-----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, A2WbycOe425PUc+j+ZhqsRsQkAC82PFPwVxq9FrH37pY6C41H7W1X/GvpZuzWWZ/ ibSr1IFdZGOvEOPToSEGBA== 0001047469-97-001182.txt : 19971021 0001047469-97-001182.hdr.sgml : 19971021 ACCESSION NUMBER: 0001047469-97-001182 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 17 FILED AS OF DATE: 19971020 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRIENDLY ICE CREAM CORP CENTRAL INDEX KEY: 0000039135 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 042053130 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-34633 FILM NUMBER: 97697950 BUSINESS ADDRESS: STREET 1: 1855 BOSTON ROAD CITY: WILBRAHAM STATE: MA ZIP: 01095 BUSINESS PHONE: 4135432400 MAIL ADDRESS: STREET 1: 1855 BOSTON ROAD CITY: WILBRAHAM STATE: MA ZIP: 01095 S-1/A 1 S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 20, 1997 REGISTRATION NO. 333-34633 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- FRIENDLY ICE CREAM CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 5812 04-2053130 (State of Incorporation) (Primary Standard Industrial (I.R.S. Employer Classification Code Number) Identification No.)
1855 BOSTON ROAD WILBRAHAM, MASSACHUSETTS 01095 (413) 543-2400 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) AARON B. PARKER FRIENDLY ICE CREAM CORPORATION 1855 BOSTON ROAD WILBRAHAM, MASSACHUSETTS 01095 (413) 543-2400 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------------------- COPIES TO: MICHAEL A. CAMPBELL JOHN B. TEHAN MAYER, BROWN & PLATT SIMPSON THACHER & BARTLETT 190 SOUTH LASALLE STREET 425 LEXINGTON AVENUE CHICAGO, ILLINOIS 60603-3441 NEW YORK, NEW YORK 10017 (312) 782-0600 (212) 455-2000
-------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. -------------------------- If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462 (b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462 (c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED (1) UNIT(2) OFFERING PRICE (2) REGISTRATION FEE Common Stock, 5,750,000 shares $ 21.00 $ 120,750,000 $ 36,600 (3) $.01 par value (1)................
(1) Includes 750,000 shares that may be purchased by the Underwriters to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457. (3) Previously paid. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED OCTOBER 20, 1997 5,000,000 SHARES [LOGO] COMMON STOCK ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY (THE "COMMON STOCK OFFERING") ARE BEING SOLD BY FRIENDLY ICE CREAM CORPORATION (THE "COMPANY"). CONCURRENTLY WITH THE COMMON STOCK OFFERING, THE COMPANY IS OFFERING TO THE PUBLIC $175 MILLION AGGREGATE PRINCIPAL AMOUNT OF SENIOR NOTES DUE 2007 (THE "SENIOR NOTE OFFERING" AND, TOGETHER WITH THE COMMON STOCK OFFERING, THE "OFFERINGS") AND, CONTINGENT UPON THE OFFERINGS, WILL ENTER INTO THE NEW CREDIT FACILITY (AS DEFINED HEREIN). CONSUMMATION OF EACH OF THE COMMON STOCK OFFERING, THE SENIOR NOTE OFFERING AND THE NEW CREDIT FACILITY IS CONTINGENT UPON CONSUMMATION OF THE OTHER. PRIOR TO THE COMMON STOCK OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $19.00 AND $21.00 PER SHARE. SEE "UNDERWRITING" FOR A DISCUSSION OF FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE COMMON STOCK HAS BEEN APPROVED FOR QUOTATION, SUBJECT TO NOTICE OF ISSUANCE, ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "FRND." AT THE COMPANY'S REQUEST, UP TO 250,000 SHARES OF COMMON STOCK OFFERED HEREBY HAVE BEEN RESERVED FOR SALE TO CERTAIN INDIVIDUALS, INCLUDING DIRECTORS AND EMPLOYEES OF THE COMPANY AND THEIR FAMILIES. SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ----------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT (A) COMPANY (B) PER SHARE............................. $ $ $ TOTAL (C)............................. $ $ $
(A) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE UNDERWRITERS AND OTHER MATTERS. (B) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $427,000. (C) THE COMPANY, CERTAIN LENDERS UNDER THE COMPANY'S OLD CREDIT FACILITY (AS DEFINED HEREIN) THAT ARE STOCKHOLDERS AND CERTAIN OTHER STOCKHOLDERS OF THE COMPANY HAVE GRANTED TO THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO AN ADDITIONAL 750,000 SHARES OF COMMON STOCK, SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE PRICE TO PUBLIC WILL TOTAL $ , THE UNDERWRITING DISCOUNT WILL TOTAL $ , THE PROCEEDS TO COMPANY WILL TOTAL $ AND THE PROCEEDS TO SUCH LENDERS AND OTHER STOCKHOLDERS WILL TOTAL $ AND $ , RESPECTIVELY. SEE "OWNERSHIP OF COMMON STOCK" AND "UNDERWRITING." THE SHARES OF COMMON STOCK ARE OFFERED BY THE UNDERWRITERS NAMED HEREIN WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THE UNDERWRITERS AND SUBJECT TO THEIR RIGHT TO REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF CERTIFICATES REPRESENTING THE SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT THE OFFICE OF NATIONSBANC MONTGOMERY SECURITIES, INC. ON OR ABOUT , 1997. --------------------- NATIONSBANC MONTGOMERY SECURITIES, INC. PIPER JAFFRAY INC. TUCKER ANTHONY INCORPORATED , 1997 [Inside Front Cover: the Company's "Friendly" logo, the words "Leave room for the ice cream" and color pictures of three of the Company's products (a large hamburger, a banana split and a Frozen dessert drink.)] [Gatefold: the Company's "Friendly" logo and the words "Expanded Building," "Hand-Dipped Frozen Dessert Station," Revitalized Interior Decor," "Retail Dessert Center," "Hearty Breakfasts," "Delicious Lunches," "Entree Salads," "Home Style Dinners," "Premium Half Gallons, "Great Temptations-TM- Low Fat Half Gallons" and "Candy Shoppe Sundae Cup." Color picture of a Friendly's restaurant, an ice cream dipping station, the interior of a revitalized Friendly's restaurant, a grocery store ice cream freezer decorated with the Company's logo, a truck with the Friendly's logo on its side, various frozen dessert products (three half gallon packages, a sundae cup and two types of sundaes), a "Kids meal" (including a sundae, drink, hamburger and fries) and various other food presentations (chili, omelette, eggs, sandwich wraps, salad, steak, shrimp and vegetables.)] CERTAIN PERSONS PARTICIPATING IN THE COMMON STOCK OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT INDICATES OTHERWISE, (I) REFERENCES TO "FRIENDLY'S" OR THE "COMPANY" REFER TO FRIENDLY ICE CREAM CORPORATION, ITS PREDECESSORS AND ITS CONSOLIDATED SUBSIDIARIES, (II) AS USED HEREIN, "NORTHEAST" REFERS TO THE COMPANY'S CORE MARKETS WHICH INCLUDE CONNECTICUT, MAINE, MASSACHUSETTS, NEW HAMPSHIRE, NEW JERSEY, NEW YORK, PENNSYLVANIA, RHODE ISLAND AND VERMONT, (III) THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION IN THE COMMON STOCK OFFERING AND (IV) THIS PROSPECTUS GIVES EFFECT TO THE 924-FOR-1 STOCK SPLIT WHICH WILL OCCUR PRIOR TO THE COMMON STOCK OFFERING. THE COMPANY'S FISCAL YEARS ENDED DECEMBER 27, 1992, JANUARY 2, 1994, JANUARY 1, 1995, DECEMBER 31, 1995 AND DECEMBER 29, 1996 ARE REFERRED TO HEREIN AS 1992, 1993, 1994, 1995 AND 1996, RESPECTIVELY. THE COMPANY Friendly's is the leading full-service restaurant operator and has a leading position in premium frozen dessert sales in the Northeast. The Company owns and operates 662 and franchises 34 full-service restaurants and manufactures a complete line of packaged frozen desserts distributed through more than 5,000 supermarkets and other retail locations in 15 states. Friendly's offers its customers a unique dining experience by serving a variety of high-quality, reasonably-priced breakfast, lunch and dinner items, as well as its signature frozen desserts, in a fun and casual neighborhood setting. For the twelve-month period ended September 28, 1997, Friendly's generated $667.0 million in total revenues and $74.9 million in EBITDA (as defined herein) and incurred $44.0 million of interest expense. During the same period, management estimates that over $230 million of total revenues were from the sale of approximately 21 million gallons of frozen desserts. Friendly's restaurants target families with children and adults who desire a reasonably-priced meal in a full-service setting. The Company's menu offers a broad selection of freshly-prepared foods which appeal to customers throughout all day-parts. Breakfast items include specialty omelettes and breakfast combinations featuring eggs, pancakes and bacon or sausage. Lunch and dinner items include a new line of wrap sandwiches, entree salads, soups, super-melts, specialty burgers and new stir-fry, chicken, pot pie, tenderloin steak and seafood entrees. Friendly's is also recognized for its extensive line of ice cream shoppe treats, including proprietary products such as the Fribble-Registered Trademark-, Candy Shoppe-Registered Trademark- Sundaes and the Wattamelon Roll-Registered Trademark-. The Company believes that one of its key strengths is the strong consumer awareness of the Friendly's brand name, particularly as it relates to the Company's signature frozen desserts. This strength and the Company's vertically-integrated operations provide several competitive advantages, including the ability to (i) utilize its broad, high-quality menu to attract customer traffic across multiple day-parts, particularly the afternoon and evening snack periods, (ii) generate incremental revenues through strong restaurant and retail market penetration, (iii) promote menu enhancements and extensions in combination with its unique frozen desserts and (iv) control quality and maintain operational flexibility through all stages of the production process. Friendly's, founded in 1935, was publicly held from 1968 until January 1979, at which time it was acquired by Hershey Foods Corporation ("Hershey"). While owned by Hershey, the Company increased the total number of restaurants from 601 to 849 yet devoted insufficient resources to product development and capital improvements. In 1988, The Restaurant Company ("TRC"), an investor group led by Donald Smith, the Company's current Chairman, Chief Executive Officer and President, acquired Friendly's from Hershey (the "TRC Acquisition"). The high leverage associated with the TRC Acquisition and the Old Credit Facility (as defined herein) severely impacted the liquidity and profitability of the Company and, therefore, limited the scope and implementation of certain of the Company's business and growth strategies. The Company has reported net losses and had earnings that were insufficient to cover fixed 3 charges for each fiscal year since the TRC Acquisition except for the nine months ended September 28, 1997. As a result of subsequent restructurings, and upon completion of the Recapitalization and the Related Transactions (both as defined herein), approximately 16.8% and 9.8% of the Common Stock will be owned by the Company's employees and lenders under the Old Credit Facility, respectively. See "Risk Factors," "Selected Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Ownership of Common Stock." Despite the Company's capital constraints, management implemented a number of initiatives to restore and improve operational and financial efficiencies. From the date of the TRC Acquisition through 1994, the Company (i) implemented a major revitalization of its restaurants, (ii) repositioned the Friendly's concept from a sandwich and ice cream shoppe to a full-service, family-oriented restaurant with broader menu and day-part appeal, (iii) elevated customer service levels by recruiting more qualified managers and expanding the Company's training program, (iv) disposed of 123 under-performing restaurants and (v) capitalized upon the Company's strong brand name recognition by initiating the sale of Friendly's unique line of packaged frozen desserts through retail locations. Beginning in 1994, the Company began implementing several growth initiatives including (i) testing and implementing a program to expand the Company's domestic distribution network by selling frozen desserts and other menu items through non-traditional locations, (ii) distributing frozen desserts internationally by introducing dipping stores in South Korea and the United Kingdom and (iii) implementing a franchising strategy to extend profitably the Friendly's brand without the substantial capital required to build new restaurants. As part of this strategy, on July 14, 1997 the Company entered into the DavCo Agreement. See "--Recent Developments." Implementation of these initiatives since the TRC Acquisition has resulted in substantial improvements in revenues and EBITDA. Despite the closing of 152 restaurants (net of restaurants opened) since the beginning of 1989 and periods of economic softness in the Northeast, the Company's restaurant revenues have increased 7.5% from $557.3 million in 1989 to $599.3 million in the twelve-months ended September 28, 1997, while average revenue per restaurant has increased 29.8% from $665,000 to $863,000 during the same period. Retail, institutional and other revenues and franchise revenues have also increased from $1.4 million in 1989 to $67.7 million in the twelve months ended September 28, 1997. In addition, EBITDA has increased 58.0% from $47.4 million in 1989 to $74.9 million in the twelve-month period ended September 28, 1997, while operating income has increased from $4.1 million to $42.0 million over the same period. Friendly's intends to utilize the increased liquidity and operating and financial flexibility resulting from consummation of the Recapitalization, of which the Offerings are a part, in order to continue to grow the Company's revenues and earnings by implementing the following key business strategies: (i) continuously upgrade the menu and introduce new products, (ii) revitalize and re-image existing Friendly's restaurants, (iii) construct new restaurants, (iv) enhance the Friendly's dining experience, (v) expand the restaurant base through high-quality franchisees, (vi) increase market share through additional retail accounts and restaurant locations, (vii) introduce modified formats of the Friendly's concept into non-traditional locations and (viii) extend the Friendly's brand into international markets. The principal executive offices of the Company are located at 1855 Boston Road, Wilbraham, Massachusetts 01095, and the telephone number is (413) 543-2400. 4 RECENT DEVELOPMENTS On July 14, 1997, the Company entered into a long-term agreement granting DavCo Restaurants, Inc. ("DavCo"), a franchisor of more than 230 Wendy's restaurants, exclusive rights to operate, manage and develop Friendly's full-service restaurants in the franchising region of Maryland, Delaware, the District of Columbia and northern Virginia (the "DavCo Agreement"). Pursuant to the DavCo Agreement, DavCo has purchased certain assets and rights in 34 existing Friendly's restaurants in this franchising region, has committed to open an additional 74 restaurants over the next six years and, subject to the fulfillment of certain conditions, has further agreed to open 26 additional restaurants, for a total of 100 new restaurants in this franchising region over the next ten years. DavCo will also manage under contract 14 other Friendly's locations in this franchising region with an option to acquire these restaurants in the future. Friendly's received approximately $8.2 million in cash for the sale of certain non-real property assets and in payment of franchise and development fees, and receives (i) a royalty based on franchised restaurant revenues and (ii) revenues and earnings from the sale to DavCo of Friendly's frozen desserts and other products. DavCo is required to purchase from Friendly's all of the frozen desserts to be sold in these restaurants. See "Business--Restaurant Operations--Franchising Program." 5 THE RECAPITALIZATION The Offerings are part of a series of related transactions to refinance all of the indebtedness under the Company's existing credit facilities (the "Old Credit Facility") and thereby lengthen the average maturities of the Company's outstanding indebtedness, reduce interest expense and increase liquidity and operating and financial flexibility. Concurrent with, and contingent upon, the consummation of the Offerings, the Company expects to enter into a new senior secured credit facility consisting of (i) a $105 million term loan facility (the "Term Loan Facility"), (ii) a $55 million revolving credit facility (the "Revolving Credit Facility") and (iii) a $15 million letter of credit facility (the "Letter of Credit Facility" and, together with the Term Loan Facility and the Revolving Credit Facility, the "New Credit Facility"). The Offerings, the New Credit Facility and the application of the estimated net proceeds therefrom are hereinafter referred to as the "Recapitalization." In addition, subsequent to September 28, 1997, the Company (i) has paid $9.6 million of interest on the Old Credit Facility, (ii) will record $1.9 million of net income related to deferred interest no longer payable under the Old Credit Facility, (iii) will record $5.8 million of non-cash stock compensation expense, net of taxes, arising out of the issuance of certain shares of Common Stock to management and the vesting of certain shares of restricted stock previously issued to management, (iv) will write-off $319,000 of deferred financing and debt restructuring costs, net of taxes, related to the Old Credit Facility and (v) will apply $10.0 million of previously restricted cash to be received from Restaurant Insurance Corporation, its insurance subsidiary ("RIC"), in exchange for a letter of credit, toward amounts outstanding under the Old Credit Facility (collectively, the "Related Transactions"). Upon completion of the Recapitalization, Friendly's total available borrowings under the New Credit Facility are expected to be $55.0 million, excluding $2.1 million of letter of credit availability (compared to $27.0 million as of September 28, 1997 under the Old Credit Facility, excluding $2.1 million of letter of credit availability), which borrowings may be used, with certain limitations, for capital spending and general corporate purposes. After giving effect to the Recapitalization and the Related Transactions, the aggregate pro forma net decrease in interest expense would have been $15.3 million for 1996 and $11.4 million for the nine-month period ended September 28, 1997. See "Selected Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Description of New Credit Facility." The following table sets forth the estimated sources and uses of funds in connection with the Recapitalization after giving effect to the Related Transactions:
AT CLOSING --------------------- (DOLLARS IN THOUSANDS) SOURCES OF FUNDS: Term Loan Facility (a)................................................ $ 105,000 Senior Note Offering (b).............................................. 175,000 Common Stock Offering (c)............................................. 100,000 -------- Total Sources..................................................... $ 380,000 -------- -------- USES OF FUNDS: Working capital....................................................... $ 4,732 Retirement of Old Credit Facility (d)................................. 348,042 Retirement of capital leases.......................................... 7,976 Estimated fees and expenses (e)....................................... 19,250 -------- Total Uses........................................................ $ 380,000 -------- --------
- ---------------------------------- (a) Represents borrowing in full under the Term Loan Facility. As part of the Recapitalization, the Company will have a $55,000 Revolving Credit Facility which is expected to be undrawn at closing and $2,093 available under the Letter of Credit Facility. These facilities are expected to be drawn in part, from time to time, to finance the Company's working capital and other general corporate requirements. (b) Represents gross proceeds from the Senior Note Offering. (c) Represents gross proceeds from the sale of 5,000,000 shares of Common Stock at an assumed initial public offering price of $20.00 per share. (d) Represents the balance of all amounts expected to be outstanding under the Old Credit Facility ($358,042 as of September 28, 1997) after giving effect to the application of $10,000 of previously restricted cash and investments of RIC which is expected to be released to the Company in exchange for a $12,907 letter of credit, with the $2,907 of additional released cash and investments increasing the Company's cash balance. (e) Includes estimated underwriting discounts and commissions and other fees and expenses relating to the Offerings and the New Credit Facility of which $8,427 relates to the Common Stock Offering and $10,823 relates to the Senior Note Offering and the New Credit Facility. See "Underwriting." 6 THE COMMON STOCK OFFERING Common Stock offered by the Company... 5,000,000 shares (a) Common Stock to be outstanding after the Common Stock Offering............. 7,125,000 shares (a) (b) Concurrent Senior Note Offering ...... Concurrently with the Common Stock Offering, the Company is offering to the public $175 million aggregate principal amount of Senior Notes due 2007. Consummation of each of the Common Stock Offering and the Senior Note Offering is contingent upon consummation of the other. See "Description of Senior Notes." Use of proceeds....................... The Company intends to use up to approximately $356.0 million of net proceeds from the Offerings and borrowings under the New Credit Facility to refinance indebtedness and thereby lengthen the average maturities of the Company's outstanding indebtedness, reduce interest expense and increase liquidity and operating and financial flexibility. See "Use of Proceeds." Proposed Nasdaq National Market symbol................................ FRND Risk factors.......................... Prospective purchasers of the Common Stock offered hereby should carefully consider the information set forth under the caption "Risk Factors" and all other information set forth in this Prospectus before making any investment in the Common Stock. As set forth more fully in "Risk Factors," the risk factors associated with such an investment include, among others, those relating to the Company's (i) substantial leverage and stockholders' deficit; (ii) history of losses; (iii) implementation of new business concepts and strategies; (iv) development of a franchising program; (v) expansion of its international operations; (vi) geographic concentration in the Northeast; and (vii) highly competitive business environment, as well as those relating to restrictions imposed under the New Credit Facility, factors affecting the food service industry generally and circumstances potentially impacting the trading markets for, or value of, the Common Stock offered hereby.
- ------------------------ (a) Excludes up to an aggregate of 125,158 shares of Common Stock that the Underwriters have the option to purchase from the Company to cover over-allotments, if any. See "Underwriting." (b) Excludes an aggregate of approximately 400,000 shares and 375,000 shares of Common Stock reserved for issuance under the Stock Option Plan and the Restricted Stock Plan, respectively. See "Management--Executive Compensation--Stock Option Plan" and "--Restricted Stock Plan." 7 SUMMARY CONSOLIDATED FINANCIAL INFORMATION
NINE MONTHS ENDED FISCAL YEAR (A) ---------------------------- ------------------------------------------------ SEPTEMBER 29, SEPTEMBER 28, 1992 1993 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF RESTAURANTS) STATEMENT OF OPERATIONS DATA: Revenues: Restaurant................................. $542,859 $580,161 $589,383 $593,570 $596,675 $ 452,373 $ 455,026 Retail, institutional and other............ 20,346 30,472 41,631 55,579 54,132 39,446 49,173 Franchise.................................. -- -- -- -- -- -- 3,834 -------- -------- -------- -------- -------- ------------- ------------- Total revenues............................... 563,205 610,633 631,014 649,149 650,807 491,819 508,033 -------- -------- -------- -------- -------- ------------- ------------- Non-cash write-downs (b)..................... -- 25,552 -- 7,352 227 -- 607 Depreciation and amortization................ 35,734 35,535 32,069 33,343 32,979 25,127 24,226 Operating income............................. 25,509 8,116 36,870 16,670 30,501 22,848 34,299 Interest expense, net (c).................... 37,630 38,786 45,467 41,904 44,141 33,084 32,972 Cumulative effect of changes in accounting principles, net of income taxes (d)........ -- (42,248) -- -- -- -- 2,236 Net income (loss)............................ $(13,321) $(61,448) $ (3,936) $(58,653) $ (7,772) $ (5,794 ) $ 2,363 -------- -------- -------- -------- -------- ------------- ------------- -------- -------- -------- -------- -------- ------------- ------------- OTHER DATA: EBITDA (e)................................... $ 61,243 $ 69,203 $ 68,939 $ 57,365 $ 63,707 $ 47,975 $ 59,132 Net cash provided by operating activities.... 34,047 42,877 38,381 27,790 26,163 23,637 29,224 Capital expenditures: Cash....................................... 33,577 37,361 29,507 19,092 24,217 18,547 14,656 Non-cash (f)............................... 3,121 7,129 7,767 3,305 5,951 3,570 2,227 -------- -------- -------- -------- -------- ------------- ------------- Total capital expenditures................. $ 36,698 $ 44,490 $ 37,274 $ 22,397 $ 30,168 $ 22,117 $ 16,883 Ratio of earnings to fixed charges (g)....... -- -- -- -- -- -- 1.0 x PRO FORMA DATA: EBITDA (e)(h)................................ $ 64,653 $ 48,685 $ 59,132 Interest expense, net (c)(i)................. 28,804 21,580 21,617 Net income (j)............................... 1,835 1,412 9,062 Net income per share......................... $ 0.26 $ 0.20 $ 1.27 Weighted average shares outstanding (k)...... 7,125 7,125 7,125 Ratio of EBITDA to interest expense, net..... 2.2x 2.3 x 2.7 x Ratio of earnings to fixed charges (g)....... 1.1x 1.1 x 1.4 x Ratio of total long-term debt to EBITDA (e)........................................ 3.8 x(l) RESTAURANT OPERATING DATA: Number of restaurants (end of period) (m).... 764 757 750 735 707 710 662 Average revenue per restaurant (n)........... $ 708 $ 750 $ 783 $ 797 $ 828 -- $ 863 Increase in comparable restaurant revenues (o)........................................ 6.0% 5.4% 3.4% 0.9% 1.8% 0.3% 3.1%
AS OF SEPTEMBER 28, 1997 -------------- ACTUAL -------------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital (deficit)...................................................................................... $ (17,895) Total assets................................................................................................... 362,914 Total long-term debt and capital lease obligations, excluding current maturities............................... 371,296 Total stockholders' equity (deficit)........................................................................... $ (170,684) AS ADJUSTED -------------- BALANCE SHEET DATA: Working capital (deficit)...................................................................................... $ (10,949)(p) Total assets................................................................................................... 358,348(q) Total long-term debt and capital lease obligations, excluding current maturities............................... 288,585(r) Total stockholders' equity (deficit)........................................................................... $ (73,471)(s)
- ------------------------------ (a) All fiscal years presented include 52 weeks of operations except 1993 which includes 53 weeks of operations. (b) Includes non-cash write-downs of approximately $16,337 in 1993 related to a trademark license agreement as a result of new product development and the replacement of certain trademarked menu items and $3,346 in 1995 related to a postponed debt restructuring. All other non-cash write-downs relate to property and equipment disposed of in the normal course of the Company's operations. See Notes 3, 5 and 6 of Notes to Consolidated Financial Statements. (c) Interest expense, net is net of capitalized interest of $128, $156, $176, $62, $49, $44 and $27 and interest income of $222, $240, $187, $390, $318, $273 and $239 for 1992, 1993, 1994, 1995, 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively. 8 (d) Includes non-cash items, net of related income taxes, as a result of adoption of accounting pronouncements related to income taxes of $30,968, post-retirement benefits other than pensions of $4,140 and post-employment benefits of $7,140 in 1993 and pensions of $2,236 in 1997. (e) EBITDA represents consolidated Net income (loss) before (i) Cumulative effect of changes in accounting principles, net of income taxes, (ii) (Provision for) benefit from income taxes, (iii) Equity in net loss of joint venture, (iv) Interest expense, net, (v) Depreciation and amortization and (vi) Non-cash write-downs and all other non-cash items, plus cash distributions from unconsolidated subsidiaries, each determined in accordance with generally accepted accounting principles ("GAAP"). The Company has included information concerning EBITDA in this Prospectus because it believes that such information is used by certain investors as one measure of an issuer's historical ability to service debt. EBITDA should not be considered as an alternative to, or more meaningful than, earnings from operations or other traditional indications of an issuer's operating performance. (f) Non-cash capital expenditures represent the cost of assets acquired through the incurrence of capital lease obligations. (g) The Ratio of earnings to fixed charges is computed by dividing (i) income before interest expense, income taxes and other fixed charges by (ii) fixed charges, including interest expense, amortization of debt issuance costs and the portion of rent expense which represents interest (assumed to be one-third). For 1992, 1993, 1994, 1995, 1996 and the nine months ended September 29, 1996 earnings were insufficient to cover fixed charges by $12,249, $30,826, $8,773, $25,296, $13,689 and $10,280, respectively. (h) Represents historical EBITDA adjusted to give effect to the benefit from the change in accounting for pensions related to determining the return-on-asset component of annual pension expense of $946 in 1996 and $710 for the nine months ended September 29, 1996. See Note 10 of Notes to Consolidated Financial Statements. (i) Represents historical interest expense adjusted to give effect to the Recapitalization. Borrowings under the New Credit Facility will bear interest at a floating rate equal to LIBOR plus 2.25% or the Alternative Base Rate (as defined in the New Credit Facility) plus 0.75% per annum for drawings under the Revolving Credit Facility and the Letter of Credit Facility, 0.50% per annum for amounts undrawn under the Revolving Credit Facility, 2.25% per annum for amounts issued but undrawn under the Letter of Credit Facility and a weighted average floating rate equal to LIBOR plus 2.46% or the Alternative Base Rate plus 0.96% for the Term Loan Facility. The following table represents changes to Interest expense, net on a pro forma basis, resulting from the Recapitalization and the Related Transactions:
NINE MONTHS ENDED FISCAL YEAR ------------------ 1996 SEPTEMBER 29, 1996 ------------------ ------------------ (IN THOUSANDS) Elimination of interest on Old Credit Facility............................ $ (41,827) $ (31,337) Reduction of interest on capital lease obligations........................ (774) (580) Interest on Revolving Credit Facility..................................... 779 624 Interest on Letter of Credit Facility..................................... 268 134 Interest on Term Loan Facility............................................ 8,279 6,202 Interest on Senior Notes.................................................. 17,938 13,453 -------- -------- Decrease in Interest expense, net....................................... $ (15,337) $ (11,504) -------- -------- -------- -------- SEPTEMBER 28, 1997 ------------------ Elimination of interest on Old Credit Facility............................ $ (31,434) Reduction of interest on capital lease obligations........................ (580) Interest on Revolving Credit Facility..................................... 732 Interest on Letter of Credit Facility..................................... 134 Interest on Term Loan Facility............................................ 6,340 Interest on Senior Notes.................................................. 13,453 -------- Decrease in Interest expense, net....................................... $ (11,355) -------- --------
