above is based upon good faith estimates and assumptions believed by management of the Borrower to be reasonable at the time made, it being recognized by the Lenders that such financial information as it relates to future events is not to be viewed as fact, that actual results during the period or periods covered by such financial information may differ from the projected results set forth therein by a material amount and that no assurance can be given that such projected results will be realized. There is no fact known to any Loan Party that could reasonably be expected to have a Material Adverse Effect that has not been expressly disclosed herein, in the other Loan Documents or in any other documents, certificates and statements furnished to the Agent and the Lenders for use in connection with the transactions contemplated hereby and by the other Loan Documents. 4.19 SECURITY DOCUMENTS. (a) The Guarantee and Collateral Agreement is effective to create in favor of the Agent, for the benefit of the Lenders, a legal, valid and enforceable security interest in the Collateral described therein and proceeds thereof. In the case of the Pledged Stock described in the Guarantee and Collateral Agreement, when stock certificates representing such Pledged Stock are delivered to the Agent, and in the case of the other Collateral described in the Guarantee and Collateral Agreement, when financing statements in appropriate form are filed in the offices specified on Schedule 4.19(a), the Guarantee and Collateral Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in such Collateral and the proceeds thereof, as security for the Obligations (as defined in the Guarantee and Collateral Agreement). (b) Each of the Mortgages is effective to create in favor of the Agent, for the benefit of the Lenders, a legal, valid and enforceable Lien on the Mortgaged Properties described therein and proceeds thereof, and when the Mortgages are filed in the offices specified on Schedule 4.19(b), each such Mortgage shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Loan Parties in the Mortgaged Properties and the proceeds thereof, as security for the Obligations (as defined in the relevant Mortgage). 4.20 SOLVENCY. Each Loan Party is, and after giving effect to the Recapitalization and the incurrence of all Indebtedness and obligations being incurred in connection herewith and therewith will be, Solvent. 4.21 REGULATION H. No Mortgage encumbers improved Real Property which is located in an area that has been identified by the Secretary of Housing and Urban Development as an area having special flood hazards and in which flood insurance has been made available under the National Flood Insurance Act of 1968. 4.22 MATERIAL CONTRACTS. Set forth on Schedule 4.22 is a complete list as of the date hereof of all material agreements, instruments and undertakings to which the 48 Borrower or any of its Subsidiaries is a party or by which any of their respective Properties are bound. SECTION 5. CONDITIONS PRECEDENT 5.1 CONDITIONS TO INITIAL EXTENSION OF CREDIT. The agreement of each Lender to make the initial extension of credit requested to be made by it is subject to the satisfaction, prior to or concurrently with the making of such extension of credit on the Closing Date, of the following conditions precedent: (a) LOAN DOCUMENTS. The Agent shall have received (i) this Agreement, executed and delivered by a duly authorized officer of the Borrower, (ii) the Guarantee and Collateral Agreement, executed and delivered by a duly authorized officer of the Borrower and each Guarantor, (iii) Mortgages covering each of the Mortgaged Properties, each executed and delivered by a duly authorized officer of each party thereto, and (iv) for the account of each relevant Lender, Notes conforming to the requirements hereof and executed and delivered by a duly authorized officer of the Borrower. (b) OFFERINGS. Each of the Offerings shall have been consummated, in each case on terms and conditions reasonably satisfactory to the Lenders, for gross cash proceeds of at least $275,000,000 of which not less than $75,000,000 shall consist of the gross cash proceeds from the Common Stock Offering. (c) APPROVALS. All governmental and third party approvals (including landlords' and other consents) necessary in connection with the Recapitalization, the continuing operations of the Borrower and its Subsidiaries and the transactions contemplated hereby shall have been obtained and be in full force and effect, and all applicable waiting periods shall have expired without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose adverse conditions on the Recapitalization or the financing contemplated hereby. (d) RELATED AGREEMENTS. The Agent shall have received (in a form reasonably satisfactory to it), with a copy for each Lender, true and correct copies, certified as to authenticity by the Borrower, of the Senior Note Indenture and such other documents or instruments as may be reasonably requested by the Agent, including, without limitation, a copy of any other debt instrument, security agreement or other material contract to which the Loan Parties may be a party. (e) EXISTING CREDIT FACILITY. The Agent shall have received evidence satisfactory to it that the Existing Credit Facility shall be simultaneously terminated or assigned to the Lenders, all amounts thereunder shall be simultaneously paid in full or assigned to the Lenders and arrangements satisfactory to the Agent shall have been made for the termination of Liens and security interests granted in connection therewith. 49 (f) FEES. The Lenders and the Agent shall have received all fees required to be paid, and all expenses for which invoices have been presented, on or before the Closing Date. (g) BUSINESS PLAN. The Lenders shall have received a satisfactory business plan for fiscal years 1997 through 2002 and a satisfactory written analysis of the business and prospects of the Borrower and its Subsidiaries for the period from the Closing Date through December 31, 2002. (h) SOLVENCY ANALYSIS. The Lenders shall have received a reasonably satisfactory solvency analysis certified by the chief financial officer of the Borrower which shall document the solvency of the Borrower and its Subsidiaries considered as a whole after giving effect to the transactions contemplated hereby. (i) BUDGET. The Lenders shall have received a budget for the Borrower and its Subsidiaries for the 1998 fiscal year. (j) LIEN SEARCHES. The Agent shall have received the results of a recent lien search in each of the jurisdictions where assets of the Loan Parties are located, and such search shall reveal no liens on any of the assets of the Borrower or its Subsidiaries except for liens permitted by Section 7.3 and liens to be terminated on the Closing Date. (k) EXPENSES. The Agent shall have received satisfactory evidence that the fees and expenses to be incurred in connection with the Recapitalization and the financing thereof shall not exceed $25,000,000. (l) CLOSING CERTIFICATE. The Agent shall have received, with a counterpart for each Lender, a certificate of each Loan Party, dated the Closing Date, substantially in the form of Exhibit C, with appropriate insertions and attachments. (m) LEGAL OPINIONS. The Agent shall have received the following executed legal opinions: (i) the legal opinion of Mayer, Brown & Platt, special counsel to the Borrower and its Subsidiaries, substantially in the form of Exhibit F-1; (ii) the legal opinion of Larry W. Browne, Esq., General Counsel of the Borrower and its Subsidiaries, substantially in the form of Exhibit F-2; (iii) to the extent consented to by the relevant counsel, each legal opinion, if any, delivered in connection with the Offerings accompanied by a reliance letter in favor of the Lenders; and (iv) the legal opinion of Choate, Hall & Stewart, special Massachusetts counsel to the Borrower and its Subsidiaries. 50 Each such legal opinion shall cover such other matters incident to the transactions contemplated by this Agreement as the Agent may reasonably require. (n) PLEDGED STOCK; STOCK POWERS. The Agent shall have received the certificates representing the shares of Capital Stock pledged pursuant to the Guarantee and Collateral Agreement, together with an undated stock power for each such certificate executed in blank by a duly authorized officer of the pledgor thereof. (o) FILINGS, REGISTRATIONS AND RECORDINGS. Each document (including, without limitation, any Uniform Commercial Code financing statement) required by the Security Documents or under law or reasonably requested by the Agent to be filed, registered or recorded in order to create in favor of the Agent, for the benefit of the Lenders, a perfected Lien on the Collateral described therein, prior and superior in right to any other Person (other than with respect to Liens expressly permitted by Section 7.3), shall be in proper form for filing, registration or recordation. (p) MORTGAGES, ETC. (i) The Agent shall have received, and the title insurance company issuing the policy referred to in Section 5.1(p)(ii) (the "TITLE INSURANCE COMPANY") shall have received to the extent reasonably requested by the Agent, maps or plats of an as-built survey of the sites of the Mortgaged Properties listed on Schedule 5.1(p) (the "MAJOR MORTGAGED PROPERTIES") certified to the Agent and the Title Insurance Company in a manner satisfactory to them, dated a date satisfactory to the Agent and the Title Insurance Company by an independent professional licensed land surveyor satisfactory to the Agent and the Title Insurance Company, which maps or plats and the surveys on which they are based shall be made in accordance with the Minimum Standard Detail Requirements for Land Title Surveys jointly established and adopted by the American Land Title Association and the American Congress on Surveying and Mapping in 1992, and, without limiting the generality of the foregoing, there shall be surveyed and shown on such maps, plats or surveys the following: (A) the locations on such sites of all the buildings, structures and other improvements and the established building setback lines; (B) the lines of streets abutting the sites and width thereof; (C) all access and other easements appurtenant to the sites; (D) all roadways, paths, driveways, easements, encroachments and overhanging projections and similar encumbrances affecting the site, whether recorded, apparent from a physical inspection of the sites or otherwise known to the surveyor; (E) any encroachments on any adjoining property by the building structures and improvements on the sites; (F) if the site is described as being on a filed map, a legend relating the survey to said map; and (G) the flood zone designations, if any, in which the Major Mortgaged Properties are located. (ii) The Agent shall have received in respect of each Major Mortgaged Property a mortgagee's title insurance policy (or policies) or marked up unconditional binder for such insurance. Each such policy shall (A) be in an amount equal to the fair market value of such Major Mortgaged Property; (B) be issued at ordinary rates; (C) insure that the Mortgage insured thereby creates a valid first Lien on such Major Mortgaged Property free and clear of all defects and encumbrances, except as disclosed therein; (D) name the Agent for the benefit of the Lenders as the insured 51 thereunder; (E) be in the form of 1992 ALTA Loan Policy (or equivalent policies); (F) contain such endorsements and affirmative coverage as the Agent may reasonably request; and (G) be issued by title companies satisfactory to the Agent (including any such title companies acting as co-insurers or reinsurers, at the option of the Agent). The Agent shall have received evidence satisfactory to it that all premiums in respect of each such policy, all charges for mortgage recording tax, and all related expenses, if any, have been paid. (iii) If reasonably requested by the Agent, the Agent shall have received (A) a policy of flood insurance which (1) covers any parcel of improved Real Property located in a flood hazard zone and which is encumbered by any Mortgage, (2) is written in an amount not less than the outstanding principal amount of the indebtedness secured by such Mortgage which is reasonably allocable to such Real Property or the maximum limit of coverage made available with respect to the particular type of property under the National Flood Insurance Act of 1968, whichever is less, and (3) has a term ending not later than the maturity of the Indebtedness secured by such Mortgage; and (B) confirmation that the Borrower has received the notice required pursuant to Section 208(e)(3) of Regulation H of the Board. (iv) The Agent shall have received a copy of all recorded documents referred to, or listed as exceptions to title in, the title policy or policies referred to in Section 5.1(p)(ii). (q) INSURANCE. The Agent shall have received insurance certificates satisfying the requirements of Section 6.5. (r) APPRAISALS. The Agent shall have received and be satisfied with the form and content of asset appraisal reports with respect to the Property owned by the Borrower and its Subsidiaries. 