In calculating pro forma Interest expense, net, the assumed rates on the Revolving Credit Facility, Letter of Credit Facility, Term Loan Facility and Senior Notes were 7.67%, 2.25%, 7.88%, and 10.25% for 1996, respectively, 7.66%, 2.25%, 7.87% and 10.25% for the nine months ended September 29, 1996, respectively and 7.84%, 2.25%, 8.09% and 10.25% for the nine months ended September 28, 1997, respectively. (j) Represents historical net income adjusted to give effect to (i) the reduction in interest expense, net of income taxes, of $9,049, $6,788 and $6,699 for 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively, as a result of the Recapitalization and the Related Transactions and (ii) the benefit, net of income taxes, related to the change in accounting for pensions described in (h) above of $558, $418 and $0 for 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively. (k) Represents historical weighted average shares outstanding adjusted to give effect to the issuance of 27 shares upon consummation of the Recapitalization under the Management Stock Plan (as defined herein), and the return of 375 net shares to the Company in connection with the Recapitalization. Actual weighted average shares outstanding were 2,414, 2,394 and 2,473 for 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively. See "Ownership of Common Stock" and Note 17 of Notes to Consolidated Financial Statements. (l) For purposes of this ratio, EBITDA represents historical EBITDA for the twelve months ended September 28, 1997 adjusted by $236 to give effect to the benefit related to the change in accounting for pensions described in (h) above. (m) The number at September 28, 1997 reflects the acquisition by DavCo of 34 restaurants pursuant to the DavCo Agreement. See "Recent Developments." (n) Represents restaurant revenues divided by the weighted average number of restaurants open during such period. Fiscal 1993 has been adjusted to conform to a 52-week year. The number at September 28, 1997 represents data for the twelve months then ended. (o) When computing comparable restaurant revenues, restaurants open for at least twelve months are compared from period to period. (p) As adjusted for (i) $3,307 reduction in current portion of capital lease obligations in connection with the Recapitalization, (ii) $4,732 of working capital provided in the Recapitalization, (iii) $2,907 cash provided in connection with the letter of credit issued to RIC and (iv) the use of $4,000 of current restricted cash to reduce the amount outstanding on the Old Credit Facility. (q) As adjusted for (i) $10,000 of previously restricted cash applied to the Old Credit Facility, (ii) payment of $9,581 of interest on the Old Credit Facility, (iii) write-off of $540 of deferred financing costs related to the Old Credit Facility, (iv) $10,823 of estimated expenses related to the Senior Note Offering and (v) $4,732 of working capital provided in the Recapitalization. (r) As adjusted for (i) repayment of the $358,042 outstanding on the Old Credit Facility and $4,669 of long-term portion of capital lease obligations and (ii) proceeds of $280,000 from the Senior Note Offering and the New Credit Facility. (s) As adjusted for (i) estimated net proceeds of $91,573 from the Common Stock Offering, (ii) $1,948 of net income related to deferred interest expense no longer payable under the Old Credit Facility, (iii) write-off of $319 of deferred financing costs, net of taxes, related to the Old Credit Facility and (iv) the tax benefit of $4,011 related to the non-cash stock compensation expense arising out of the issuance of certain shares of Common Stock to management and the vesting of certain shares of restricted stock previously issued to management. 9 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SECURITIES OFFERED HEREBY. SUBSTANTIAL LEVERAGE; STOCKHOLDERS' DEFICIT The Company is highly leveraged. At September 28, 1997, on a pro forma basis after giving effect to the Recapitalization and the Related Transactions, the Company's total consolidated long-term debt and capital lease obligations (including current maturities) would have been $293.0 million and the Company's total consolidated stockholders' deficit would have been $73.5 million. Upon completion of the Recapitalization, the Company's total available borrowings under the New Credit Facility are estimated to be $55.0 million, excluding $2.1 million of availability under the Letter of Credit Facility (compared to $27.0 million as of September 28, 1997 under the Old Credit Facility, excluding $2.1 million of letter of credit availability). Additional borrowings may, subject to certain limitations, be used for capital expenditures and general corporate purposes, thereby increasing the Company's leverage. The Company's ability to pay principal on the Senior Notes when due or to repurchase the Senior Notes upon a Change of Control will be dependent upon the Company's ability to generate cash from operations sufficient for such purposes or its ability to refinance the Senior Notes. In addition, under the New Credit Facility, in the event of circumstances which are similar to a Change of Control, repayment of borrowings under the New Credit Facility will be subject to acceleration. See "Description of New Credit Facility." The degree to which the Company is leveraged could have important consequences, including the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired, (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of the principal of and interest on its indebtedness and, because borrowings under the New Credit Facility in part will bear interest at floating rates, the Company could be adversely affected by any increase in prevailing rates, (iii) the New Credit Facility and the Indenture relating to the Senior Notes will impose significant financial and operating restrictions on the Company and its subsidiaries which, if violated, could permit the Company's creditors to accelerate payments thereunder or foreclose upon the collateral securing the New Credit Facility, (iv) the Company is more leveraged than certain of its principal competitors, which may place the Company at a competitive disadvantage and (v) the Company's substantial leverage may limit its ability to respond to changing business and economic conditions and make it more vulnerable to a downturn in general economic conditions. See "Use of Proceeds," "Business--Competition," "Description of New Credit Facility" and "Description of Senior Notes." HISTORY OF LOSSES The Company has reported net losses of $13.3 million, $61.4 million, $3.9 million, $58.7 million and $7.8 million for 1992, 1993, 1994, 1995 and 1996, respectively, and earnings of $2.4 million for the nine months ended September 28, 1997. There can be no assurance that the Company's profitability will be sustained. The Company's earnings were insufficient to cover fixed charges by $12.2 million, $30.8 million, $8.8 million, $25.3 million and $13.7 million for 1992, 1993, 1994, 1995 and 1996, respectively, and there can be no assurance that the Company's earnings will be sufficient to cover fixed charges in the future. See "Selected Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related Notes thereto. 10 RESTRICTIONS IMPOSED UNDER NEW CREDIT FACILITY; SECURITY INTEREST The New Credit Facility will impose significant operating and financial restrictions on the Company's ability to, among other things, incur indebtedness, create liens, sell assets, engage in mergers or consolidations, pay dividends and engage in certain transactions with affiliates. The New Credit Facility limits the amount which the Company may spend on capital expenditures and requires the Company to comply with certain financial ratios. These requirements may limit the ability of the Company to meet its obligations, including its obligations with respect to the Senior Notes. The ability of the Company to comply with the covenants in the New Credit Facility and the Senior Notes may be affected by events beyond the control of the Company. Failure to comply with any of these covenants could result in a default under the New Credit Facility and the Senior Notes, and such default could result in acceleration thereof. The New Credit Facility will restrict the Company's ability to repurchase, directly or indirectly, the Senior Notes. In addition, under the New Credit Facility, in the event of circumstances which are similar to a Change of Control, repayment of borrowings under the New Credit Facility will be subject to acceleration, which could further restrict the Company's ability to repurchase the Senior Notes. There can be no assurance that the Company will be permitted or have funds sufficient to repurchase the Senior Notes when it would otherwise be required to offer to do so. It is expected that the obligations of the Company under the New Credit Facility will be (i) secured by a first priority security interest in substantially all material assets of the Company and all other assets owned or hereafter acquired and (ii) guaranteed, on a senior secured basis, by the Friendly's Restaurants Franchise, Inc. subsidiary and may also be so guaranteed by certain subsidiaries created or acquired after consummation of the Recapitalization. The Senior Notes will be effectively subordinated to all existing and certain future secured indebtedness of the Company, including indebtedness under the New Credit Facility, to the extent of the value of the assets securing such secured indebtedness. The Senior Notes will rank PARI PASSU to any future senior indebtedness of the Company and be structurally subordinated to all existing and future indebtedness of any subsidiary of the Company that is not a guarantor of the Senior Notes. Lenders under the New Credit Facility will also have a prior claim on the assets of subsidiaries of the Company that are guarantors under the New Credit Facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources," "Description of New Credit Facility" and "Description of Senior Notes." RISKS RELATING TO THE IMPLEMENTATION OF NEW BUSINESS CONCEPTS AND STRATEGIES The Company has recently initiated several new business concepts and strategies, including the remodeling and re-imaging of selected restaurants, the upgrading of its menu and the development of modified restaurant formats in non-traditional locations. There can be no assurance that the Company will continue to develop such concepts and strategies, that such concepts and strategies will be successful or profitable or that such concepts and strategies will fill the strategic roles intended for them by the Company. See "Business--Business Strategies." RISKS ATTRIBUTABLE TO THE DEVELOPMENT OF A FRANCHISING PROGRAM The success of the Company's business strategy will also depend, in part, on the development and implementation of a franchising program. The Company does not have significant experience in franchising restaurants and there can be no assurance that the Company will continue to successfully locate and attract suitable franchisees or that such franchisees will have the business abilities or sufficient access to capital to open restaurants or will operate restaurants in a manner consistent with the Company's concept and standards or in compliance with franchise agreements. The success of the Company's franchising program will also be dependent upon certain other factors, certain of which are not within the control of the Company or its franchisees, including the availability of suitable sites on acceptable lease or purchase terms, permitting and regulatory compliance and general economic and business conditions. See "Prospectus Summary--Recent Developments" and "Business--Restaurant Operations--Franchising Program." 11 RISKS ARISING OUT OF THE EXPANSION OF INTERNATIONAL OPERATIONS The Company has operations in South Korea, the United Kingdom and the People's Republic of China ("China"). These international operations are subject to various risks, including changing political and economic conditions, currency fluctuations, trade barriers, trademark rights, adverse tax consequences, import tariffs, customs and duties and government regulations. Government regulations, relating to, among other things, the preparation and sale of food, building and zoning requirements, wages, working conditions and the Company's relationship with its employees, may vary widely from those in the United States. There can be no assurance that the Company will be successful in maintaining or expanding its international operations. GEOGRAPHIC CONCENTRATION Approximately 85% of the Company-owned restaurants are located, and substantially all of its retail sales are generated, in the Northeast. As a result, a severe or prolonged economic recession or changes in demographic mix, employment levels, population density, weather, real estate market conditions or other factors specific to this geographic region may adversely affect the Company more than certain of its competitors which are more geographically diverse. RELATIONSHIPS WITH PERKINS; POTENTIAL CONFLICTS OF INTEREST After giving effect to the Recapitalization and the Related Transactions, approximately 10.3% and 2.1% of the Company's Common Stock would have been owned, as of October 15, 1997, by Donald N. Smith and The Equitable Life Assurance Society of the United States (the "Equitable"), respectively. These stockholders indirectly own 33.2% and 28.1%, respectively, of the general partner of Perkins Family Restaurants, L.P. ("PFR"), which, through Perkins Restaurants Operating Company, L.P. ("Perkins"), owns and franchises family-style restaurants. Mr. Smith, the Company's Chairman, Chief Executive Officer and President, is an officer of the general partner of PFR. In addition, three of the directors of the general partner of PFR serve as directors of the Company. In the ordinary course of business, the Company enters into transactions with Perkins. See "Certain Transactions." After giving effect to the Recapitalization and the Related Transactions, the directors and executive officers of the Company would have owned approximately 13.1% of the Common Stock as of October 15, 1997. Circumstances could arise in which the interests of such stockholders could be in conflict with the interests of the other stockholders of the Company and the holders of the Senior Notes. In addition, Mr. Smith serves as Chairman, Chief Executive Officer and President of the Company and as Chairman and Chief Executive Officer of Perkins and, consequently, devotes a portion of his time to the affairs of each Company and may be required to limit his involvement in those areas, if any, where the interests of the Company conflict with those of Perkins. Mr. Smith does not have an employment agreement with the Company nor is he contractually prohibited from engaging in other business ventures in the future, any of which could compete with the Company or its subsidiaries. See "Ownership of Common Stock." DEPENDENCE ON SENIOR MANAGEMENT The Company's business is managed, and its business strategies formulated, by a relatively small number of key executive officers and other personnel, certain of whom have joined the Company since Mr. Smith's arrival. The loss of these key management persons, including Mr. Smith, could have a material adverse effect on the Company. See "Management." HIGHLY COMPETITIVE BUSINESS ENVIRONMENT The restaurant business is highly competitive and is affected by changes in the public's eating habits and preferences, population trends and traffic patterns, as well as by local and national economic conditions affecting consumer spending habits, many of which are beyond the Company's control. Key 12 competitive factors in the industry are the quality and value of the food products offered, quality and speed of service, attractiveness of facilities, advertising, name brand awareness and image and restaurant location. Each of the Company's restaurants competes directly or indirectly with locally-owned restaurants as well as restaurants with national or regional images, and to a limited extent, restaurants operated by its franchisees. A number of the Company's significant competitors are larger or more diversified and have substantially greater resources than the Company. The Company's retail operations compete with national and regional manufacturers of frozen desserts, many of which have greater financial resources and more established channels of distribution than the Company. Key competitive factors in the retail food business include brand awareness, access to retail locations, price and quality. EXPOSURE TO COMMODITY PRICING AND AVAILABILITY RISKS The basic raw materials for the Company's frozen desserts are dairy products and sugar. The Company's purchasing department purchases other food products, such as coffee, in large quantities. Although the Company does not hedge its positions in any of these commodities as a matter of policy, it may opportunistically purchase some of these items in advance of a specific need. As a result, the Company is subject to the risk of substantial and sudden price increases, shortages or interruptions in supply of such items, which could have a material adverse effect on the Company. RISKS ASSOCIATED WITH THE FOOD SERVICE INDUSTRY Food service businesses are often affected by changes in consumer tastes, national, regional and local economic conditions, demographic trends, traffic patterns, the cost and availability of labor, purchasing power, availability of products and the type, number and location of competing restaurants. The Company could also be substantially adversely affected by publicity resulting from food quality, illness, injury or other health concerns or alleged discrimination or other operating issues stemming from one location or a limited number of locations, whether or not the Company is liable. In addition, factors such as increased costs of goods, regional weather conditions and the potential scarcity of experienced management and hourly employees may also