5.2 CONDITIONS TO EACH EXTENSION OF CREDIT. The agreement of each Lender to make any extension of credit requested to be made by it on any date (including, without limitation, its initial extension of credit) is subject to the satisfaction of the following conditions precedent: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties made by any Loan Party in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date, except for representations and warranties expressly stated to relate to a specific earlier date, in which case such representations and warranties shall continue to be true and correct in all material respects as of such earlier date. (b) NO DEFAULT. No Default or Event of Default shall have occurred and be continuing on such date or after giving effect to the extensions of credit requested to be made on such date. 52 Each borrowing by and issuance of a Letter of Credit on behalf of the Borrower hereunder shall constitute a representation and warranty by the Borrower as of the date of such extension of credit that the conditions contained in this Section 5.2 have been satisfied. SECTION 6. AFFIRMATIVE COVENANTS The Borrower hereby agrees that, so long as the Commitments remain in effect, any Letter of Credit remains outstanding or any Loan or other amount is owing to any Lender or the Agent hereunder, the Borrower shall and shall cause each of its Subsidiaries to: 6.1 FINANCIAL STATEMENTS. Furnish to the Agent: (a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Borrower, a copy of the audited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such year and the related audited consolidated statements of income and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, reported on without a "going concern" or like qualification or exception, or qualification arising out of the scope of the audit, by Arthur Andersen LLP or other independent certified public accountants of nationally recognized standing; and (b) as soon as available, but in any event not later than 45 days after the end of each of the first three quarterly periods of each fiscal year of the Borrower, the unaudited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such quarter and the related unaudited consolidated statements of income and of cash flows for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by an Authorized Signatory as being fairly stated in all material respects (subject to normal year-end audit adjustments); and all such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein). Notwithstanding the foregoing, it is understood and agreed that so long as the Borrower is required to file Forms 10-K and 10-Q (or any successor forms) with the Securities and Exchange Commission (or any successor agency), the Borrower may deliver copies of such Forms with respect to the relevant time periods in lieu of the deliveries specified in Sections 6.1(a) and (b). 6.2 CERTIFICATES; OTHER INFORMATION. Furnish to the Agent or, in the case of clause (h), to the relevant Lender: (a) concurrently with the delivery of the financial statements referred to in Section 6.1(a), a certificate of the independent certified public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; 53 (b) concurrently with the delivery of any financial statements pursuant to Section 6.1, (i) a certificate of an Authorized Signatory stating that, to the best of such Authorized Signatory's knowledge, each Loan Party during such period has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in this Agreement and the other Loan Documents to which it is a party to be observed, performed or satisfied by it, and that such Authorized Signatory has obtained no knowledge of any Default or Event of Default except as specified in such certificate and (ii) in the case of quarterly or annual financial statements, (x) a Compliance Certificate containing all information necessary for determining compliance by the Borrower and its Subsidiaries with the provisions of this Agreement referred to therein as of the last day of the fiscal quarter or fiscal year of the Borrower, as the case may be, and (y) to the extent not previously disclosed to the Agent, a listing of any county or state within the United States where any Loan Party keeps inventory or equipment and of any Intellectual Property acquired by any Loan Party since the date of the most recent list delivered pursuant to this clause (y) (or, in the case of the first such list so delivered, since the Closing Date); (c) as soon as available, and in any event no later than 45 days after the end of each fiscal year of the Borrower, a detailed consolidated budget for the following fiscal year (including a projected consolidated balance sheet of the Borrower and its Subsidiaries as of the end of the following fiscal year, and the related consolidated statements of projected cash flow, projected changes in financial position and projected income), and, as soon as available, significant revisions, if any, of such budget and projections with respect to such fiscal year (collectively, the "PROJECTIONS"), which Projections shall in each case be accompanied by a certificate of an Authorized Signatory stating that such Projections are based on reasonable estimates, information and assumptions and that such Authorized Signatory has no reason to believe that such Projections are incorrect or misleading in any material respect; (d) within 45 days after the end of each fiscal quarter of the Borrower, a narrative discussion and analysis of the financial condition and results of operations of the Borrower and its Subsidiaries for such fiscal quarter and for the period from the beginning of the then current fiscal year to the end of such fiscal quarter, as compared to the portion of the Projections covering such periods and to the comparable periods of the previous year; (e) no later than ten Business Days prior to the effectiveness thereof, copies of substantially final drafts of any proposed amendment, supplement, waiver or other modification with respect to the Senior Note Indenture; (f) within five days after the same are sent, copies of all financial statements and reports which the Borrower sends to the holders of any class of its debt securities or public equity securities and within five days after the same are filed, copies of all financial statements and reports which the Borrower may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; 54 (g) within ten days of receipt, copies of any management letter issued or provided by the auditors of the Borrower or any Subsidiary; and (h) promptly, such additional financial and other information as any Lender may from time to time reasonably request. 6.3 PAYMENT OF OBLIGATIONS. (a) Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its material obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower or its Subsidiaries, as the case may be, and (b) pay when due all real estate taxes, assessments and other charges assessed or levied against any Real Property. 6.4 CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE, ETC. (a) (i) Preserve, renew and keep in full force and effect its corporate existence and (ii) take all reasonable action to maintain all rights, privileges and franchises necessary or desirable in the normal conduct of its business, except, in each case, as otherwise permitted by Section 7.4 and except, in the case of clause (ii) above, to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect; (b) comply with all Contractual Obligations and Requirements of Law (including, without limitation, those relating to Real Property) except to the extent that failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 6.5 MAINTENANCE OF PROPERTY; INSURANCE. (a) Keep all Property useful and necessary in its business (including, without limitation, all Real Property) in good working order and condition, ordinary wear and tear excepted. (b) Maintain with financially sound and reputable insurance companies insurance on all its Property (including, without limitation, all Inventory, Equipment and Vehicles) in at least such amounts and against at least such risks (but including in any event fire, explosion, theft, such other casualties as may be reasonably requested by the Agent, public liability, product liability and business interruption) as are usually insured against in the same general area by companies engaged in the same or a similar business, it being understood that dealings with RIC in accordance with past practice shall not cause this Section 6.5 to be breached, and insuring the Borrower, its Subsidiaries, the Agent and the Lender against liability for personal injury and property damage relating to such Property. (c) With respect to all Real Property, maintain casualty insurance in an amount equal to "full replacement value", covering risks customarily insured against in the prudent operation of a similar business. (d) All such insurance shall (i) name the Agent as insured party, loss payee or mortgagee, (ii) provide that 30 days' notice will be given to the Agent for any cancellation, material reduction in amount, material change in coverage or other modification, (iii) if reasonably requested by the Agent, include a breach of warranty clause and (iv) be reasonably satisfactory in all other respects to the Agent. 55 (e) The Borrower shall deliver to the Agent and the Lenders a certificate reputable insurance broker with respect to such insurance on an annual basis upon policy renewal and such supplemental reports with respect thereto as the Agent may from time to time reasonably request. 6.6 INSPECTION OF PROPERTY; BOOKS AND RECORDS; DISCUSSIONS. (a) Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities and (b) permit representatives of any Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records at any reasonable time during normal business hours and upon reasonable advance notice to the Borrower and as often as may reasonably be desired and to discuss the business, operations, properties and financial and other condition of the Borrower and its Subsidiaries with officers and employees of the Borrower and its Subsidiaries and with its independent certified public accountants; PROVIDED, HOWEVER, that (i) the Agent and each Lender agree to use reasonable efforts to coordinate their visits and inspections so as not to be unreasonably burdensome to the Borrower and (ii) any discussions between a Lender or the Agent and the Borrower's accountants shall be with the right of a representative of the Borrower to be in attendance. 6.7 NOTICES. Promptly give notice to the Agent and each Lender of: (a) the occurrence of any Default or Event of Default; (b) any (i) default or event of default under any Contractual Obligation of the Borrower or any of its Subsidiaries or (ii) litigation, investigation or proceeding which may exist at any time between the Borrower or any of its Subsidiaries and any Governmental Authority, which in either case, if not cured or if adversely determined, as the case may be, could reasonably be expected to have a Material Adverse Effect; (c) any litigation or proceeding which, if adversely determined, could result in a liability to the Borrower or any of its Subsidiaries of $1,000,000 or more and not covered by insurance or in which injunctive or similar relief is sought; (d) the following events, as soon as possible and in any event within 30 days after the Borrower knows or has reason to know thereof: (i) the occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or the Borrower or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, Reorganization or Insolvency of, or termination under circumstances to which the provisions of Section 4041(c) of ERISA apply of, any Plan; and (e) any development or event which has had or could reasonably be expected to have a Material Adverse Effect. 