adversely affect the food service industry in general and the results of operations and financial condition of the Company. REGULATION The restaurant and food distribution industries are subject to numerous Federal, state and local government regulations, including those relating to the preparation and sale of food and building and zoning requirements. Also, the Company is subject to laws governing its relationship with employees, including minimum wage requirements, overtime, working conditions and citizenship requirements. The failure to obtain or retain food licenses or an increase in the minimum wage rate, employee benefit costs or other costs associated with employees could adversely affect the Company. In September 1997, the second phase of an increase in the minimum wage was implemented in accordance with the Federal Fair Labor Standards Act of 1996, which could adversely affect the Company. See "Business--Government Regulation." FRAUDULENT CONVEYANCE The incurrence of indebtedness and other obligations in connection with the Recapitalization, including the issuance of the Senior Notes, may be subject to review by a court under federal bankruptcy law or comparable provisions of state fraudulent transfer law. Generally, if a court or other trier of fact were to find that the Company did not receive fair consideration or reasonably equivalent value for incurring such indebtedness or obligation and, at the time of such incurrence, the Company (i) was insolvent, (ii) was rendered insolvent by reason of such incurrence, (iii) was engaged in a business or transaction for which the assets remaining in the Company constituted unreasonably small capital or (iv) intended to incur or believed it would incur debts beyond its ability to pay such debts as they mature, 13 such court, subject to applicable statutes of limitations, could determine to invalidate, in whole or in part, such indebtedness and obligations as fraudulent conveyances or subordinate such indebtedness and obligations to existing or future creditors of the Company. The definition or measure of such matters as fair consideration, reasonably equivalent value, insolvency or unreasonably small capital for purposes of the foregoing will vary depending on the law of the jurisdiction which is being applied. Generally, however, the Company would be considered insolvent if, at the time it incurred indebtedness, either the fair market value (or fair saleable value) of its assets was less than the amount required to pay its total debts and liabilities (including contingent liabilities) as they became absolute and matured or it had incurred debt beyond its ability to repay such debt as it matures. The proceeds of the Recapitalization will be used primarily to repay debt of the Company. There can be no assurance as to what standard a court would apply in making determinations under bankruptcy or fraudulent transfer laws or whether a court would agree with any Company assessment that the Company is receiving fair consideration or reasonably equivalent value in return for incurring the indebtedness and other obligations in connection with the Recapitalization or that, after giving effect to indebtedness incurred in connection with the Recapitalization and the use of the proceeds of such indebtedness, it will have sufficient capital for the businesses in which it is engaged. In addition, as of September 28, 1997 on a pro forma basis giving effect to the Recapitalization and the Related Transactions as if they had occurred on such date, the Company would have had a negative net worth as determined pursuant to generally accepted accounting principles. ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Common Stock Offering, there has been no public market for the Common Stock. There can be no assurance that an active trading market will develop for the Common Stock after the Common Stock Offering or, if developed, that such market will be sustained. The initial public offering price of the Common Stock will be based on negotiations between the Company and the Underwriters and may bear no relationship to the price at which the Common Stock will trade after the completion of the Common Stock Offering. See "Underwriting" for factors to be considered in determining the initial public offering price. In addition, quarterly operating results of the Company or other restaurant companies, changes in general conditions in the economy, the financial markets or the restaurant industry, natural disasters, changes in earnings estimates or recommendations by research analysts, or other developments affecting the Company or its competitors could cause the market price of the Common Stock to fluctuate substantially. In recent years, the stock market and the restaurant industry in particular have experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Common Stock Offering, the Company will have 7,125,000 shares of Common Stock outstanding. Of these shares, 5,000,000 shares sold in the Common Stock Offering will be freely tradeable without restriction under the Securities Act of 1933, as amended (the "Securities Act"), except any shares purchased by persons deemed to be "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. The remaining 2,125,000 shares of Common Stock are deemed "restricted securities" (the "Restricted Shares") under Rule 144 because they were originally issued and sold by the Company in private transactions in reliance upon exemptions from the Securities Act. Under Rule 144, substantially all of these remaining Restricted Shares may become eligible for resale 90 days after the date the Company becomes subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended (the "Exchange Act") (i.e., 90 days after the consummation of the Common Stock Offering), and may be resold prior to such date only in compliance with the registration requirements of the Securities Act or pursuant to a valid exemption therefrom. Sales of substantial amounts of shares of 14 Common Stock in the public market after the Common Stock Offering or the perception that such sales could occur may adversely affect the market price of the Common Stock. All executive officers and directors and the existing shareholders of the Company who, after the Common Stock Offering, will hold in the aggregate approximately 2,125,000 shares of Common Stock (1,500,158 shares if the Underwriters' over-allotment option is exercised in full), have agreed, pursuant to lock-up agreements, that they will not, without the prior written consent of NationsBanc Montgomery Securities, Inc., offer, sell, contract to sell or otherwise dispose of any shares of Common Stock beneficially owned by them for a period of 360 days after the date of this Prospectus, except that the lenders under the Old Credit Facility may sell (i) shares of Common Stock to other stockholders of the Company existing prior to the Common Stock Offering and (ii) any shares of Common Stock acquired by them in or after the Common Stock Offering, which shares are not "restricted securities" pursuant to Rule 144 under the Securities Act. The Company intends to file registration statements under the Securities Act to register (i) all shares of Common Stock issuable pursuant to the Company's Stock Option Plan and Restricted Stock Plan and (ii) certain shares of Common Stock to be issued under the Company's Management Stock Plan and Limited Stock Compensation Program (as defined herein). Subject to the completion of the 360-day period described above, shares of Common Stock issued under, or issued upon the exercise of awards issued under, such plans and after the effective date of such registration statements, generally will be eligible for sale in the public market. See "Management--Executive Compensation" and "Ownership of Common Stock." The Company, its shareholders holding Class A and Class B common shares prior to the Recapitalization and certain warrant holders have entered into an amendment to an existing registration rights agreement providing that such shareholders may demand registration under the Securities Act, at any time within 18 months (the "Registration Period") after the end of the 360-day lock-up period commencing with the date of this Prospectus, of shares of the Company's Common Stock into which such Class A and Class B common shares are converted in connection with the Recapitalization or for which such warrants are exercised. The Company may postpone such a demand under certain circumstances. In addition, such shareholders may request the Company to include such shares of Common Stock in any registration by the Company of its capital stock under the Securities Act during the Registration Period. In addition, prior to the consummation of the Common Stock Offering, the Company and Mr. Smith intend to enter into a registration rights agreement providing Mr. Smith with a demand registration right covering his shares of Common Stock. See "Ownership of Common Stock" and "Shares Eligible for Future Sale." EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS The Company's Restated Articles of Organization (the "Restated Articles") and Restated By-Laws (the "Restated By-Laws") contain provisions that may make it more difficult for a third party to acquire, or discourage acquisition bids for, the Company. The Restated By-Laws provide that a stockholder seeking to have business conducted at a meeting of stockholders must give advance notice to the Company prior to the scheduled meeting. The Restated By-Laws further provide that a special stockholders meeting may be called only by the Board of Directors, Chairman of the Board of Directors, or President of the Company. Massachusetts law, the Restated Articles and the Restated By-Laws provide for a classified Board of Directors and for the removal of directors only for cause upon the affirmative vote of (i) the holders of at least a majority of the shares entitled to vote or (ii) a majority of the directors then in office. Moreover, upon completion of the Common Stock Offering, the Company expects to be subject to an anti-takeover provision of the Massachusetts General Laws which prohibits, subject to certain exceptions, a holder of 5% or more of the outstanding voting stock of a corporation from engaging in certain transactions with the corporation, including a merger or stock or asset sale. While the Company's Restated By-Laws exclude the applicability of another Massachusetts anti-takeover statute which provides that any stockholder who acquires 20% or more of the outstanding voting stock of a corporation subject to the statute may not vote 15 such stock unless the stockholders of the corporation so authorize, the Board of Directors of the Company may amend the Restated By-Laws at any time to subject the Company to this statute prospectively. These provisions could limit the price that certain investors might be willing to pay in the future for shares of the Common Stock and may have the effect of preventing changes in the management of the Company. In addition, shares of the Company's Preferred Stock may be issued in the future without further stockholder approval and upon such terms and conditions, and have such rights, privileges and preferences, as the Board of Directors may determine. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of any holders of Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or discouraging a third party from acquiring, a majority of the outstanding voting stock of the Company. The Company has no present plans to issue any shares of Preferred Stock. See "Description of Capital Stock--Preferred Stock." EFFECT OF ADOPTION OF STOCKHOLDER RIGHTS PLAN The Company's Board of Directors intends to enact a stockholder rights plan (the "Rights Plan") designed to protect the interests of the Company's stockholders in the event of a potential takeover in a manner or on terms not approved by the Board of Directors as being in the best interests of the Company and its stockholders. Pursuant to the Rights Plan, upon the filing of the Restated Articles prior to the consummation of the Common Stock Offering, the Board will declare a dividend distribution of one purchase right (a "Right") for each outstanding share of Common Stock. The Rights Plan provides, in substance, that should any person or group (other than Mr. Smith, Equitable, senior management and their respective affiliates) acquire 15% or more of the Company's Common Stock, each Right, other than Rights held by the acquiring person or group, would entitle its holder to purchase a specified number of shares of Common Stock for 50% of their then current market value. Unless a 15% acquisition has occurred, the Rights may be redeemed by the Company at any time prior to the termination date of the Rights Plan. The Rights Plan has certain anti-takeover effects, in that it will cause substantial dilution to a person or group that attempts to acquire a significant interest in the Company on terms not approved by the Board of Directors. See "Description of Capital Stock--Stockholder Rights Plan." SUBSTANTIAL AND IMMEDIATE DILUTION Purchasers of the Common Stock offered hereby will experience immediate and significant dilution in net tangible book value per share of approximately $33.93 per share of Common Stock (at an assumed initial public offering price of $20.00 per share). See "Dilution." 16 USE OF PROCEEDS The Company is implementing the Recapitalization to refinance all of the indebtedness under the Old Credit Facility and thereby lengthen the average maturities of the Company's outstanding indebtedness, reduce interest expense and increase liquidity and operating and financial flexibility. Concurrent with, and contingent upon, the consummation of the Offerings, the Company will enter into the New Credit Facility. As of September 28, 1997, borrowings under the Old Credit Facility accrued interest at a rate of 11.0% per annum, and such borrowings will become due in May 1998, unless repaid or previously extended for an additional year pursuant to the terms of the Old Credit Facility. Borrowings under the New Credit Facility will bear interest at a floating rate equal to LIBOR plus 2.25% or the Alternative Base Rate (as defined in the New Credit Facility) plus 0.75% per annum for drawings under the Revolving Credit Facility and the Letter of Credit Facility, 0.50% per annum for amounts undrawn under the Revolving Credit Facility, 2.25% per annum for amounts issued but undrawn under the Letter of Credit Facility and a weighted average floating rate equal to LIBOR plus 2.46% or the Alternative Base Rate plus 0.96% for the Term Loan Facility. See "Description of New Credit Facility." The following table sets forth the estimated sources and uses of funds in connection with the Recapitalization after giving effect to the Related Transactions:
AT CLOSING -------------------- (DOLLARS IN THOUSANDS) SOURCES OF FUNDS: Term Loan Facility (a)................................................ $ 105,000 Senior Note Offering (b).............................................. 175,000 Common Stock Offering (c)............................................. 100,000 -------- Total Sources..................................................... $ 380,000 -------- -------- USES OF FUNDS: Working capital....................................................... $ 4,732 Retirement of Old Credit Facility (d)................................. 348,042 Retirement of capital leases.......................................... 7,976 Estimated fees and expenses (e)....................................... 19,250 -------- Total Uses........................................................ $ 380,000 -------- --------