56 Each notice pursuant to this Section 6.7 shall be accompanied by a statement of an Authorized Signatory setting forth details of the occurrence referred to therein and stating what action the Borrower or the relevant Subsidiary proposes to take with respect thereto. 6.8 ENVIRONMENTAL LAWS. (a) Comply in all material respects with, and ensure compliance in all material respects by all tenants and subtenants, if any, with, all applicable Environmental Laws, and obtain and comply in all material respects with and maintain, and ensure that all tenants and subtenants obtain and comply in all material respects with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws. (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws. 6.9 INTEREST RATE PROTECTION. In the case of the Borrower, within 60 days after the Closing Date, enter into Interest Rate Protection Agreements to the extent necessary to provide that at least 50% of the aggregate principal amount of outstanding Loans and Letters of Credit is subject to either a fixed interest rate or interest rate protection for a period of not less than two years, which Interest Rate Protection Agreements shall have terms and conditions reasonably satisfactory to the Agent. 6.10 ADDITIONAL COLLATERAL, ETC. (a) With respect to any Property acquired after the Closing Date by the Borrower or any of its Subsidiaries other than RIC and Excluded Foreign Subsidiaries (other than (x) any Property described in paragraph (b), (c) or (d) below and (y) any Property subject to a Lien expressly permitted by Section 7.3(g)) as to which the Agent, for the benefit of the Lenders, does not have a perfected Lien, promptly (i) execute and deliver to the Agent such amendments to the Guarantee and Collateral Agreement or such other documents as the Agent deems necessary or advisable in order to grant to the Agent, for the benefit of the Lenders, a security interest in such Property and (ii) take all actions necessary or advisable to grant to the Agent, for the benefit of the Lenders, a perfected security interest in such Property, including without limitation, the filing of Uniform Commercial Code financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement or by law or as may be requested by the Agent. (b) With respect to any fee interest or leasehold interest in any real estate having a value (together with improvements thereof) of at least $100,000 acquired after the Closing Date by the Borrower or any of its Subsidiaries other than RIC and Excluded Foreign Subsidiaries (other than any such real estate subject to a Lien expressly permitted by Section 7.3(g)), promptly (i) execute and deliver a Mortgage in favor of the Agent, for the benefit of the Lenders, covering such real estate, (ii) if such value is in excess of $1,000,000, provide the Lenders with (x) title and extended coverage insurance covering such real estate in an amount at least equal to the purchase price of such real estate (or such other amount as shall be reasonably specified by the Agent) as well as a current ALTA survey thereof, together with a surveyor's certificate and (y) any consents or estoppels reasonably deemed necessary or advisable by the Agent in connection with such mortgage or deed of trust, each of the 57 foregoing in form and substance reasonably satisfactory to the Agent, and (iii) if requested by the Agent, deliver to the Agent legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Agent. (c) With respect to any new Subsidiary (other than an Excluded Foreign Subsidiary) created or acquired by the Borrower or any of its Subsidiaries after the Closing Date (which, for the purposes of this paragraph (c), shall include any existing Subsidiary that ceases to be an Excluded Foreign Subsidiary), promptly (i) execute and deliver to the Agent such amendments to the Guarantee and Collateral Agreement as the Agent deems necessary or advisable in order to grant to the Agent, for the benefit of the Lenders, a perfected first priority security interest in the Capital Stock of such new Subsidiary which is owned by the Borrower or any of its Subsidiaries, (ii) deliver to the Agent the certificates representing such Capital Stock, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the Borrower or such Subsidiary, as the case may be, (iii) cause such new Subsidiary (A) to become a party to the Guarantee and Collateral Agreement and (B) to take such actions necessary or advisable to grant to the Agent for the benefit of the Lenders a perfected first priority security interest in the Collateral described in the Guarantee and Collateral Agreement with respect to such new Subsidiary, including, without limitation, the filing of Uniform Commercial Code financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement or by law or as may be requested by the Agent, and (iv) if requested by the Agent, deliver to the Agent legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Agent. (d) With respect to any new Excluded Foreign Subsidiary created or acquired after the Closing Date by the Borrower or any of its Subsidiaries, promptly (i) execute and deliver to the Agent such amendments to the Guarantee and Collateral Agreement as the Agent deems necessary or advisable in order to grant to the Agent, for the benefit of the Lenders, a perfected first priority security interest in the Capital Stock of such new Subsidiary which is owned by the Borrower or any of its Subsidiaries (other than Excluded Foreign Subsidiaries) (provided that in no event shall more than 65% of the total outstanding Capital Stock of any such new Subsidiary be required to be so pledged), (ii) deliver to the Agent the certificates representing such Capital Stock, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the Borrower or such Subsidiary, as the case may be, and take such other actions as may be necessary or, in the opinion of the Agent, desirable to perfect the Lien thereon, and (iii) if requested by the Agent, deliver to the Agent legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Agent. 6.11 MORTGAGE RECORDING TAXES. The Borrower shall pay all taxes and other charges imposed by any Governmental Authority or by any Requirement of Law in connection with the recording or filing of any of the Mortgages, which taxes and charges shall be paid when due or when assessed or requested by such Governmental Authority. 58 SECTION 7. NEGATIVE COVENANTS The Borrower hereby agrees that, so long as the Commitments remain in effect, any Letter of Credit remains outstanding or any Loan or other amount is owing to any Lender or the Agent hereunder, the Borrower shall not, and shall not permit any of its Subsidiaries to, directly or indirectly: 7.1 FINANCIAL CONDITION COVENANTS. (a) CONSOLIDATED LEVERAGE RATIO. Permit the Consolidated Leverage Ratio as at the last day of any period of four consecutive fiscal quarters of the Borrower (or, if less, the number of full fiscal quarters subsequent to the Closing Date) ending with any fiscal quarter set forth below to exceed the ratio set forth below opposite such fiscal quarter: Consolidated Fiscal Quarter Leverage Ratio -------------- -------------- Fiscal quarters from and including fourth quarter of fiscal 1997 through and including third quarter of fiscal 1998 4.50 to 1.00 Fiscal quarters from and including fourth quarter of fiscal 1998 through and including third quarter of fiscal 1999 4.25 to 1.00 Fiscal quarters from and including fourth quarter of fiscal 1999 through and including third quarter of fiscal 2000 4.00 to 1.00 Fiscal quarters from and including fourth quarter of fiscal 2000 through and including third quarter of fiscal 2001 3.50 to 1.00 Fiscal quarters from and including fourth quarter of fiscal 2001 through and including third quarter of fiscal 2002 3.00 to 1.00 Fiscal quarters from and including fourth quarter of fiscal 2002 through and including third quarter of fiscal 2003 2.50 to 1.00 Fiscal quarters from and including fourth quarter of fiscal 2003 through and including third quarter of fiscal 2004 2.25 to 1.00 Fourth fiscal quarter of fiscal 2004 and all fiscal quarters thereafter 2.00 to 1.00; 59 PROVIDED that, for purposes of determining the ratio described above for the first three fiscal quarters of the Borrower following the Closing Date, Consolidated EBITDA for each of the first three fiscal quarters of 1997 shall be deemed to be the respective amounts set forth on Schedule 7.1. (b) CONSOLIDATED INTEREST COVERAGE RATIO. Permit the Consolidated Interest Coverage Ratio for any period of four consecutive fiscal quarters of the Borrower (or, if less, the number of full fiscal quarters subsequent to the Closing Date) ending with any fiscal quarter set forth below to be less than the ratio set forth below opposite such fiscal quarter: Consolidated Interest Fiscal Quarter Coverage Ratio -------------- --------------------- Fiscal quarters from and including fourth quarter of fiscal 1997 through and including third quarter of fiscal 1999 1.70 to 1.00 Fiscal quarters from and including fourth quarter of fiscal 1999 through and including third quarter of fiscal 2000 1.90 to 1.00 Fiscal quarters from and including fourth quarter of fiscal 2000 through and including third quarter of fiscal 2001 2.30 to 1.00 Fiscal quarters from and including fourth quarter of fiscal 2001 through and including third quarter of fiscal 2002 2.50 to 1.00 Fiscal quarters from and including fourth quarter of fiscal 2002 through and including third quarter of fiscal 2003 2.90 to 1.00 Fourth fiscal quarter of fiscal 2003 and all fiscal quarters thereafter 3.50 to 1.00; PROVIDED that, for purposes of determining the ratio described above for the first three fiscal quarters of the Borrower following the Closing Date, Consolidated EBITDA, Consolidated Cash Interest Expense and cash income taxes for each of the first three fiscal quarters of 1997 shall be deemed to be the respective amounts set forth on Schedule 7.1. (c) CONSOLIDATED FIXED CHARGE COVERAGE RATIO. Permit the Consolidated Fixed Charge Coverage Ratio for any period of four consecutive fiscal quarters of the Borrower (or, if less, the number of full fiscal quarters subsequent to the Closing Date) ending with any fiscal quarter set forth below to be less than the ratio set forth below opposite such fiscal quarter: 60 Consolidated Fixed Fiscal Quarter Charge Coverage Ratio -------------- --------------------- Fiscal quarters from and including fourth quarter of fiscal 1997 through and including third quarter of fiscal 2000 1.50 to 1.00 Fiscal quarters from and including fourth quarter of fiscal 2000 through and including third quarter of fiscal 2001 1.60 to 1.00 Fiscal quarters from and including fourth quarter of fiscal 2001 through and including third quarter of fiscal 2002 1.75 to 1.00 Fourth fiscal quarter of fiscal 2002 and all fiscal quarters thereafter 2.00 to 1.00; PROVIDED that, for purposes of determining the ratio described above for the first three fiscal quarters of the Borrower following the Closing Date, Consolidated EBITDA, Consolidated Cash Interest Expense, cash income taxes and the other components of Consolidated Fixed Charges for each of the first three fiscal quarters of 1997 shall be deemed to be the respective amounts set forth on Schedule 7.1. (d) MAINTENANCE OF NET WORTH. Permit Consolidated Net Worth as of the last day of any fiscal quarter of the Borrower ending during any fiscal year set forth below to be less than the amount set forth below opposite such fiscal year: Consolidated Fiscal Year Net Worth ----------- ------------ 1997 ($85,000,000) 1998 ($75,000,000) 1999 ($65,000,000) 2000 ($50,000,000) 2001 ($25,000,000) 2002 $10,000,000 2003 $40,000,000 2004 $80,000,000 2005 $130,000,000 7.2 LIMITATION ON INDEBTEDNESS AND DISQUALIFIED STOCK. Create, incur, assume or suffer to exist (in each case, to "INCUR") any Indebtedness or issue Disqualified Stock, except: (a) Indebtedness of any Loan Party pursuant to any Loan Document; 61 (b) Indebtedness (i) of the Borrower to any Subsidiary, (ii) of any Wholly Owned Subsidiary Guarantor to the Borrower or any other Subsidiary and (iii) to the extent permitted by Section 7.8(h), of any Subsidiary that is not a Guarantor to the Borrower or any other Subsidiary; (c) Indebtedness of the Borrower or any of its Subsidiaries incurred to finance the acquisition, construction or improvement of fixed or capital assets, in an aggregate principal amount at any one time outstanding not to exceed $15,000,000, PROVIDED that such Indebtedness is incurred within 180 days after the date of such acquisition, construction or improvement and does not exceed the fair market value of such acquired, constructed or improved assets as determined in good faith by the Borrower's Board of Directors; (d) Indebtedness represented by Capital Lease Obligations in respect of Sale/Leaseback Transactions involving the sale of restaurants within 24 months of the purchase of the associated real property, in an aggregate principal amount not to exceed $20,000,000 at any one time outstanding; (e) Indebtedness outstanding on the date hereof and listed on Schedule 7.2(e) and any refinancings, refundings, renewals or extensions thereof (without any increase in the principal amount thereof); (f) guarantees made in the ordinary course of business by the Borrower or any of its Subsidiaries of obligations of any Subsidiary of the Borrower, PROVIDED that, in the case of any guarantee of obligations of any Subsidiary that is not a Guarantor, such guarantee is permitted by Section 7.8(h); (g) guarantees made in the ordinary course of business by the Borrower or any of its Subsidiaries of Indebtedness of franchisees of the Borrower or any Wholly Owned Subsidiary Guarantor in an aggregate principal amount at any one time outstanding not to exceed $20,000,000; (h) Indebtedness incurred by the Borrower or any of its Subsidiaries to finance the payment of property, casualty and specialty insurance premiums in the ordinary course of the Borrower's business which is repaid within 18 months of its incurrence, PROVIDED that such Indebtedness does not exceed $7,500,000 in the aggregate at any one time outstanding; (i) Indebtedness represented by guarantees of loans to employees of the Borrower or any of its Subsidiaries for the purpose of paying withholding taxes incurred by such employees in connection with the vesting of stock and/or stock options granted by the Borrower, in an aggregate amount not to exceed $3,000,000 at any one time outstanding; (j) (i) Indebtedness of the Borrower in respect of the Senior Notes in an aggregate principal amount not to exceed $175,000,000 and (ii) Guarantee Obligations of any Guarantor in respect of such Indebtedness; 62 (k) interest rate protection, currency swap, commodity swap and foreign exchange arrangements entered into in connection with bona fide hedging operations; (l) initial or successive refinancings of the Indebtedness permitted by clause (j) above; PROVIDED that (i) such refinancing Indebtedness has a stated maturity no earlier than the stated maturity of the Indebtedness being refinanced, (ii) such refinancing Indebtedness has a weighted average life at the time such Indebtedness is incurred that is equal to or greater than the weighted average life of the Indebtedness being refinanced, (iii) such refinancing Indebtedness is unsecured and (iv) such refinancing Indebtedness is in an aggregate principal amount (or if issued with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if issued with original issue discount, the aggregate accreted value) then outstanding of the Indebtedness being refinanced; and PROVIDED FURTHER that such refinancing Indebtedness shall not include Indebtedness of a Subsidiary of the Borrower that refinances Indebtedness of the Borrower; and (m) obligations with respect to customary provisions regarding post-closing purchase price adjustments and indemnification in agreements for the purchase or sale of a business or assets otherwise permitted by this Agreement. 7.3 LIMITATION ON LIENS. Create, incur, assume or suffer to exist any Lien upon any of its Property or revenues, whether now owned or hereafter acquired, except for: (a) Liens for taxes, fees, assessments and other governmental charges not yet due or which are being contested in good faith by appropriate proceedings, PROVIDED that adequate reserves with respect thereto are maintained on the books of the Borrower or its Subsidiaries, as the case may be, in conformity with GAAP; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith by appropriate proceedings; (c) pledges or deposits in connection with workers' compensation, unemployment insurance and other social security legislation; (d) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (e) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and which do not in any case materially detract from the value of the Property subject thereto or materially interfere with the ordinary conduct of the business of the Borrower or any of its Subsidiaries; 63 (f) Liens in existence on the date hereof listed on Schedule 7.3(f), securing Indebtedness permitted by Section 7.2(e), PROVIDED that no such Lien is spread to cover any additional Property after the Closing Date and that the amount of Indebtedness secured thereby is not increased; (g) Liens securing Indebtedness of the Borrower or any other Subsidiary incurred pursuant to Section 7.2(c) to finance the acquisition, construction or improvement of fixed or capital assets, PROVIDED that (i) such Liens shall be created substantially simultaneously with, or within 90 days after, the acquisition, construction or improvement of such fixed or capital assets, (ii) such Liens do not at any time encumber any Property other than the Property financed by such Indebtedness and (iii) the amount of Indebtedness secured thereby shall not exceed the cost of the assets or property so acquired, constructed or improved; (h) Liens created pursuant to the Security Documents; (i) any interest or title of a lessor under any lease entered into by the Borrower or any other Subsidiary in the ordinary course of its business and covering only the assets so leased; (j) Liens securing Capital Lease Obligations permitted by Section 7.2(d), PROVIDED that (i) such Liens shall be created substantially simultaneously with the related Sale/Leaseback Transaction, (ii) such Liens do not at any time encumber any Property other than the Property subject to such Sale/Leaseback Transaction and (iii) the amount of the Indebtedness secured thereby shall not exceed the fair market value of the Property subject to such Sale/Leaseback Transaction; (k) Liens arising by virtue of any statutory or common law provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a depository institution; (l) leases or subleases granted in the ordinary course of business; and (m) Liens arising in the ordinary course of business out of consignment or similar arrangements for the sale of goods. 7.4 LIMITATION ON FUNDAMENTAL CHANGES. Enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or Dispose of all or substantially all of its Property or business, except: (a) any Subsidiary of the Borrower may be merged or consolidated with or into the Borrower (PROVIDED that the Borrower shall be the continuing or surviving corporation) or with or into any Wholly Owned Subsidiary Guarantor (PROVIDED that the Wholly Owned Subsidiary Guarantor shall be the continuing or surviving corporation); 64 (b) any Subsidiary of the Borrower may Dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Borrower or any Wholly Owned Subsidiary Guarantor; and (c) any transaction permitted by Section 7.5(f). 7.5 LIMITATION ON SALE OF ASSETS. Dispose of any of its Property or business (including, without limitation, receivables and leasehold interests), whether now owned or hereafter acquired, or, in the case of any Subsidiary, issue or sell any shares of such Subsidiary's Capital Stock to any Person, except: (a) the Disposition of obsolete or worn out property in the ordinary course of business; (b) the sale of inventory in the ordinary course of business; (c) Dispositions permitted by Section 7.4(b); (d) the sale or issuance of any Subsidiary's Capital Stock to the Borrower or any Wholly Owned Subsidiary Guarantor; (e) Dispositions permitted by Section 7.2(d); (f) any Asset Sale or Recovery Event, PROVIDED that at least 75% of the consideration for any Asset Sale shall consist of cash and Cash Equivalents and PROVIDED FURTHER that the requirements of Sections 2.10(b) and 2.10(c) are complied with in connection with any such Asset Sale or Recovery Event; and (g) the license of trademarks, service marks, tradenames and other similar intangibles in the ordinary course of business. 7.6 LIMITATION ON DIVIDENDS. Declare or pay any dividend (other than dividends payable solely in common stock of the Person making such dividend) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of the Borrower or any Subsidiary or any warrants or options to purchase any such Capital Stock, whether now or hereafter outstanding, or make any other distribution in respect thereof, either directly or indirectly, whether in cash or property or in obligations of the Borrower or any Subsidiary (collectively, "RESTRICTED PAYMENTS"), except that: (a) any Subsidiary may make Restricted Payments to the Borrower or any Wholly Owned Subsidiary Guarantor; (b) any Subsidiary may declare and pay pro rata cash dividends to Persons other than the Borrower and its Subsidiaries, PROVIDED, that the aggregate amount of payments under this paragraph shall not exceed $5,000,000 or, if as of the last day of each of three consecutive fiscal quarters ending subsequent to the date hereof 65 Consolidated EBITDA for the four consecutive fiscal quarters ending on such days shall exceed $100,000,000, $10,000,000; and (c) so long as no Default or Event of Default shall have occurred and be continuing, the Borrower may purchase its Common Stock or Common Stock options from present or former officers of the Borrower or any of its Subsidiaries upon the death, disability or termination of employment of such officer, PROVIDED, that the aggregate amount of payments under this paragraph during the term of this Agreement shall not exceed $2,000,000 in any 12-month period and $5,000,000 in the aggregate. 7.7 LIMITATION ON CAPITAL EXPENDITURES. Make or commit to make (by way of the acquisition of securities of a Person or otherwise) any Capital Expenditure, except (a) Capital Expenditures of the Borrower and its Subsidiaries in the ordinary course of business not exceeding the Permitted Capital Expenditure Amount; PROVIDED, that (i) so long as no Default or Event of Default shall have occurred and be continuing or would occur as a result thereof, any such amount referred to above, if not so expended in the fiscal year for which it is permitted, may be carried over for expenditure in the next succeeding fiscal year and (ii) Capital Expenditures made pursuant to this clause (a) during any fiscal year shall be deemed made, FIRST, in respect of amounts carried over from the prior fiscal year pursuant to subclause (i) above and, SECOND, in respect of amounts permitted for such fiscal year as provided above and (b) Capital Expenditures made with the proceeds of any Reinvestment Deferred Amount. 7.8 LIMITATION ON INVESTMENTS, LOANS AND ADVANCES. Make any advance, loan, extension of credit (by way of guaranty or otherwise) or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets constituting all or a material part of a business unit of, or make any other investment in, any Person, except: (a) extensions of trade credit in the ordinary course of business; (b) investments in Cash Equivalents; (c) Guarantee Obligations permitted by Section 7.2; (d) loans and advances to employees of the Borrower or any of its Subsidiaries in the ordinary course of business (including, without limitation, for travel, entertainment and relocation expenses) in an aggregate amount for the Borrower and its Subsidiaries not to exceed $2,000,000 at any one time outstanding; (e) purchases of Common Stock and Common Stock options permitted by Section 7.6(b); (f) investments made by the Borrower or any of its Subsidiaries with the proceeds of any Reinvestment Deferred Amount; (g) investments by the Borrower or any of its Subsidiaries in any Person that, prior to such investment, is a Guarantor; 66 (h) investments in existence on the date hereof and listed on Schedule 7.8(h) and additional investments in, and extensions of credit to, any Subsidiary that is not a Guarantor and/or other Persons, PROVIDED that such additional investments and extensions of credit shall not exceed an aggregate amount of $10,000,000 or, if as of the last day of each of three consecutive fiscal quarters ending subsequent to the date hereof Consolidated EBITDA for the four consecutive fiscal quarters ending on such days shall exceed $100,000,000, $20,000,000; (i) investments by Friendly's International, Inc. or its United Kingdom Subsidiaries in Shanghai Friendly Food Co., Ltd. as a result of the transfer by the Borrower of its interests in Shanghai Friendly Food Co., Ltd. to such Person; (j) investments in stock, obligations or securities received in settlement of debts created in the ordinary course of business and owing to the Borrower or any of its Subsidiaries or in satisfaction of judgments and which are readily convertible into cash in U.S. dollars in an amount equal to the fair market value thereof as determined in good faith by the Board of Directors of the Borrower; (k) investments in securities of account debtors received in settlement of obligations or pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such account debtors; (l) investments in foreign exchange contracts, currency swap agreements, commodity swap agreements, commodity future agreements, commodity hedge agreements, Interest Rate Protection Agreements and other similar agreements entered into in the ordinary course of business, PROVIDED that such agreements are entered into for bona fide hedging purposes, are not for speculation or trading purposes and are designed to protect against fluctuations in currency exchange rates, commodity prices or interest rates, as the case may be, and, in the case of Interest Rate Protection Agreements, any such Interest Rate Protection Agreement has a notional amount corresponding to the Indebtedness being hedged thereby; (m) investments in franchisees of the Borrower in an aggregate amount at any one time outstanding not to exceed $10,000,000; (n) investments in accounts and notes receivable from franchisees, customers, suppliers and others in the ordinary course of business; and (o) investments made by the Borrower or any of its Subsidiaries in connection with a Disposition of Property permitted by Section 7.5, PROVIDED that the aggregate amount of such investments held at any time shall not exceed $5,000,000. 7.9 LIMITATION ON OPTIONAL PAYMENTS AND MODIFICATIONS OF DEBT INSTRUMENTS, ETC. (a) Make or offer to make any payment, prepayment, repurchase or redemption of or otherwise defease or segregate funds with respect to the Senior Notes (other than scheduled interest payments required to be made in cash), or (b) amend, modify, waive or otherwise change, or consent or agree to any amendment, modification, waiver or other change to, any 67 of the terms of the Senior Notes (other than any such amendment, modification, waiver or other change which (i) would extend the maturity or reduce the amount of any payment of principal thereof or which would reduce the rate or extend the date for payment of interest thereon and (ii) does not involve the payment of a consent fee), except that (x) upon any private or public offering of Capital Stock of the Borrower (other than the Common Stock Offering and the issuance of common stock pursuant to employee benefit plans or as compensation to employees), the Borrower may repurchase or redeem Senior Notes with the Net Cash Proceeds of such offering, PROVIDED that no more than $60,000,000 principal amount of Senior Notes may be so repurchased or redeemed, and (y) the Senior Notes may be refinanced in accordance with Section 7.2(l). 7.10 LIMITATION ON TRANSACTIONS WITH AFFILIATES. Enter into any transaction, including, without limitation, any purchase, sale, lease or exchange of Property, the rendering of any service or the payment of any management, advisory or similar fees, with any Affiliate (other than the Borrower or any Guarantor) unless such transaction is (a) otherwise permitted under this Agreement, (b) in the ordinary course of business of the Borrower or such Subsidiary, as the case may be, and (c) upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary, as the case may be, than it would obtain in a comparable arm's length transaction with a Person which is not an Affiliate. 7.11 LIMITATION ON SALES AND LEASEBACKS. Enter into any arrangement with any Person providing for the leasing by the Borrower or any Subsidiary of real or personal property which has been or is to be sold or transferred by the Borrower or such Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Borrower or such Subsidiary other than the Sale/Leaseback Transactions permitted by Sections 7.2(d) and 7.5(e). 7.12 LIMITATION ON CHANGES IN FISCAL PERIODS. Permit the fiscal year of the Borrower to end on a day other than the last Sunday in December (unless that day is earlier than December 27, in which case the fiscal year ends on the following Sunday) or change the Borrower's method of determining fiscal quarters. 7.13 LIMITATION ON NEGATIVE PLEDGE CLAUSES. Enter into or suffer to exist or become effective any agreement which prohibits or limits the ability of the Borrower or any of its Subsidiaries to create, incur, assume or suffer to exist any Lien upon any of its Property or revenues, whether now owned or hereafter acquired, to secure the Obligations or, in the case of any Guarantor, its obligations under the Guarantee and Collateral Agreement, other than (a) this Agreement and the other Loan Documents and (b) any agreements governing any purchase money Liens or Capital Lease Obligations otherwise permitted hereby (in which case, any prohibition or limitation shall only be effective against the assets financed thereby). 7.14 LIMITATION ON RESTRICTIONS ON SUBSIDIARY DISTRIBUTIONS. Enter into or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Subsidiary of the Borrower to (a) pay dividends or make any other distributions in respect of any Capital Stock of such Subsidiary held by, or pay any Indebtedness owed to, the Borrower or any other Subsidiary of the Borrower, (b) make loans or advances to the 68 Borrower or any other Subsidiary of the Borrower or (c) transfer any of its assets to the Borrower or any other Subsidiary of the Borrower, except for such encumbrances or restrictions existing under or by reason of (i) any restrictions existing under the Loan Documents, (ii) any restrictions with respect to a Subsidiary imposed pursuant to an agreement which has been entered into in connection with the Disposition of all or substantially all of the Capital Stock or assets of such Subsidiary, (iii) any encumbrance or restriction in the Existing Credit Facility prior to the termination thereof, (iv) any encumbrance or restriction with respect to a Subsidiary pursuant to an agreement relating to any Indebtedness Incurred by such Subsidiary on or prior to the date on which such Subsidiary was acquired by the Borrower or a Subsidiary and outstanding on such date (other than Indebtedness Incurred in connection with, or in contemplation of, the transaction or series of related transactions pursuant to which such Subsidiary became a Subsidiary or was acquired by the Borrower or a Subsidiary), (v) any encumbrance or restriction pursuant to an agreement contained in any amendment to an agreement referred to in clause (iv) of this covenant; PROVIDED, HOWEVER, that the encumbrances and restrictions contained in any such refinancing agreement or amendment are not materially less favorable to the Lenders than the encumbrances and restrictions contained in any such agreement, (vi) in the case of clause (c), any encumbrance or restriction (A) that restricts in a customary manner the subletting, assignment or transfer of any property or asset that is subject to a lease, license or similar contract, (B) by virtue of any transfer of, agreement to transfer, option or right with respect to, or Lien on, any property or assets of the Borrower or any Subsidiary not otherwise prohibited by this Agreement or (C) contained in security agreements securing Indebtedness of a Subsidiary to the extent such encumbrance or restrictions restrict the transfer of the property subject to such security agreements, (vii) any encumbrance or restriction arising under or by reason of applicable law, (viii) any encumbrance or restriction contained in the Senior Note Indenture, (ix) customary provision in joint venture agreements relating solely to the securities, assets and revenues of such joint venture or other business venture, (x) any encumbrance or restriction applicable to secured Indebtedness otherwise permitted to be Incurred under this Agreement that limits the right of the debtor to dispose of the assets securing such Indebtedness, and 69 (xi) customary net worth provisions contained in leases and other agreements entered into by a Subsidiary in the ordinary course of business. 7.15 LIMITATION ON LINES OF BUSINESS. Enter into any business, either directly or through any Subsidiary, except for those businesses in which the Borrower and its Subsidiaries are engaged on the date of this Agreement or which are reasonably related thereto, or permit RIC to engage in any business other than the reinsurance of certain of the Borrower's risks (i.e. workers' compensation, employer's liability, general liability and product liability) from a third party insurer. SECTION 8. EVENTS OF DEFAULT If any of the following events shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Loan or Reimbursement Obligation when due in accordance with the terms hereof; or the Borrower shall fail to pay any interest on any Loan or Reimbursement Obligation, or any other amount payable hereunder or under any other Loan Document, within three Business Days after any such interest or other amount becomes due in accordance with the terms hereof; or (b) Any representation or warranty made or deemed made by any Loan Party herein or in any other Loan Document or which is contained in any certificate, document or financial or other statement furnished by it at any time under or in connection with this Agreement or any such other Loan Document shall prove to have been inaccurate in any material respect on or as of the date made or deemed made; or (c) (i) Any Loan Party shall default in the observance or performance of any agreement contained in clause (i) of Section 6.4(a) (with respect to the Borrower only), Section 6.7(a), Section 7, or Section 5.6 of the Guarantee and Collateral Agreement or (ii) an "Event of Default" under and as defined in any Mortgage shall have occurred and be continuing; or (d) any Loan Party shall default in the observance or performance of any other agreement contained in this Agreement or any other Loan Document (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of 30 days after notice to the Borrower from the Agent or the Required Lenders; or (e) The Borrower or any of its Subsidiaries shall (i) default in making any payment of any principal of any Indebtedness (including, without limitation, any Guarantee Obligation, but excluding the Loans and Reimbursement Obligations) when due (giving effect to any applicable grace period) with respect thereto; or (ii) default in making any payment of any interest on any such Indebtedness beyond the period of grace, if any, provided in the instrument or agreement under which such Indebtedness was created; or (iii) default in the observance or performance of any other agreement or condition relating to any such Indebtedness or contained in any