- ------------------------ (a) Represents borrowing in full under the Term Loan Facility. As part of the Recapitalization, the Company will have a $55,000 Revolving Credit Facility which is expected to be undrawn at closing and $2,093 available under the Letter of Credit Facility. These facilities are expected to be drawn in part, from time to time, to finance the Company's working capital and other general corporate requirements. (b) Represents gross proceeds from the Senior Note Offering. (c) Represents gross proceeds from the sale of 5,000,000 shares of Common Stock at an assumed initial public offering price of $20.00 per share. (d) Represents the balance of all amounts expected to be outstanding under the Old Credit Facility ($358,042 as of September 28, 1997) after giving effect to the application of $10,000 of previously restricted cash and investments of RIC which is expected to be released to the Company in exchange for a $12,907 letter of credit, with the $2,907 of additional released cash and investments increasing the Company's cash balance. (e) Includes estimated underwriting discounts and commissions and other fees and expenses relating to the Offerings and the New Credit Facility of which $8,427 relates to the Common Stock Offering and $10,823 relates to the Senior Note Offering and the New Credit Facility. See "Underwriting." 17 DIVIDEND POLICY The Company currently intends to retain its earnings to finance future growth and, therefore, does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. Any determination as to the payment of dividends will depend upon the future results of operations, capital requirements and financial condition of the Company and its subsidiaries and such other facts as the Board of Directors of the Company may consider, including any contractual or statutory restrictions on the Company's ability to pay dividends. The New Credit Facility and the Indenture relating to the Senior Notes will each limit the Company's ability to pay dividends on its Common Stock. See "Description of New Credit Facility" and "Description of Senior Notes." DILUTION The net tangible book value of the Company as of September 28, 1997 was $(186,203,000), or $(75.30) per share. "Net tangible book value" per share is determined by dividing the number of shares of Common Stock outstanding into the net tangible book value of the Company (total tangible assets less total liabilities). After giving effect to the Recapitalization and the Related Transactions, the Company's pro forma net tangible book value as of September 28, 1997 would have been $(99,273,000), or $(13.93) per share. This represents an immediate increase in net tangible book value of $61.37 per share to existing stockholders and an immediate dilution of $33.93 per share to new investors purchasing Common Stock in the Common Stock Offering. The following table illustrates this dilution: Assumed initial public offering price.............................. $ 20.00 Net tangible book value per share at September 28, 1997.......... $ (75.30) Increase per share attributable to new investors in the Common Stock Offering.......................................... 61.37 --------- Pro forma net tangible book value per share after the Common Stock Offering................................................. (13.93) --------- Dilution per share to new investors................................ $ 33.93 --------- ---------
The following table summarizes as of September 28, 1997, on a pro forma as adjusted basis after giving effect to the Recapitalization and the Related Transactions, the difference between existing stockholders and new investors with respect to the number of shares of Common Stock purchased from the Company, the total cash consideration paid to the Company, and the average price per share paid by existing stockholders and by the purchasers of the shares offered by the Company hereby (at an assumed initial public offering price of $20.00 per share):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------------- --------------------------- PRICE NUMBER (A) PERCENT AMOUNT PERCENT PER SHARE -------------- ----------- -------------- ----------- ----------- Existing stockholders.......................... 2,125,000(b) 29.8% $ 46,875,000 31.9% $ 22.06 New investors.................................. 5,000,000 70.2 100,000,000 68.1 $ 20.00 -------------- ----- -------------- ----- Total...................................... 7,125,000 100.0% $ 146,875,000 100.0% -------------- ----- -------------- ----- -------------- ----- -------------- -----
- ------------------------ (a) Excludes an aggregate of approximately 400,000 shares and 375,000 shares of Common Stock reserved for issuance under the Stock Option Plan and the Restricted Stock Plan, respectively. See "Management--Executive Compensation--Stock Option Plan" and "--Restricted Stock Plan". (b) Represents actual shares outstanding as of September 28, 1997, plus 27,113 shares to be issued upon consummation of the Common Stock Offering under the Management Stock Plan, less 375,000 net shares to be returned to the Company in connection with the Recapitalization. See "Ownership of Common Stock" and Note 17 of Notes to Consolidated Financial Statements. 18 CAPITALIZATION The following table sets forth the balance of Cash and cash equivalents, Current maturities of long-term debt and capital lease obligations and capitalization of the Company (i) as of September 28, 1997 and (ii) as of September 28, 1997, as adjusted to give effect to the Recapitalization and the Related Transactions. This table should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
AS OF SEPTEMBER 28, 1997 ------------------------ ACTUAL AS ADJUSTED ----------- ----------- (IN THOUSANDS) Cash and cash equivalents.............................................................. $ 12,044 $ 10,102(a) ----------- ----------- ----------- ----------- Current maturities of long-term debt and capital lease obligations..................... $ 7,739 $ 4,432 ----------- ----------- ----------- ----------- Long-term debt Old Credit Facility.................................................................. $ 358,042 $ --(b) Revolving Credit Facility............................................................ -- --(c) Term Loan Facility................................................................... -- 105,000 Senior Notes......................................................................... -- 175,000 Capital lease obligations and other.................................................. 13,254 8,585 ----------- ----------- Total long-term debt................................................................... 371,296 288,585 ----------- ----------- Stockholders' equity (d) Preferred Stock, $0.01 par value, 1,000 shares authorized and none outstanding, as adjusted........................................................................... -- -- Common Stock, $0.01 par value, 7,389 shares authorized and 2,473 shares outstanding; 50,000 shares authorized and 7,125 shares outstanding, as adjusted................. 25 71(e) Paid-in capital...................................................................... 46,905 148,214(e) Unrealized gain on investment securities............................................. 130 130 Accumulated deficit.................................................................. (217,796) (221,938)(f) Cumulative translation adjustment.................................................... 52 52 ----------- ----------- Total stockholders' equity (deficit)................................................... (170,684) (73,471) ----------- ----------- Total capitalization................................................................... $ 200,612 $ 215,114 ----------- ----------- ----------- -----------
- ------------------------ (a) Gives effect to (i) the $9,581 interest payment made in October 1997 under the Old Credit Facility, (ii) the receipt of $12,907 of previously restricted cash from RIC released in exchange for a letter of credit, net of $10,000 applied to the Old Credit Facility and (iii) $4,732 of working capital provided in the Recapitalization. (b) Gives effect to the application of (i) $348,042 of the gross proceeds from the Recapitalization and (ii) $10,000 of restricted cash released from RIC. See "Use of Proceeds." (c) As part of the Recapitalization, the Company will have a $55,000 Revolving Credit Facility which is expected to be undrawn at closing and $2,093 available under the Letter of Credit Facility. These facilities are expected to be drawn in part, from time to time, to finance the Company's working capital and other general corporate requirements. (d) Historical share information includes Class A common shares and Class B common shares. In connection with the Recapitalization, the Class A common shares and Class B common shares will be converted into Common Stock. (e) Gives effect to (i) an assumed $100,000 of gross proceeds from the Common Stock Offering, (ii) $8,427 of expenses associated with the Common Stock Offering, (iii) the 924-for-1 stock split which will occur prior to the Common Stock Offering and (iv) $9,782 of non-cash stock compensation expense arising out of the issuance of certain shares of Common Stock to management and the vesting of certain shares of restricted stock previously issued to management. See Note 17 of Notes to Consolidated Financial Statements. (f) Gives effect to (i) $1,948 of net income related to deferred interest no longer payable under the Old Credit Facility, (ii) $5,771 of non-cash stock compensation expense, net of taxes, arising out of the issuance of certain shares of Common Stock to management and the vesting of certain shares of restricted stock previously issued to management discussed in (e) above and (iii) the write-off of $319 of deferred financing and debt restructuring costs, net of taxes, related to the Old Credit Facility. 19 SELECTED CONSOLIDATED FINANCIAL INFORMATION The following table sets forth selected consolidated historical financial information of the Company and its consolidated subsidiaries for each of the periods presented below. This information should be read in conjunction with the Consolidated Financial Statements and related Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere herein. The selected consolidated historical financial information for each of 1994, 1995 and 1996, and as of December 31, 1995 and December 29, 1996, has been derived from the Company's audited Consolidated Financial Statements which are included elsewhere herein. The selected consolidated historical financial information as of and for the nine months ended September 29, 1996 and September 28, 1997 has been derived from the Company's unaudited consolidated financial statements which, in the opinion of management, reflect all adjustments (consisting only of normal recurring accruals) necessary to present fairly, in accordance with GAAP, the information contained therein. See Note 3 of Notes to Consolidated Financial Statements for a discussion of the basis of the presentation and significant accounting policies of the consolidated historical financial information set forth below. Results for interim periods are not necessarily indicative of full fiscal year results. No stock dividends were declared or paid for any period presented.
NINE MONTHS ENDED FISCAL YEAR (A) ------------- ----------------------------------------------------- SEPTEMBER 29, 1992 1993 1994 1995 1996 1996 --------- --------- --------- --------- --------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Restaurant........................................ $ 542,859 $ 580,161 $ 589,383 $ 593,570 $ 596,675 $ 452,373 Retail, institutional and other................... 20,346 30,472 41,631 55,579 54,132 39,446 Franchise......................................... -- -- -- -- -- -- --------- --------- --------- --------- --------- ------------- Total revenues...................................... 563,205 610,633 631,014 649,149 650,807 491,819 --------- --------- --------- --------- --------- ------------- Costs and expenses: Cost of sales..................................... 154,796 170,431 179,793 192,600 191,956 143,388 Labor and benefits................................ 201,431 209,522 211,838 214,625 209,260 159,502 Operating expenses................................ 108,363 120,626 132,010 143,854 143,163 109,006 General and administrative expenses............... 37,372 40,851 38,434 40,705 42,721 31,948 Non-cash write-downs (b).......................... -- 25,552 -- 7,352 227 -- Depreciation and amortization..................... 35,734 35,535 32,069 33,343 32,979 25,127 Gain on sale of restaurant operations............... -- -- -- -- -- -- --------- --------- --------- --------- --------- ------------- Operating income.................................... 25,509 8,116 36,870 16,670 30,501 22,848 Interest expense, net (c)........................... 37,630 38,786 45,467 41,904 44,141 33,084 Equity in net loss of joint venture................. -- -- -- -- -- -- --------- --------- --------- --------- --------- ------------- Income (loss) before (provision for) benefit from income taxes and cumulative effect of changes in accounting principles............................. (12,121) (30,670) (8,597) (25,234) (13,640) (10,236) (Provision for) benefit from income taxes........... (1,200) 11,470 4,661 (33,419) 5,868 4,442 Cumulative effect of changes in accounting principles, net of income taxes (d)............... -- (42,248) -- -- -- -- --------- --------- --------- --------- --------- ------------- Net income (loss)................................... $ (13,321) $ (61,448) $ (3,936) $ (58,653) $ (7,772) $ (5,794) --------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- --------- ------------- OTHER DATA: EBITDA (e).......................................... $ 61,243 $ 69,203 $ 68,939 $ 57,365 $ 63,707 47,975 Net cash provided by operating activities........... 34,047 42,877 38,381 27,790 26,163 23,637 Capital expenditures: Cash.............................................. 33,577 37,361 29,507 19,092 24,217 18,547 Non-cash (f)...................................... 3,121 7,129 7,767 3,305 5,951 3,570 --------- --------- --------- --------- --------- ------------- Total capital expenditures.......................... $ 36,698 $ 44,490 $ 37,274 $ 22,397 $ 30,168 $ 22,117 Ratio of earnings to fixed charges (g).............. -- -- -- -- -- -- PRO FORMA DATA: EBITDA (e)(h)....................................... $ 64,653 $ 48,685 Interest expense, net (c)(i)........................ 28,804 21,580 Net income(j)....................................... 1,835 1,412 Net income per share................................ $ 0.26 $ 0.20 Weighted average shares outstanding (k)............. 7,125 7,125 Ratio of EBITDA to interest expense, net............ 2.2x 2.3x Ratio of earnings to fixed charges (g).............. 1.1x 1.1x Ratio of total long-term debt to EBITDA (e)......... SEPTEMBER 28, 1997 ------------- STATEMENT OF OPERATIONS DATA: Revenues: Restaurant........................................ $ 455,026 Retail, institutional and other................... 49,173 Franchise......................................... 3,834 ------------- Total revenues...................................... 508,033 ------------- Costs and expenses: Cost of sales..................................... 147,105 Labor and benefits................................ 159,315 Operating expenses................................ 112,009 General and administrative expenses............... 32,775 Non-cash write-downs (b).......................... 607 Depreciation and amortization..................... 24,226 Gain on sale of restaurant operations............... 2,303 ------------- Operating income.................................... 34,299 Interest expense, net (c)........................... 32,972 Equity in net loss of joint venture................. 1,112 ------------- Income (loss) before (provision for) benefit from income taxes and cumulative effect of changes in accounting principles............................. 215 (Provision for) benefit from income taxes........... (88) Cumulative effect of changes in accounting principles, net of income taxes (d)............... 2,236 ------------- Net income (loss)................................... $ 2,363 ------------- ------------- OTHER DATA: EBITDA (e).......................................... $ 59,132 Net cash provided by operating activities........... 29,224 Capital expenditures: Cash.............................................. 14,656 Non-cash (f)...................................... 2,227 ------------- Total capital expenditures.......................... $ 16,883 Ratio of earnings to fixed charges (g).............. 1.0x PRO FORMA DATA: EBITDA (e)(h)....................................... $ 59,132 Interest expense, net (c)(i)........................ 21,617 Net income(j)....................................... 9,062 Net income per share................................ $ 1.27 Weighted average shares outstanding (k)............. 7,125 Ratio of EBITDA to interest expense, net............ 2.7x Ratio of earnings to fixed charges (g).............. 1.4x Ratio of total long-term debt to EBITDA (e)......... 3.8x(l)
20
FISCAL YEAR (A) AS OF AS OF ----------------------------------------------------- SEPTEMBER 29, SEPTEMBER 28, 1992 1993 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- ------------- ------------- BALANCE SHEET DATA: Working capital (deficit)........ $ (28,451) $ (27,919) $ (35,856) $ (14,678) $ (20,700) $ (28,333) $ (17,895) Total assets..................... 380,087 365,330 374,669 370,292 360,126 359,080 362,914 Total long-term debt and capital lease obligations, excluding current maturities............. 358,102 363,028 369,549 389,144 385,977 379,241 371,296 Total stockholders' equity (deficit)...................... $ (43,993) $(102,965) $(106,901) $(165,534) $(173,156) $(171,306) $(170,684) AS ADJUSTED SEPTEMBER 28, 1997 ------------- BALANCE SHEET DATA: Working capital (deficit)........ $ (10,949)(m) Total assets..................... 358,348(n) Total long-term debt and capital lease obligations, excluding current maturities............. 288,585(o) Total stockholders' equity (deficit)...................... $ (73,471)(p)