instrument or 70 agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or beneficiary of such Indebtedness (or a trustee or agent on behalf of such holder or beneficiary) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or (in the case of any such Indebtedness constituting a Guarantee Obligation) to become payable; PROVIDED, that a default, event or condition described in clause (i), (ii) or (iii) of this paragraph (e) shall not at any time constitute an Event of Default unless, at such time, one or more defaults, events or conditions of the type described in clauses (i), (ii) and (iii) of this paragraph (e) shall have occurred and be continuing with respect to Indebtedness the outstanding principal amount of which exceeds in the aggregate $5,000,000; or (f) (i) The Borrower or any of its Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or the Borrower or any of its Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against the Borrower or any of its Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) the Borrower or any of its Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) the Borrower or any of its Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (g) (i) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of the Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the 71 Borrower or any Commonly Controlled Entity shall, or in the reasonable opinion of the Required Lenders is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could reasonably be expected to have a Material Adverse Effect; or (h) One or more judgments or decrees shall be entered against the Borrower or any of its Subsidiaries involving in the aggregate a liability (not paid or fully covered by insurance as to which the relevant insurance company has acknowledged coverage) of $5,000,000 or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 30 days from the entry thereof; or (i) Any of the Security Documents shall cease, for any reason, to be in full force and effect, or any Loan Party or any Affiliate of any Loan Party shall so assert, or any Lien created by any of the Security Documents shall cease to be enforceable and of the same effect and priority purported to be created thereby; or (j) The guarantee contained in Section 2 of the Guarantee and Collateral Agreement shall cease, for any reason, to be in full force and effect or any Loan Party or any Affiliate of any Loan Party shall so assert; or (k)(i) (A) Any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")), excluding the Permitted Holders, shall become, or obtain rights (whether by means or warrants, options or otherwise) to become, the "beneficial owner" (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of more than 35% of the outstanding common stock of the Borrower and (B) the Permitted Holders "beneficially own" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, in the aggregate a lesser percentage of total voting power of the Voting Stock of the Borrower than such other person and do not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the Board of Directors of the Borrower; (ii) a majority of the board of directors of the Borrower shall cease to consist of Continuing Directors; or (iii) there shall occur a "Change of Control" as defined in the Senior Note Indenture; or then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) above with respect to the Borrower, automatically the Commitments shall immediately terminate and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents (including, without limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: (i) with the consent of the Majority Revolving Credit Facility Lenders, the Agent may, or upon the request of the Majority Revolving Credit Facility Lenders, the Agent shall, by notice to the Borrower declare the 72 Revolving Credit Commitments to be terminated forthwith, whereupon the Revolving Credit Commitments shall immediately terminate; and (ii) with the consent of the Required Lenders, the Agent may, or upon the request of the Required Lenders, the Agent shall, by notice to the Borrower, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents (including, without limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) to be due and payable forthwith, whereupon the same shall immediately become due and payable. With respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to this paragraph, the Borrower shall at such time deposit in a cash collateral account opened by the Agent an amount equal to the aggregate then undrawn and unexpired amount of such Letters of Credit. Amounts held in such cash collateral account shall be applied by the Agent to the payment of drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit shall have expired or been fully drawn upon, if any, shall be applied to repay other obligations of the Borrower hereunder and under the other Loan Documents. After all such Letters of Credit shall have expired or been fully drawn upon, all Reimbursement Obligations shall have been satisfied and all other obligations of the Borrower hereunder and under the other Loan Documents shall have been paid in full, the balance, if any, in such cash collateral account shall be returned to the Borrower (or such other Person as may be lawfully entitled thereto). SECTION 9. THE AGENT 9.1 APPOINTMENT. Each Lender hereby irrevocably designates and appoints the Agent as the agent of such Lender under this Agreement and the other Loan Documents, and each such Lender irrevocably authorizes the Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. 9.2 DELEGATION OF DUTIES. The Agent may execute any of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys in-fact selected by it with reasonable care. 9.3 EXCULPATORY PROVISIONS. Neither the Agent nor any of its respective officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except to the extent that any of the foregoing are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from its or such Person's own gross negligence or willful misconduct) or (ii) 73 responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by any Loan Party or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of any Loan Party a party thereto to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of any Loan Party. 9.4 RELIANCE BY AGENT. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any instrument, writing, resolution, notice, consent, certificate, affidavit, letter, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Agent. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders (or, if so specified by this Agreement, all Lenders) as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required Lenders (or, if so specified by this Agreement, all Lenders), and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Loans. 9.5 NOTICE OF DEFAULT. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless it has received notice from a Lender or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Agent receives such a notice, the Agent shall give notice thereof to the Lenders. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders (or, if so specified by this Agreement, all Lenders); PROVIDED that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. 9.6 NON-RELIANCE ON AGENT AND OTHER LENDERS. Each Lender expressly acknowledges that neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates have made any representations or warranties to such Lender and that no act by the Agent hereinafter taken, including any review of the affairs of a Loan Party 74 or any affiliate of a Loan Party, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Loan Parties and their affiliates and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Loan Parties and their affiliates. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of any Loan Party or any affiliate of a Loan Party which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. 9.7 INDEMNIFICATION. The Lenders agree to indemnify the Agent in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Revolving Credit Percentages, Tranche A Term Loan Percentages, Tranche B Term Loan Percentages and Tranche C Term Loan Percentages in effect on the date on which indemnification is sought under this Section (or, if indemnification is sought after the date upon which the Commitments shall have terminated and the Loans shall have been paid in full, ratably in accordance with such Percentages immediately prior to such date), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Loans) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of, the Commitments, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent under or in connection with any of the foregoing; PROVIDED that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements which are found by a final and nonappealable decision of a court of competent jurisdiction to have resulted from the Agent's gross negligence or willful misconduct. The agreements in this Section 9.7 shall survive the payment of the Loans and all other amounts payable hereunder. 9.8 AGENT IN ITS INDIVIDUAL CAPACITY. The Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with any Loan Party as though the Agent was not the Agent. With respect to its Loans made or renewed by it and with respect to any Letter of Credit issued or participated in by it, the Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not the Agent, and the terms "Lender" and "Lenders" shall include the Agent in its individual capacity. 75 9.9 SUCCESSOR AGENT. Subject to the appointment of a successor agent as provided below, the Agent may resign as Agent upon 10 days' notice to the Lenders and the Borrower. If the Agent shall resign as Agent under this Agreement and the other Loan Documents, then the Required Lenders shall appoint from among the Lenders a successor agent for the Lenders, which successor agent shall (unless an Event of Default under Section 8(a) or Section 8(f) with respect to the Borrower shall have occurred and be continuing) be subject to approval by the Borrower (which approval shall not be unreasonably withheld or delayed), whereupon such successor agent shall succeed to the rights, powers and duties of the Agent and the term "Agent" shall mean such successor agent effective upon such appointment and approval, and the former Agent's rights, powers and duties as Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement or any holders of the Loans. After any retiring Agent's resignation as Agent, the provisions of this Section 9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement and the other Loan Documents. 9.10 AUTHORIZATION TO RELEASE LIENS. The Agent is hereby irrevocably authorized by each of the Lenders to release any Lien covering any Property of the Borrower or any of its Subsidiaries that is the subject of a Disposition which is permitted by this Agreement or which has been consented to in accordance with Section 10.1. SECTION 10. MISCELLANEOUS 10.1 AMENDMENTS AND WAIVERS. Neither this Agreement, any other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this Section 10.1. The Required Lenders and each Loan Party to the relevant Loan Document may, or (with the written consent of the Required Lenders) the Agent and each Loan Party to the relevant Loan Document may, from time to time, (a) enter into written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lenders or of the Loan Parties hereunder or thereunder or (b) waive, on such terms and conditions as the Required Lenders, or the Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; PROVIDED, HOWEVER, that no such waiver and no such amendment, supplement or modification shall (i) forgive the principal amount or extend the final scheduled date of maturity of any Loan, extend the scheduled date of any amortization payment in respect of any Term Loan, reduce the stated rate of any interest, fee or letter of credit commission payable hereunder or extend the scheduled date of any payment thereof, or increase the amount or extend the expiration date of any Lender's Revolving Credit Commitment, in each case without the consent of each Lender directly affected thereby; (ii) amend, modify or waive any provision of this Section 10.1 or reduce any percentage specified in the definition of Required Lenders or Required Prepayment Lenders, consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement and the other Loan Documents, release all or substantially all of the Collateral or release all or substantially all of the Guarantors from their obligations under the Guarantee and Collateral Agreement, in each case without the written consent of all Lenders; (iii) 76 amend, modify or waive any condition precedent to any extension of credit under the Revolving Credit Facility set forth in Section 5.2 (including, without limitation, in connection with any waiver of an existing Default or Event of Default) without the written consent of the Majority Revolving Credit Facility Lenders; (iv) reduce the percentage specified in the definition of Majority Facility Lenders without the written consent of all Lenders under each affected Facility; (v) amend, modify or waive any provision of Section 9 without the written consent of the Agent; or (vi) amend, modify or waive any provision of Section 3 without the written consent of the Issuing Lender. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Loan Parties, the Lenders, the Agent and all future holders of the Loans. In the case of any waiver, the Loan Parties, the Lenders and the Agent shall be restored to their former position and rights hereunder and under the other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. 10.2 NOTICES. All notices, requests and demands to or upon the respective parties hereto to be effective shall be in writing (including by telecopy), and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered, or three Business Days after being deposited in the mail, postage prepaid, or, in the case of telecopy notice, when received, addressed as follows in the case of the Borrower and the Agent, and as set forth in an administrative questionnaire delivered to the Agent in the case of the Lenders, or to such other address as may be hereafter notified by the respective parties hereto: The Borrower: Friendly Ice Cream Corporation 1855 Boston Road Wilbraham, Massachusetts 01095 Attention: George Roller Telecopy: (413) 543-3186 Telephone: (413) 543-2400 with a copy to: Friendly Ice Cream Corporation 1855 Boston Road Wilbraham, Massachusetts 01095 Attention: Aaron Parker Telecopy: (413) 543-3282 Telephone: (413) 543-2400 The Agent: Societe Generale 1221 Avenue of the Americas New York, New York 10020 Attention: Kateline Martinez Telecopy: (212) 278-7490 Telephone: (212) 278-6855 77 with a copy to: Societe Generale 1221 Avenue of the Americas New York, New York 10020 Attention: Brent Johnston Telecopy: (212) 278-7430 Telephone: (212) 278-6881 PROVIDED that any notice, request or demand to or upon the Agent or the Lenders shall not be effective until received. 10.3 NO WAIVER; CUMULATIVE REMEDIES. No failure to exercise and no delay in exercising, on the part of the Agent or any Lender, any right, remedy, power or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 10.4 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made hereunder, in the other Loan Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans hereunder. 10.5 PAYMENT OF EXPENSES. The Borrower agrees (a) to pay or reimburse the Agent for all its reasonable out-of-pocket costs and expenses incurred in connection with the development, syndication, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Agent, (b) to pay or reimburse each Lender and the Agent for all their respective costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents, including, without limitation, the fees and disbursements of counsel (including the non-duplicative allocated fees and expenses of in-house counsel) to each Lender and of counsel to the Agent, (c) to pay, indemnify, and hold each Lender and the Agent harmless from, any and all recording and filing fees or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents and (d) to pay, indemnify, and hold each Lender and the Agent and their respective officers, directors, employees, affiliates, agents and controlling persons (each, an "INDEMNITEE") harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the other Loan Documents and any such other documents, including, without limitation, any of the foregoing relating to the use of proceeds of the Loans or the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of the Borrower or any of its Subsidiaries or any of the Properties (all the foregoing in this clause (d), collectively, the 78 "INDEMNIFIED LIABILITIES"), PROVIDED, that the Borrower shall have no obligation hereunder to any indemnitee with respect to indemnified liabilities to the extent such indemnified liabilities resulted from the gross negligence or willful misconduct of such indemnitee. The agreements in this Section shall survive repayment of the Loans and all other amounts payable hereunder. 10.6 SUCCESSORS AND ASSIGNS; PARTICIPATIONS AND ASSIGNMENTS. (a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Agent, all future holders of the Loans and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Agent and each Lender. Nothing expressed or implied herein is intended to give, or shall be construed to give, any Person, other than the parties hereto and their permitted successors and assigns hereunder, any benefit or legal or equitable right, remedy or claim under or by virtue of this Agreement or under or by virtue of any provision herein. (b) Any Lender may, without the consent of the Borrower, in accordance with applicable law, at any time sell to one or more banks, financial institutions or other entities (each, a "PARTICIPANT") participating interests in any Loan owing to such Lender, any Commitment of such Lender or any other interest of such Lender hereunder and under the other Loan Documents; PROVIDED that no such participation to a Participant shall be in an aggregate principal amount of less than $5,000,000 (other than in the case of a participation of all of a Lender's interests under this Agreement), unless otherwise agreed by the Borrower and the Agent. In the event of any such sale by a Lender of a participating interest to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Loan for all purposes under this Agreement and the other Loan Documents, and the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents. In no event shall any Participant under any such participation have any right to approve any amendment or waiver of any provision of any Loan Document, or any consent to any departure by any Loan Party therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on, the Loans or any fees payable hereunder, or postpone the date of the final maturity of the Loans, in each case to the extent subject to such participation. The Borrower agrees that if amounts outstanding under this Agreement and the Loans are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall, to the maximum extent permitted by applicable law, be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement, PROVIDED that, in purchasing such participating interest, such Participant shall be deemed to have agreed to share with the Lenders the proceeds thereof as provided in Section 10.7(a) as fully as if it were a Lender hereunder. The Borrower also agrees that each Participant shall be entitled to the benefits of Sections 2.17, 2.18 and 2.19 with respect to its participation in the Commitments and the Loans outstanding from time to time as if it was a Lender; PROVIDED that, in the case of Section 2.18, such Participant shall have complied with the requirements of said Section and PROVIDED, FURTHER, that no Participant shall be entitled to receive any 79 greater amount pursuant to any such Section than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such participation occurred. (c) Any Lender (an "ASSIGNOR") may, in accordance with applicable law, at any time and from time to time assign to any Lender or any affiliate thereof or, with the consent of the Borrower, and the Agent (which, in each case, shall not be unreasonably withheld or delayed) (PROVIDED that no such consent need be obtained in the case of any assignment made when any Event of Default shall have occurred and be continuing), to an additional bank, financial institution or other entity (an "ASSIGNEE") all or any part of its rights and obligations under this Agreement pursuant to an Assignment and Acceptance, substantially in the form of Exhibit E, executed by such Assignee, such Assignor and the Agent (and, where the consent of the Borrower is required pursuant to the foregoing provisions, by the Borrower) and delivered to the Agent for its acceptance and recording in the Register; PROVIDED that no such assignment to an Assignee (other than any Lender or any affiliate thereof) shall be in an aggregate principal amount of less than $10,000,000 (or, in the case of any Tranche C Term Loan, $5,000,000) other than in the case of an assignment of all of a Lender's interests under this Agreement, unless otherwise agreed by the Borrower and the Agent. Any such assignment need not be ratable as among the Facilities. Upon such execution, delivery, acceptance and recording, from and after the effective date determined pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with a Commitment and/or Loans as set forth therein, and (y) the Assignor thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of an Assignor's rights and obligations under this Agreement, such assigning Lender shall cease to be a party hereto). (d) The Agent shall maintain at its address referred to in Section 10.2 a copy of each Assignment and Acceptance delivered to it and a register (the "REGISTER") for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Loans owing to, each Lender from time to time and any Notes evidencing such Loans. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Agent and the Lenders shall treat each Person whose name is recorded in the Register as the owner of the Loan and any Note evidencing such Loan recorded therein for all purposes of this Agreement. Any assignment of any Loan whether or not evidenced by a Note shall be effective only upon appropriate entries with respect thereto being made in the Register (and each Note shall expressly so provide). Any assignment or transfer of all or part of a Loan evidenced by a Note shall be registered on the Register only upon surrender for registration of assignment or transfer of the Note evidencing such Loan, accompanied by a duly executed Assignment and Acceptance, and thereupon one or more new Notes in the same aggregate principal amount shall be issued to the designated Assignee and the old Notes shall be returned by the Agent to the Borrower marked "cancelled". The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. 80 (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an Assignee (and, in the case of an Assignee that is not then a Lender or an affiliate thereof or a Person under common management with such Lender, by the Borrower, the Agent and the Issuing Lender) together with payment to the Agent of a registration and processing fee of $3,500 (except that no such registration and processing fee shall be payable in the case of an Assignee which is already a Lender or is an affiliate of a Lender or a Person under common management with a Lender), the Agent shall (i) promptly accept such Assignment and Acceptance and (ii) on the effective date determined pursuant thereto record the information contained therein in the Register and give notice of such acceptance and recordation to the Lenders and the Borrower. On or prior to such effective date, the Borrower, at its own expense, upon request, shall execute and deliver to the Agent (in exchange for the Revolving Credit Note and/or Term Notes, as the case may be, of the assigning Lender) a new Revolving Credit Note and/or Term Notes, as the case may be, to the order of such Assignee in an amount equal to the Revolving Credit Commitment and/or applicable Term Loans, as the case may be, assumed or acquired by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained a Revolving Credit Commitment and/or Term Loans, as the case may be, upon request, a new Revolving Credit Note and/or Term Notes, as the case may be, to the order of the assigning Lender in an amount equal to the Revolving Credit Commitment and/or applicable Term Loans, as the case may be, retained by it hereunder. Such new Notes shall be dated the Closing Date and shall otherwise be in the form of the Note replaced thereby. (f) For avoidance of doubt, the parties to this Agreement acknowledge that the provisions of this Section concerning assignments of Loans and Notes relate only to absolute assignments and that such provisions do not prohibit assignments creating security interests, including, without limitation, any pledge or assignment by a Lender of any Loan or Note to any Federal Reserve Bank in accordance with applicable law. 10.7 ADJUSTMENTS; SET-OFF. (a) Except to the extent that this Agreement provides for payments to be allocated to the Lenders under a particular Facility, if any Lender (a "BENEFITTED LENDER") shall at any time receive any payment of all or part of its Loans or the Reimbursement Obligations owing to it, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 8(f), or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender's Loans or the Reimbursement Obligations owing to such other Lender, or interest thereon, such Benefitted Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender's Loans and/or of the Reimbursement Obligations owing to each such other Lender, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefitted Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; PROVIDED, HOWEVER, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. 81 (b) In addition to any rights and remedies of the Lenders provided by law, each Lender shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by the Borrower hereunder (whether at the stated maturity, by acceleration or otherwise) to set off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender or any branch or agency thereof to or for the credit or the account of the Borrower. Each Lender agrees promptly to notify the Borrower and the Agent after any such setoff and application made by such Lender, PROVIDED that the failure to give such notice shall not affect the validity of such setoff and application. 10.8 COUNTERPARTS. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by telecopy), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with the Borrower and the Agent. 10.9 SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10.10 INTEGRATION. This Agreement and the other Loan Documents represent the agreement of the Borrower, the Agent and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Agent or any Lender relative to subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. 10.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 10.12 SUBMISSION TO JURISDICTION; WAIVERS. Each of the Borrower, the Agent and each Lender hereby irrevocably and unconditionally: (a) submits for itself and its Property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof; 82 (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Borrower at its address set forth in Section 10.2 or at such other address of which the Agent shall have been notified pursuant thereto; (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section 10.12 any special, exemplary, punitive or consequential damages. 10.13 ACKNOWLEDGEMENTS. The Borrower hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; (b) neither the Agent nor any Lender has any fiduciary relationship with or duty to the Borrower arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Agent and Lenders, on one hand and the Borrower, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Borrower and the Lenders. 10.14 WAIVERS OF JURY TRIAL. THE BORROWER, THE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 10.15 CONFIDENTIALITY. Each of the Agent and each Lender agrees to keep confidential all non-public information provided to it by any Loan Party pursuant to this Agreement that is designated by such Loan Party as confidential; PROVIDED that nothing herein shall prevent the Agent or any Lender from disclosing any such information (a) to the Agent, any other Lender or any affiliate of any Lender, (b) to any Participant or Assignee (each, a "TRANSFEREE") or prospective Transferee which agrees to comply with the provisions of this Section 10.15, (c) to the employees, directors, agents, attorneys, accountants and other 83 professional advisors of such Lender or its affiliates, (d) upon the request or demand of any Governmental Authority having jurisdiction over the Agent or such Lender, (e) in response to any order of any court or other Governmental Authority or as may otherwise be required pursuant to any Requirement of Law, (f) if requested or required to do so in connection with any litigation or similar proceeding, (g) which has been publicly disclosed other than in breach of this Section, (h) to the National Association of Insurance Commissioners or any similar organization or any nationally recognized rating agency that requires access to information about a Lender's investment portfolio in connection with ratings issued with respect to such Lender, or (i) in connection with the exercise of any remedy hereunder or under any other Loan Document. 84 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. FRIENDLY ICE CREAM CORPORATION By: ------------------------------- Name: Title: SOCIETE GENERALE, as Arranger, Administrative Agent and a Lender By: ------------------------------- Name: Title: FIRST SOURCE By: ------------------------------- Name: Title: GE CAPITAL By: ------------------------------- Name: Title: PROTECTIVE ASSET MANAGEMENT COMPANY By: ------------------------------- Name: Title: 85 SANWA BUSINESS CREDIT CORP. By: ------------------------------- Name: Title: TRANSAMERICA BUSINESS CREDIT By: ------------------------------- Name: Title: NATIONSBANK, N.A. By: ------------------------------- Name: Title: BANK OF BOSTON By: ------------------------------- Name: Title: BLACK DIAMOND CAPITAL MANAGEMENT By: ------------------------------- Name: Title: 86 CREDIT LYONNAIS By: ------------------------------- Name: Title: EATON VANCE By: ------------------------------- Name: Title: ANNEX A ------- PRICING GRID FOR REVOLVING CREDIT LOANS, TRANCHE A TERM LOANS AND COMMITMENT FEES =========================================== ============== ============== Applicable Margin Consolidated for Eurodollar Commitment Leverage Ratio Loans Fee Rate - ------------------------------------------- -------------- -------------- > or equal to 4.0 to 1.0 2.500% 0.500% - ------------------------------------------- -------------- -------------- > or equal to 3.5 to 1.0 and < 4.0 to 1.0 2.250% 0.500% - ------------------------------------------- -------------- -------------- > or equal to 3.0 to 1.0 and < 3.5 to 1.0 2.125% 0.500% - ------------------------------------------- -------------- -------------- > or equal to 2.5 to 1.0 and < 3.0 to 1.0 1.875% 0.375% - ------------------------------------------- -------------- -------------- < 2.5 to 1.0 1.625% 0.375% =========================================== ============== ============== Changes in the Applicable Margin with respect to Revolving Loans and Tranche A Loans or in the Commitment Fee Rate resulting from changes in the Consolidated Leverage Ratio shall become effective on the date (the "ADJUSTMENT DATE") on which financial statements are delivered to the Lenders pursuant to Section 6.1 (but in any event not later than the 45th day after the end of each of the first three quarterly periods of each fiscal year or the 90th day after the end of each fiscal year, as the case may be) and shall remain in effect until the next change to be effected pursuant to this paragraph. If any financial statements referred to above are not delivered within the time periods specified above, then, until such financial statements are delivered, the Consolidated Leverage Ratio as at the end of the fiscal period that would have been covered thereby shall for the purposes of this definition be deemed to be greater than 4.0 to 1.0. Each determination of the Consolidated Leverage Ratio pursuant to this definition shall be made as at the end of and with respect to the period of four consecutive fiscal quarters of the Borrower ending at the end of the period covered by the relevant financial statements and shall reflect the matters set forth in the proviso to Section 7.1(a). ANNEX B ECF PERCENTAGE GRID ========================================== ============ Consolidated ECF Leverage Ratio Percentage ------------------------------------------ ------------ > or equal to 3.5 to 1.0 80% ------------------------------------------ ------------ > or equal to 3.0 to 1.0 and < 3.5 to 1.0 65% ------------------------------------------ ------------ > or equal to 2.0 to 1.0 and < 3.0 to 1.0 50% ------------------------------------------ ------------ < 2.0 to 1.0 0% ========================================== ============ Changes in the ECF Percentage resulting from changes in the Consolidated Leverage Ratio shall become effective on the date (the "ECF PERCENTAGE ADJUSTMENT DATE") on which audited financial statements are delivered to the Lenders pursuant to Section 6.1(a) (but in any event not later than the 90th day after the end of each fiscal year) and shall remain in effect until the next change to be effected pursuant to this paragraph. If any financial statements are not delivered within the time period specified above, then, until such financial statements are delivered, the Consolidated Leverage Ratio as at the end of the fiscal year that would have been covered thereby shall for the purposes of this definition be deemed to be greater than 3.5 to 1.0. Each determination of the Consolidated Leverage Ratio pursuant to this definition shall be made as at the end of and with respect to the period of four consecutive fiscal quarters of the Borrower ending at the end of the fiscal year covered by the relevant financial statements. ANNEX C ------- PERMITTED CAPITAL EXPENDITURE GRID
=========== ============== ============= ============================ ============= Ratio of Consolidated Permitted Capital Consolidated EBITDA to Capital Fiscal Expenditure EBITDA Consolidated Expenditure Year Amount Target EBITDA Target Percentage - ----------- -------------- ------------- ---------------------------- ------------- 1998 $ $ > or equal to 1.00 to 1.00 120% - ----------- -------------- ------------- ---------------------------- ------------- 1999 $ $ < 1.00 to 1.00 100% - ----------- -------------- ------------- and 2000 $ $ > or equal to 0.90 to 1.00 - ----------- -------------- ------------- ---------------------------- ------------- 2001 $ $ < 0.90 to 1.00 80% and 2002 $ $ > or equal to 0.80 to 1.00 - ----------- -------------- ------------- ---------------------------- ------------- 2003 $ $ < 0.80 to 1.00 50% - ----------- -------------- ------------- ---------------------------- ------------- 2004 and thereafter $ $ =========== ============== ============= ============================ =============
Changes in the Permitted Capital Expenditure Amount resulting from changes in the Ratio of Consolidated EBITDA to Consolidated EBITDA Target shall become effective on the date (the "PERMITTED CAPITAL EXPENDITURE ADJUSTMENT DATE") on which audited financial statements are delivered to the Lenders pursuant to Section 6.1(a) with respect to any fiscal year, commencing with the Borrower's 1998 fiscal year (but in any event not later than the 90th day after the end of each such fiscal year), and shall remain in effect until the next change to be effected pursuant to this paragraph. If any financial statements are not delivered within the time period specified above, then, until such financial statements are delivered, the Ratio of Consolidated EBITDA to Consolidated EBITDA Target as at the end of the fiscal year that would have been covered thereby shall for the purposes of this definition be deemed to be less than 0.80 to 1.00. Each determination of the Ratio of Consolidated EBITDA to Consolidated EBITDA Target shall be made with respect to the period of four consecutive quarters of the Borrower ending at the end of the fiscal year covered by the relevant financial statements. EX-23.2 6 EXHIBIT 23.2 --CONSENT 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-----