- ------------------------ (a) All fiscal years presented include 52 weeks of operations except 1993 which includes 53 weeks of operations. (b) Includes non-cash write-downs of approximately $16,337 in 1993 related to a trademark license agreement as a result of new product development and the replacement of certain trademarked menu items and $3,346 in 1995 related to a postponed debt restructuring. All other non-cash write-downs relate to property and equipment disposed of in the normal course of the Company's operations. See Notes 3, 5 and 6 of Notes to Consolidated Financial Statements. (c) Interest expense, net is net of capitalized interest of $128, $156, $176, $62, $49, $44 and $27 and interest income of $222, $240, $187, $390, $318, $273 and $239 for 1992, 1993, 1994, 1995, 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively. (d) Includes non-cash items, net of related income taxes, as a result of adoption of accounting pronouncements related to income taxes of $30,968, post-retirement benefits other than pensions of $4,140 and post-employment benefits of $7,140 in 1993 and pensions of $2,236 in 1997. (e) EBITDA represents consolidated Net income (loss) before (i) Cumulative effect of changes in accounting principles, net of income taxes, (ii) (Provision for) benefit from income taxes, (iii) Equity in net loss of joint venture, (iv) Interest expense, net, (v) Depreciation and amortization and (vi) Non-cash write-downs and all other non-cash items, plus cash distributions from unconsolidated subsidiaries, each determined in accordance with GAAP. The Company has included information concerning EBITDA in this Prospectus because it believes that such information is used by certain investors as one measure of an issuer's historical ability to service debt. EBITDA should not be considered as an alternative to, or more meaningful than, earnings from operations or other traditional indications of an issuer's operating performance. (f) Non-cash capital expenditures represent the cost of assets acquired through the incurrence of capital lease obligations. (g) The Ratio of earnings to fixed charges is computed by dividing (i) income before interest expense, income taxes and other fixed charges by (ii) fixed charges, including interest expense, amortization of debt issuance costs and the portion of rent expense which represents interest (assumed to be one-third). For 1992, 1993, 1994, 1995, 1996 and the nine months ended September 29, 1996, earnings were insufficient to cover fixed charges by $12,249, $30,826, $8,773, $25,296, $13,689 and $10,280, respectively. (h) Represents historical EBITDA adjusted to give effect to the benefit from the change in accounting for pensions related to determining the return-on-asset component of annual pension expense of $946 in 1996 and $710 for the nine months ended September 29, 1996. See Note 10 of Notes to Consolidated Financial Statements. (i) Represents historical interest expense adjusted to give effect to the Recapitalization. Borrowings under the New Credit Facility will bear interest at a floating rate equal to LIBOR plus 2.25% or the Alternative Base Rate (as defined in the New Credit Facility) plus 0.75% per annum for drawings under the Revolving Credit Facility and the Letter of Credit Facility, 0.50% per annum for amounts undrawn under the Revolving Credit Facility, 2.25% per annum for amounts issued but undrawn under the Letter of Credit Facility and a weighted average floating rate equal to LIBOR plus 2.46% or the Alternative Base Rate plus 0.96% for the Term Loan Facility. (j) Represents historical net income adjusted to give effect to (i) the reduction in interest expense, net of income taxes of $9,049, $6,788 and $6,699 for 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively, as a result of the Recapitalization and the Related Transactions and (ii) the benefit, net of income taxes, related to the change in accounting for pensions described in (h) above of $558, $418 and $0 for 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively. (k) Represents historical weighted average shares outstanding adjusted to give effect to the issuance of 27 shares upon consummation of the Recapitalization under the Management Stock Plan (as defined herein), and the return of 375 net shares to the Company in connection with the Recapitalization. Actual weighted average shares outstanding were 2,414, 2,394 and 2,473 for 1996, the nine months ended September 29, 1996 and the nine months ended September 28, 1997, respectively. See "Ownership of Common Stock" and Note 17 of Notes to Consolidated Financial Statements. (l) For purposes of this ratio, EBITDA represents historical EBITDA for the twelve months ended September 28, 1997 adjusted by $236 to give effect to the benefit related to the change in accounting for pensions described in (h) above. (m) As adjusted for (i) $3,307 reduction in current portion of capital lease obligations in connection with the Recapitalization, (ii) $4,732 of working capital provided in the Recapitalization, (iii) $2,907 cash provided in connection with the letter of credit issued to RIC and (iv) the use of $4,000 of current restricted cash to reduce the amount outstanding on the Old Credit Facility. (n) As adjusted for (i) $10,000 of previously restricted cash applied to the Old Credit Facility, (ii) payment of $9,581 of interest on the Old Credit Facility, (iii) write-off of $540 of deferred financing costs related to the Old Credit Facility, (iv) $10,823 of expenses related to the Senior Note Offering and (v) $4,732 of working capital provided in the Recapitalization. (o) As adjusted for (i) repayment of the $358,042 outstanding on the Old Credit Facility and $4,669 of long-term portion of capital lease obligations and (ii) proceeds of $280,000 from the Senior Note Offering and the New Credit Facility. (p) As adjusted for (i) estimated net proceeds of $91,573 from the Common Stock Offering, (ii) $1,948 of net income related to deferred interest expense no longer payable under the Old Credit Facility, (iii) write-off of $319 of deferred financing costs, net of taxes, related to the Old Credit Facility and (iv) the tax benefit of $4,011 related to the non-cash stock compensation expense arising out of the issuance of certain shares of Common Stock to management and the vesting of certain shares of restricted stock previously issued to management. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. OVERVIEW Friendly's owns and operates 662 restaurants, franchises 34 restaurants and distributes a full line of frozen desserts through more than 5,000 supermarkets and other retail locations in 15 states. The Company was publicly held from 1968 until January 1979 at which time it was acquired by Hershey. Under Hershey's ownership, the number of Company restaurants increased from 601 to 849. Hershey subsequently sold the Company in September 1988 to TRC in a highly-leveraged transaction. Beginning in 1989, the new management focused on improving operating performance through revitalizing and renovating restaurants, upgrading and expanding the menu and improving management hiring, training, development and retention. Also in 1989, the Company introduced its signature frozen desserts into retail locations in the Northeast. Since the beginning of 1989, 24 new restaurants have been opened while 176 under-performing restaurants have been closed. The high leverage associated with the TRC Acquisition has severely impacted the liquidity and profitability of the Company. As of September 28, 1997, the Company had a stockholders' deficit of $170.7 million. Cumulative interest expense of $384.0 million since the TRC Acquisition has significantly contributed to the deficit. The Company's net loss in 1996 of $7.8 million included $44.1 million of interest expense. The Company's revenue, EBITDA and operating income have improved significantly since the TRC Acquisition. Despite the closing of 152 restaurants (net of restaurants opened) since the beginning of 1989, Restaurant revenues have increased 7.5% from $557.3 million in 1989 to $599.3 million in the twelve- months ended September 28, 1997, while average revenue per restaurant has increased 29.8% from $665,000 to $863,000 during the same period. Retail, institutional and other revenues and Franchise revenues have also increased from $1.4 million in 1989 to $67.7 million in the twelve months ended September 28, 1997. In addition, EBITDA has increased 58.0% from $47.4 million in 1989 to $74.9 million in the twelve-month period ended September 28, 1997, while operating income has increased from $4.1 million to $42.0 million over the same period. As a result of the positive impact of the Company's revitalization program, the closing of under-performing restaurants, the growth of the retail, institutional and other businesses and the commencement in July 1997 of the Company's franchising program, period to period comparisons may not be meaningful. The Company's revenues are derived primarily from the operation of full-service restaurants and from the distribution and sale of frozen desserts through retail locations. In addition, the Company derives a small amount of revenue from the sale of frozen desserts in South Korea and the United Kingdom under various distribution and licensing arrangements. Furthermore, the Company is a 50% partner in a joint venture in Shanghai, China which has manufactured and distributed frozen desserts on a limited basis. The joint venture is currently seeking to establish additional distribution for its products in China. On July 14, 1997, the Company entered into the DavCo Agreement pursuant to which the Company received $8.2 million in cash for the sale of certain non-real property assets and in payment of franchise and development fees, and receives (i) a royalty based on franchised restaurant revenues and (ii) revenues and earnings from the sale to DavCo of Friendly's frozen desserts and other products. The Company anticipates receiving similar fees and royalty streams in connection with future franchising arrangements. See "Prospectus Summary--Recent Developments." Cost of sales includes direct food costs, the Company's costs to manufacture frozen desserts and the Company's costs to distribute frozen desserts and other food products to its restaurants, franchisees and its 22 retail, institutional and other customers. Retail, institutional and other revenues have higher food costs as a percentage of sales than Restaurant revenues. Labor and benefits include labor and related payroll expenses for restaurant employees. Operating expenses include all other restaurant-level expenses including supplies, utilities, maintenance, insurance and occupancy-related expenses, the costs associated with Retail, institutional and other revenues and Franchise revenues including salaries for sales personnel and other selling expenses and advertising costs. General and administrative expenses include costs associated with restaurant field supervision and the Company's headquarters personnel. Non-cash write-downs include the write-downs of long-lived assets and certain intangible assets when circumstances indicate that the carrying amount of an asset may not be recoverable. See Notes 3 and 6 of Notes to Consolidated Financial Statements. Interest expense, net is net of capitalized interest and interest income. RESULTS OF OPERATIONS The operating results of the Company expressed as a percentage of Total revenues are set forth below.
NINE MONTHS ENDED FISCAL YEAR ---------------------------------- -------------------------------- SEPTEMBER 29, SEPTEMBER 28, 1994 1995 1996 1996 1997 -------- -------- -------- --------------- --------------- Revenues: Restaurant............................ 93.4% 91.4% 91.7% 92.0% 89.6% Retail, institutional and other....... 6.6 8.6 8.3 8.0 9.7 Franchise............................. 0.0 0.0 0.0 0.0 0.7 -------- -------- -------- ----- ----- Total revenues.......................... 100.0 100.0 100.0 100.0 100.0 -------- -------- -------- ----- ----- Costs and expenses: Cost of sales......................... 28.5 29.7 29.5 29.2 29.0 Labor and benefits.................... 33.6 33.1 32.2 32.4 31.4 Operating expenses.................... 20.9 22.2 22.0 22.2 22.0 General and administrative expenses... 6.1 6.2 6.5 6.5 6.4 Non-cash write-downs.................. 0.0 1.1 0.0 0.0 0.1 Depreciation and amortization......... 5.1 5.1 5.1 5.1 4.8 Gain on sale of restaurant operations... 0.0 0.0 0.0 0.0 0.4 -------- -------- -------- ----- ----- Operating income........................ 5.8 2.6 4.7 4.6 6.7 Interest expense, net................... 7.2 6.5 6.8 6.7 6.5 Equity in net loss of joint venture..... 0.0 0.0 0.0 0.0 0.2 -------- -------- -------- ----- ----- Income (loss) before benefit from (provision for) income taxes and cumulative effect of change in accounting principle.................. (1.4) (3.9) (2.1) (2.1) 0.0 Benefit from (provision for) income taxes................................. 0.8 (5.1) 0.9 0.9 0.0 Cumulative effect of change in accounting principle, net of income tax expense........................... 0.0 0.0 0.0 0.0 0.5 -------- -------- -------- ----- ----- Net income (loss)....................... (0.6)% (9.0)% (1.2)% (1.2)% 0.5% -------- -------- -------- ----- ----- -------- -------- -------- ----- -----
NINE MONTHS ENDED SEPTEMBER 28, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 29, 1996 REVENUES--Total revenues increased $16.2 million, or 3.3%, to $508.0 million for the nine months ended September 28, 1997 from $491.8 million for the nine months ended September 29, 1996. Restaurant revenues increased $2.6 million, or 0.6%, to $455.0 million for the nine months ended September 28, 1997 from $452.4 million for the nine months ended September 29, 1996. Comparable restaurant revenues increased 3.1%. The increase in Restaurant revenues and comparable restaurant revenues was due to the introduction of higher-priced lunch and dinner entrees, selected menu price increases, a shift in sales mix to higher-priced items, the opening of three new restaurants, the re-imaging of four restaurants under the Company's FOCUS 2000 program, the revitalization of 14 restaurants, building expansions at five restaurants 23 and a milder winter in the 1997 period, which allowed for favorable traffic comparisons. The increase was partially offset by the sale of 34 restaurants to DavCo which resulted in a $7.2 million reduction in Restaurant revenues and the closing of 17 under-performing restaurants. Retail, institutional and other revenues increased by $9.8 million, or 24.9%, to $49.2 million for the nine months ended September 28, 1997 from $39.4 million for the nine months ended September 29, 1996. The increase was primarily due to a more effective sales promotion program. Franchise revenue was $3.8 million for the nine months ended September 28, 1997 compared to none for the nine months ended September 29, 1996. The increase is a result of the consummation of the DavCo Agreement on July 14, 1997. See Note 16 of Notes to Consolidated Financial Statements. COST OF SALES--Cost of sales increased $3.7 million, or 2.6%, to $147.1 million for the nine months ended September 28, 1997 from $143.4 million for the nine months ended September 29, 1996. Cost of sales as a percentage of Total revenues decreased to 29.0% in the 1997 period from 29.2% in the 1996 period. The decrease was due to a 0.6% reduction in food costs at the restaurant level despite higher guest check averages because of reduced promotional discounts. The decrease was offset by a 0.4% increase in food costs at the retail and institutional level. LABOR AND BENEFITS--Labor and benefits decreased $0.2 million, or 0.1%, to $159.3 million for the nine months ended September 28, 1997 from $159.5 million for the nine months ended September 29, 1996. Labor and benefits as a percentage of Total revenues decreased to 31.4% in the 1997 period from 32.4% in the 1996 period. The decrease was due to an increase in Retail, institutional and other revenues as a percent of Total revenues as these revenues have no associated labor and benefits cost and lower workers' compensation insurance and pension costs. OPERATING EXPENSES--Operating expenses increased $3.0 million, or 2.8%, to $112.0 million for the nine months ended September 28, 1997 from $109.0 million for the nine months ended September 29, 1996. Operating expenses as a percentage of Total revenues decreased to 22.0% in the 1997 period from 22.2% in the 1996 period. The decrease was due to reduced costs for snow removal and the allocation of fixed costs over higher Total revenues in the 1997 period partially offset by higher advertising expenditures in the 1997 period. GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses increased $0.9 million, or 2.8%, to $32.8 million for the nine months ended September 28, 1997 from $31.9 million for the nine months ended September 29, 1996. General and administrative expenses as a percentage of Total revenues decreased to 6.4% in the 1997 period from 6.5% in the 1996 period. This decrease was due to reductions in pension costs and the elimination of field management positions associated with the closing of 17 restaurants since the end of the 1996 period. GAIN ON SALE OF RESTAURANT OPERATIONS--Gain on sale of restaurant operations represents the income related to the sale of the equipment and operating rights for the 34 existing locations franchised to DavCo. See Note 16 of Notes to Consolidated Financial Statements. EBITDA--As a result of the above, EBITDA increased $11.1 million, or 23.1%, to $59.1 million for the nine months ended September 28, 1997 from $48.0 million for the nine months ended September 29, 1996. EBITDA as a percentage of Total revenues increased to 11.6% in the 1997 period from 9.8% in the 1996 period. NON-CASH WRITE-DOWNS--Non-cash write-downs were $0.6 million for the nine months ended September 28, 1997; there were no such write-downs during the nine months ended September 29, 1996. DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased $0.9 million, or 3.6%, to $24.2 million for the nine months ended September 28, 1997 from $25.1 million for the nine months ended September 29, 1996. Depreciation and amortization as a percentage of Total revenues decreased to 4.8% in the 1997 period from 5.1% in the 1996 period. The decrease was due to the closing of 17 units since the 24 end of the 1996 period, partially offset by higher amortization of debt restructuring costs incurred as a result of a debt restructuring which was effective January 1, 1996. INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and interest income, decreased by $0.1 million, or 0.3%, to $33.0 million for the nine months ended September 28, 1997 from $33.1 million for the nine months ended September 29, 1996. The decrease in interest expense was due to a reduction in interest expense on capital lease obligations as a result of lower amounts outstanding in the 1997 period. EQUITY IN NET LOSS OF JOINT VENTURE--The equity in net loss of the China joint venture of $1.1 million for the nine month period ended September 28, 1997 reflected the Company's 50% share of the China joint venture's net loss for such period. Sales for the joint venture were minimal during the 1997 period. BENEFIT FROM (PROVISION FOR) INCOME TAXES--The provision for income taxes was $0.1 million for the nine months ended September 28, 1997 compared to a benefit of $4.4 million for the nine months ended September 29, 1996 due to the improved operating results in the 1997 period. In 1997, the Company revised the method used in determining the return-on-asset component of annual pension expense as described in Note 10 of Notes to Consolidated Financial Statements. The cumulative effect of this change was $2.2 million, net of income tax expense of $1.6 million. NET INCOME (LOSS)--Net income was $2.4 million for the nine months ended September 28, 1997 compared to a net loss of $5.8 million for the nine months ended September 29, 1996 for the reasons discussed above. 1996 COMPARED TO 1995 REVENUES--Total revenues increased $1.7 million, or 0.3%, to $650.8 million in 1996 from $649.1 million in 1995. Restaurant revenues increased $3.1 million, or 0.5%, to $596.7 million in 1996 from $593.6 million in 1995. Comparable restaurant revenues increased by 1.8%. The increase in Restaurant revenues and comparable restaurant revenues was due to the introduction of higher-priced lunch and dinner entrees in the fourth quarter of 1996, selected menu price increases, a shift in sales mix to higher priced items, the opening of three new restaurants, the revitalization of 16 restaurants and building expansions at four existing locations. The increase was partially offset by the closing of 31 restaurants in 1996. Retail, institutional and other revenues declined by $1.5 million, or 2.7%, to $54.1 million in 1996 from $55.6 million in 1995. The decrease was primarily attributable to the effects of a reduction in promotional activities. COST OF SALES--Cost of sales decreased $0.6 million, or 0.3%, to $192.0 million in 1996 from $192.6 million in 1995. Cost of sales as a percentage of Total revenues decreased to 29.5% in 1996 from 29.7% in 1995. The decrease was due to a 0.2% reduction in food costs at the restaurant level as a result of reduced waste in food preparation. LABOR AND BENEFITS--Labor and benefits decreased $5.3 million, or 2.5%, to $209.3 million in 1996 from $214.6 million in 1995. Labor and benefits as a percentage of Total revenues decreased to 32.2% in 1996 from 33.1% in 1995. The decrease was due to a 1.1% reduction in labor and benefits as a percentage of Restaurant revenues as a result of an improvement in labor utilization and lower group and workers' compensation insurance costs. The decrease was offset by a 0.3% reduction in Retail, institutional and other revenues as a percentage of Total revenues as these revenues have no associated labor and benefits. OPERATING EXPENSES--Operating expenses decreased $0.7 million, or 0.5%, to $143.2 million in 1996 from $143.9 million in 1995. Operating expenses as a percentage of Total revenues decreased in 1996 to 22.0% from 22.2% in 1995. The decrease was due to the allocation of fixed costs over higher total revenues. 25 GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses increased $2.0 million, or 4.9%, to $42.7 million in 1996 from $40.7 million in 1995. General and administrative expenses as a percentage of Total revenues increased to 6.5% in 1996 from 6.2% in 1995. This increase was due to an increase in management bonuses and the annual merit-based salary increases, partially offset by reductions in group medical insurance claims and the elimination of field management positions associated with the closing of 31 restaurants in 1996. General and administrative expenses, exclusive of management bonuses, increased $0.3 million in 1996. EBITDA--As a result of the above, EBITDA increased by $6.3 million, or 11.0%, to $63.7 million in 1996 from $57.4 million in 1995. EBITDA as a percentage of Total revenues increased to 9.8% in 1996 from 8.8% in 1995. NON-CASH WRITE-DOWNS--Non-cash write-downs decreased $7.2 million to $0.2 million in 1996 from $7.4 million in 1995. The decrease was due to a reduction in the carrying value of properties held for disposition of $0.2 million in 1996 and $4.0 million in 1995. In 1995, the Company also incurred a non-cash write-down of $3.3 million relating to costs resulting from a postponed debt refinancing. For further explanation of the non-cash write-downs, see Notes 3, 5 and 6 of Notes to Consolidated Financial Statements. DEPRECIATION AND AMORTIZATION--Depreciation and amortization decreased $0.3 million, or 0.9%, to $33.0 million in 1996 from $33.3 million in 1995. The decrease was due to lower amortization of debt restructuring costs, partially offset by an increase in depreciation due to the addition of three restaurants and the ongoing implementation of the Company's revitalization program. Depreciation and amortization as a percentage of Total revenues was 5.1% for both periods. INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and interest income, increased by $2.2 million, or 5.3%, to $44.1 million in 1996 from $41.9 million in 1995. The increase was due to an increase in the interest rate on the Company's bank debt as a result of the debt restructuring effective January 1, 1996. BENEFIT FROM (PROVISION FOR) INCOME TAXES--The benefit from income taxes was $5.9 million in 1996 as compared to a provision for income taxes of $33.4 million in 1995. The benefit from income taxes of $5.9 million in 1996 represented the statutory federal and state tax benefit of the Company's loss partially offset by the impact of the federal and state tax valuation allowances. The income tax provision of $33.4 million in 1995 resulted primarily from the anticipated deconsolidation from TRC. As a result, the deferred tax asset of approximately $19 million related to the NOLs utilized by TRC as of December 31, 1995 was written off in 1995. Additionally, as a result of the anticipated change in ownership and Section 382 limitation, a valuation allowance in 1995 was placed on all Federal NOL carryforwards generated through December 31, 1995. See Note 9 of Notes to Consolidated Financial Statements. and "Net Operating Loss Carryforwards." NET INCOME (LOSS)--As a result of the above, net loss decreased by $50.9 million, or 86.7%, to a net loss of $7.8 million in 1996 from a net loss of $58.7 million in 1995. 1995 COMPARED TO 1994 REVENUES--Total revenues increased $18.1 million, or 2.9%, to $649.1 million in 1995 from $631.0 million in 1994. Restaurant revenues increased $4.2 million, or 0.7%, to $593.6 million in 1995 from $589.4 million in 1994. Comparable restaurant revenues increased by 0.9%. The increase in Restaurant revenues and comparable restaurant revenues was due to the introduction of frozen yogurt, selected menu price increases, a shift in sales mix to higher-priced items, the opening of one new restaurant, the revitalization of 14 restaurants and building expansions at five existing restaurants. The increase was partially offset by the closing of 16 restaurants in 1995. Retail, institutional and other revenues increased $14.0 million, or 26 33.7%, to $55.6 million in 1995 from $41.6 million in 1994. This increase was due to a successful promotional campaign in existing markets and the introduction of frozen yogurt into these markets. COST OF SALES--Cost of sales increased $12.8 million, or 7.1%, to $192.6 million in 1995 from $179.8 million in 1994. Cost of sales as a percentage of Total revenues increased to 29.7% in 1995 from 28.5% in 1994. The increase was due to a 0.8% rise in food costs at the restaurant level as a result of a sales mix shift to higher quality items and increased waste in food preparation and to a 0.4% rise in food costs at the retail and institutional level. LABOR AND BENEFITS--Labor and benefits increased $2.8 million, or 1.3%, to $214.6 million in 1995 from $211.8 million in 1994. Labor and benefits as a percentage of Total revenues decreased in 1995 to 33.1% from 33.6% in 1994. Approximately 0.7% of the decrease was due to an increase in Retail, institutional and other revenues as a percent of Total revenues as these revenues have no associated labor and benefits. This decrease was partially offset by a 0.2% rise in labor and benefits as a percentage of Restaurant revenue due to several large group medical claims and the introduction of a restaurant leadership team concept which placed more focus on customer service by increasing the hours of supervisory restaurant employees. OPERATING EXPENSES--Operating expenses increased $11.9 million, or 9.0%, to $143.9 million in 1995 from $132.0 million in 1994. Operating expenses as a percentage of Total revenues increased to 22.2% in 1995 from 20.9% in 1994. The increase was due to the cost of sponsoring a Ladies Professional Golf Association golf tournament ("The Friendly's Classic") for the first time, an increase in restaurant advertising expenses, higher restaurant renovation expenses, an increase in credit card fees as a result of greater use of credit cards by consumers and an increase in selling expenses associated with the growth in the retail and institutional business. GENERAL AND ADMINISTRATIVE EXPENSES--General and administrative expenses increased $2.3 million, or 6.0%, to $40.7 million in 1995 from $38.4 million in 1994. General and administrative expenses as a percentage of Total revenues increased to 6.2% in 1995 from 6.1% in 1994. The increase was due to several large group insurance claims in 1995, the annual merit-based salary increases and the benefit in 1994 from eliminating a long-term bonus plan. EBITDA--As a result of the above, EBITDA decreased by $11.5 million, or 16.7%, to $57.4 million in 1995 from $68.9 million in 1994. EBITDA as a percentage of Total revenues decreased to 8.8% in 1995 from 10.9% in 1994. NON-CASH WRITE-DOWNS--During 1995, the Company incurred a $3.3 million non-cash write-down relating to costs resulting from a postponed debt refinancing and a $4.0 million write-down of the carrying value of 51 restaurant properties. For a further explanation of the write-downs, see Notes 3, 5 and 6 of Notes to Consolidated Financial Statements. DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased $1.2 million, or 3.7%, to $33.3 million in 1995 from $32.1 million in 1994. The increase was due to the addition of one new restaurant and the ongoing implementation of the Company's revitalization program, partially offset by a decrease in amortization as a result of TRC Acquisition financing costs being fully amortized. Depreciation and amortization as a percentage of Total revenues was 5.1% for both periods. INTEREST EXPENSE, NET--Interest expense, net of capitalized interest and interest income, decreased by $3.6 million, or 7.9%, to $41.9 million in 1995 from $45.5 million in 1994. The decrease was due to the payment of a $3.6 million fee to the Company's lenders in 1994 to facilitate a refinancing of the Company's debt which was never consummated. BENEFIT FROM (PROVISION FOR) INCOME TAXES--The provision for income taxes was $33.4 million as compared to the benefit from income taxes of $4.7 million in 1994. The provision for income taxes of $33.4 million in 1995 was due to the anticipated deconsolidation from TRC. As a result, the deferred tax asset of 27 approximately $19 million related to the NOLs utilized by TRC as of December 31, 1995 was written off in 1995. Additionally, as a result of the anticipated change in ownership and Section 382 limitation, a valuation allowance in 1995 was placed on all Federal NOL carryforwards generated through December 31, 1995. See Note 9 of Notes to Consolidated Financial Statements. The benefit from income taxes of $4.7 million in 1994 represented the statutory federal and state tax benefit of the Company's loss partially offset by the impact of the state tax valuation allowance. NET INCOME (LOSS)--As a result of the above, net loss increased by $54.8 million to a net loss of $58.7 million in 1995 from a net loss of $3.9 million in 1994. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity and capital resources have been cash generated from operations and borrowings under the Old Credit Facility. Net cash provided by operating activities was $29.2 million for the nine months ended September 28, 1997, $26.2 million in 1996, $27.8 million in 1995 and $38.4 million in 1994. Available borrowings under the Old Credit Facility were $27.0 million as of September 28, 1997, excluding $2.1 million of letter of credit availability. Additional sources of liquidity consist of capital and operating leases for financing leased restaurant locations (in malls and shopping centers and land or building leases), restaurant equipment, manufacturing equipment, distribution vehicles and computer equipment. Additionally, sales of under-performing existing restaurant properties and other assets (to the extent the Company's and its subsidiaries' debt instruments, if any, permit) are sources of cash. The amounts of debt financing that the Company will be able to incur under capital leases and for property and casualty insurance financing and the amount of asset sales by the Company will be limited by the terms of the New Credit Facility and the Indenture relating to the Senior Notes. See "Description of New Credit Facility" and "Description of Senior Notes." The Company requires capital principally to maintain existing restaurant and plant facilities, to continue to renovate and re-image existing restaurants, to convert restaurants, to construct new restaurants and for general corporate purposes. Since the TRC Acquisition, the Company has spent $270.3 million on capital expenditures, including $74.1 million on the renovation of restaurants under its revitalization program. The following table, which includes the 34 restaurants franchised to DavCo, presents for the periods indicated (i) the number of restaurants opened and closed during, and the number of restaurants open at the end of, each period, (ii) the number of restaurants in which (a) seating capacity was expanded, (b) certain exterior and interior renovation was completed under the original revitalization program and (c) certain re-imaging was completed under the FOCUS 2000 program and (iii) the aggregate number of restaurants expanded, revitalized and re-imaged since the TRC Acquisition and through the end of each period.
NINE MONTHS FISCAL YEAR ENDED ------------------------------------------------- SEPTEMBER 28, 1994 1995 1996 1997 --------------- --------------- --------------- ----------------- Restaurants opened.......................................... 8 1 3 2 Restaurants closed.......................................... 15 16 31 13 Restaurants open (end of period)............................ 750 735 707 696 Restaurants expanded........................................ 7 5 4 5 Aggregate restaurants expanded.............................. 12 17 21 26 Restaurants revitalized..................................... 67 14 16 9 Aggregate restaurants revitalized........................... 594 608 624 633 Aggregate restaurants re-imaged............................. -- -- -- 4
28 Net cash used in investing activities was $19.1 million for the nine months ended September 28, 1997, $20.3 million in 1996, $18.2 million in 1995 and $28.0 million in 1994. Capital expenditures for restaurant operations, including capitalized leases, were approximately $12.8 million in the nine months ended September 28, 1997, $22.6 million in 1996, $14.5 million in 1995 and $32.6 million in 1994. Capital expenditures were offset by proceeds from the sale of property and equipment of $4.8 million, $8.4 million, $0.9 million and $1.5 million in the nine months ended September 28, 1997, and in 1996, 1995 and 1994, respectively. The Company also uses capital to repay borrowings when cash is sufficient to allow for net repayments. Net cash used in financing activities to repay borrowings was $16.7 million for the nine months ended September 28, 1997, $11.0 million in 1996 and $7.9 million in 1994 as compared to net cash provided by financing activities of $0.2 million in 1995. The Company had a working capital deficit of $17.9 million as of September 28, 1997. The Company is able to operate with a substantial working capital deficit because (i) restaurant operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable, (ii) rapid turnover allows a limited investment in inventories and (iii) cash from sales is usually received before related accounts for food, supplies and payroll become due. The full amount of the Term Loan Facility will be drawn at the closing of the Offerings. Amounts repaid or prepaid under the Term Loan Facility may not be reborrowed. The Company's primary sources of liquidity and capital resources in the future will be cash generated from operations and borrowings under the Revolving Credit Facility and the Letter of Credit Facility. The Revolving Credit Facility will be a five-year facility providing for revolving loans to the Company in a principal amount not to exceed $55 million, including a $5 million sublimit for each of trade and standby letters of credit. The Letter of Credit Facility will mature contemporaneously with the Revolving Credit Facility and will provide for up to $15 million of standby letters of credit. It is expected that no amounts will initially be drawn under the Revolving Credit Facility and $2.1 million will be available under the Letter of Credit Facility at the consummation of the Recapitalization. These facilities are expected to be drawn in part, from time to time, to finance the Company's working capital and other general corporate requirements. See "Description of New Credit Facility." It is expected that the Term Loan Facility will require quarterly amortization payments beginning on April 15, 1999. Annual amortization amounts will total $4.7 million, $10.7 million, $12.7 million, $14.7 million, $18.7 million, $20.3 million and $23.5 million in 1999 through 2005, respectively. In addition to the scheduled amortization, it is expected that the Term Loan Facility will be permanently reduced by (i) specified percentages of each year's Excess Cash Flow (as defined in the New Credit Facility) and (ii) 100% of the aggregate net proceeds from asset sales not in the ordinary course of business and certain insurance claim proceeds, in each case, not re-employed within a specified period in the Company's business, exclusive of up to $7.5 million of aggregate net proceeds received from asset sales subsequent to the closing relating to the New Credit Facility. Such applicable proceeds and Excess Cash Flow shall be applied to the Term Loan Facility in inverse order of maturity. At the Company's option, loans may be prepaid at any time with certain notice and breakage cost provisions. 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 Company's Friendly's Restaurants Franchise, Inc. subsidiary and may also be so guaranteed by certain subsidiaries created or acquired after consummation of the Recapitalization. At the Company's option, the interest rates per annum applicable to the New Credit Facility will be either LIBOR (as defined in the New Credit Facility), plus a margin ranging from 2.25% to 2.75%, or the Alternative Base Rate (as defined in the New Credit Facility), plus a margin ranging from 0.75% to 1.25%. The Alternative Base Rate is the greater of (a) Societe Generale's Prime Rate or (b) the Federal Funds 29 Rate plus 0.50%. It is expected that after the first twelve calendar months of the New Credit Facility, pricing reductions will be available in certain circumstances. The Company anticipates requiring capital in the future principally to maintain existing restaurant and plant facilities, to continue to renovate and re-image existing restaurants, to convert restaurants and to construct new restaurants. Capital expenditures for the fourth quarter of 1997 and for 1998 are anticipated to be $64.3 million in the aggregate, of which $56.3 million will be spent on restaurant operations. See "Business--Restaurant Operations--Capital Investment Program" for a further description of the Company's estimated 1997 and 1998 capital expenditures. The Company's actual 1997 and 1998 capital expenditures may vary from the estimated amounts set forth herein. See "Risk Factors--Substantial Leverage; Stockholders' Deficit" for a discussion of certain factors, many of which are beyond the Company's control, that could affect the Company's ability to make its planned capital expenditures. In addition, the Company may need capital in connection with (i) commitments as of September 28, 1997 to purchase $51.2 million of raw materials, food products and supplies used in the normal course of business and (ii) its self-insurance through retentions or deductibles of the majority of its workers' compensation, automobile, general liability and group health insurance programs. The Company's self-insurance obligations may exceed its reserves. See Notes 12 and 15 of Notes to Consolidated Financial Statements. The Company believes that the combination of the funds anticipated to be generated from operating activities and borrowing availability under the New Credit Facility will be sufficient to meet the Company's anticipated operating and capital requirements for the foreseeable future. See "Risk Factors--Substantial Leverage; Stockholders' Deficit," "--History of Losses" and "--Restrictions Imposed Under New Credit Facility; Security Interest." OLD CREDIT FACILITY In January 1995, the Company and its lenders amended the Old Credit Facility as a result of certain covenant violations and, in connection therewith, the lenders were granted the right to receive a contingent payment in certain circumstances. In January 1996, the Old Credit Facility was amended and restated pursuant to which revolving credit and term loans totaling $373.6 million were converted to revolving credit loans of $38.5 million and term loans of $335.1 million. In connection therewith, the lenders received Class B common shares which increased their interests in the Company to an aggregate of 50% of the then-issued and outstanding common shares. As a result of the issuance of certain common shares to management and the exercise of certain warrants, additional common shares were issued to the lenders in 1996 to maintain their minimum equity interest at 47.5%. As a result of their ownership of Class B common shares, the lenders obtained the right to elect two of the five members of the Company's Board of Directors. The lenders were given the right to increased board representation and voting rights and the right to receive additional common shares upon certain events. As part of the Recapitalization, the Old Credit Facility will be repaid, the outstanding Class B common shares will be converted into shares of Common Stock, the ownership of such lenders will decrease to approximately 9.8% of the outstanding Common Stock (4.5% if the Underwriters' over-allotment option is exercised in full) and such lenders' nominees on the Board of Directors will be replaced. See "Management," "Ownership of Common Stock," "Shares Eligible for Future Sale," "Underwriting" and Note 7 of Notes to Consolidated Financial Statements. NET OPERATING LOSS CARRYFORWARDS As of December 29, 1996, the Company and its subsidiaries had a federal net operating loss ("NOL") carryforward of $40.1 million. Because of a change of ownership of the Company under Section 382 of the Internal Revenue Code on March 26, 1996 (see Note 9 of Notes to Consolidated Financial Statements), $29.7 million of the NOL carryforward can be used only to offset current or future taxable income to the 30 extent that net unrealized built-in gains which existed at March 26, 1996 are recognized by March 26, 2001. Accordingly, a valuation allowance has been recorded to offset the $29.7 million of the NOL carryforward. The consolidated balance sheet of the Company as of December 29, 1996 includes the tax effect of the remaining federal and state NOLs ("New NOLs") of $4.6 million for the periods prior to March 26, 1996 and $5.8 million for the period from March 27, 1996 to December 29, 1996. It is expected that the Common Stock Offering will result in the Company having another change of ownership under Section 382 of the Internal Revenue Code. Accordingly, in tax years ending after the Common Stock Offering, the Company will be limited in how much of its New NOLs it can utilize. The amount of New NOLs that can be utilized in any tax year ending after the date of the Common Stock Offering will be limited to an amount equal to the equity value of the Company immediately prior to the Common Stock Offering (without taking into account the proceeds of the Offerings) multiplied by the long-term tax exempt rate in effect for the month of the Common Stock Offering (5.3% for October 1997). While the limitation on the use of the New NOLs will delay when the New NOLs are utilized, the Company expects all of the New NOLs to be utilized before they expire. Accordingly, no valuation allowance is required related to any New NOLs. The NOLs expire, if unused, between 2001 and 2012. In addition, the NOL carryforwards are subject to adjustment upon review by the Internal Revenue Service. See Note 9 of Notes to Consolidated Financial Statements. INFLATION The inflationary factors which have historically affected the Company's results of operations include increases in cost of milk, sweeteners, purchased food, labor and other operating expenses. Approximately 17% of wages paid in the Company's restaurants are impacted by changes in the federal or state minimum hourly wage rate. Accordingly, changes in the federal or states minimum hourly wage rate directly affect the Company's labor cost. The Company is able to minimize the impact of inflation on occupancy costs by owning the underlying real estate for approximately 42% of its restaurants. The Company and the restaurant industry typically attempt to offset the effect of inflation, at least in part, through periodic menu price increases and various cost reduction programs. However, no assurance can be given that the Company will be able to offset such inflationary cost increases in the future. See "Risk Factors-- Regulation." SEASONALITY Due to the seasonality of frozen dessert consumption, and the effect from time to time of weather on patronage in its restaurants, the Company's revenues and EBITDA are typically higher in its second and third quarters. 31 BUSINESS GENERAL Friendly's is the leading full-service restaurant operator and has a leading position in premium frozen dessert sales in the Northeast. The Company owns and operates 662 and franchises 34 full-service restaurants and manufactures a complete line of packaged frozen desserts distributed through more than 5,000 supermarkets and other retail locations in 15 states. Friendly's offers its customers a unique dining experience by serving a variety of high-quality, reasonably-priced breakfast, lunch and dinner items, as well as its signature frozen desserts, in a fun and casual neighborhood setting. For the twelve-month period ended September 28, 1997, Friendly's generated $667.0 million in total revenues and $74.9 million in EBITDA (as defined herein) and incurred $44.0 million of interest expense. During the same period, management estimates that over $230 million of total revenues were from the sale of approximately 21 million gallons of frozen desserts. Friendly's restaurants target families with children and adults who desire a reasonably-priced meal in a full-service setting. The Company's menu offers a broad selection of freshly-prepared foods which appeal to customers throughout all day-parts. Breakfast items include specialty omelettes and breakfast combinations featuring eggs, pancakes and bacon or sausage. Lunch and dinner items include a new line of wrap sandwiches, entree salads, soups, super-melts, specialty burgers and new stir-fry, chicken, pot pie, tenderloin steak and seafood entrees. Friendly's is also recognized for its extensive line of ice cream shoppe treats, including proprietary products such as the Fribble-Registered Trademark-, Candy Shoppe-Registered Trademark- Sundaes and the Wattamelon Roll-Registered Trademark-. The Company believes that one of its key strengths is the strong consumer awareness of the Friendly's brand name, particularly as it relates to the Company's signature frozen desserts. This strength and the Company's vertically-integrated operations provide several competitive advantages, including the ability to (i) utilize its broad, high-quality menu to attract customer traffic across multiple day-parts, particularly the afternoon and evening snack periods, (ii) generate incremental revenues through strong restaurant and retail market penetration, (iii) promote menu enhancements and extensions in combination with its unique frozen desserts and (iv) control quality and maintain operational flexibility through all stages of the production process. Friendly's, founded in 1935, was publicly held from 1968 until January 1979, at which time it was acquired by Hershey Foods Corporation ("Hershey"). While owned by Hershey, the Company increased the total number of restaurants from 601 to 849 yet devoted insufficient resources to product development and capital improvements. In 1988, The Restaurant Company ("TRC"), an investor group led by Donald Smith, the Company's current Chairman, Chief Executive Officer and President, acquired Friendly's from Hershey (the "TRC Acquisition"). The high leverage associated with the TRC Acquisition and the Old Credit Facility severely impacted the liquidity and profitability of the Company and, therefore, limited the scope and implementation of certain of the Company's business and growth strategies. The Company has reported net losses and had earnings that were insufficient to cover fixed charges for each fiscal year since the TRC Acquisition except for the nine months ended September 28, 1997. As a result of subsequent restructurings, and upon completion of the Recapitalization and the Related Transactions, approximately 16.8% and 9.8% of the Common Stock will be owned by Company's employees and lenders under the Old Credit Facility, respectively. See "Risk Factors," "Selected Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Ownership of Common Stock." Despite the Company's capital constraints, management implemented a number of initiatives to restore and improve operational and financial efficiencies. From the date of the TRC Acquisition through 1994, the Company (i) implemented a major revitalization of its restaurants, (ii) repositioned the Friendly's concept from a sandwich and ice cream shoppe to a full-service, family-oriented restaurant with broader menu and day-part appeal, (iii) elevated customer service levels by recruiting more qualified managers and expanding the Company's training program, (iv) disposed of 123 under-performing restaurants and (v) 32 capitalized upon the Company's strong brand name recognition by initiating the sale of Friendly's unique line of packaged frozen desserts through retail locations. Beginning in 1994, the Company began implementing several growth initiatives including (i) testing and implementing a program to expand the Company's domestic distribution network by selling frozen desserts and other menu items through non-traditional locations, (ii) distributing frozen desserts internationally by introducing dipping stores in South Korea and the United Kingdom and (iii) implementing a franchising strategy to extend profitably the Friendly's brand without the substantial capital required to build new restaurants. As part of this strategy, on July 14, 1997 the Company entered into the DavCo Agreement. See "Prospectus Summary--Recent Developments." Implementation of these initiatives since the TRC Acquisition has resulted in substantial improvements in revenues and EBITDA. Despite the closing of 152 restaurants (net of restaurants opened) since the beginning of 1989 and periods of economic softness in the Northeast, the Company's restaurant revenues have increased 7.5% from $557.3 million in 1989 to $599.3 million in the twelve-months ended September 28, 1997, while average revenue per restaurant has increased 29.8% from $665,000 to $863,000 during the same period. Retail, institutional and other revenues and franchise revenues have also increased from $1.4 million in 1989 to $67.7 million in the twelve months ended September 28, 1997. In addition, EBITDA has increased 58.0% from $47.4 million in 1989 to $74.9 million in the twelve-month period ended September 28, 1997, while operating income has increased from $4.1 million to $42.0 million over the same period. Friendly's intends to utilize the increased liquidity and operating and financial flexibility resulting from consummation of the Recapitalization in order to continue to grow the Company's revenues and earnings by implementing the following key business strategies: (i) continuously upgrade the menu and introduce new products, (ii) revitalize and re-image existing Friendly's restaurants, (iii) construct new restaurants, (iv) enhance the Friendly's dining experience, (v) expand the restaurant base through high-quality franchisees, (vi) increase market share through additional retail accounts and restaurant locations, (vii) introduce modified formats of the Friendly's concept into non-traditional locations and (viii) extend the Friendly's brand into international markets. COMPETITIVE STRENGTHS THE COMPANY BELIEVES THAT, IN THE NORTHEAST, ITS LEADING POSITION IN FULL-SERVICE RESTAURANT AND PREMIUM FROZEN DESSERT SALES IS ATTRIBUTABLE TO THE FOLLOWING COMPETITIVE STRENGTHS: STRONG BRAND NAME RECOGNITION. During the past 60 years, management believes the Friendly's brand name has become synonymous with high-quality food and innovative frozen desserts. The Company believes that the brand name awareness created by its premium frozen dessert heritage drives customer traffic, particularly during the afternoon and evening snack periods, promotes menu enhancement and extension and generates incremental revenues from the Company's retail and non-traditional distribution channels. The Company's independent surveys indicate that, in the Northeast, over 90% of all households recognize the Friendly's brand and that over 30% of these households visit a Friendly's restaurant every three months. SIGNATURE FROZEN DESSERTS. Friendly's produces an innovative line of high-quality freshly-scooped and packaged frozen desserts, which have been cited by customers as a key reason for choosing Friendly's. Accordingly, approximately 50% of all visits to a Friendly's restaurant include a frozen dessert purchase. Freshly-scooped specialties served in Friendly's restaurants include the Jim Dandy and Oreo-Registered Trademark- Brownie sundaes, and the Fribble-Registered Trademark-, the Company's signature thick shake. Packaged goods available for purchase in both restaurant and retail locations include traditional and low-fat ice cream, yogurt and sorbets in half gallons, pints and cups and a wide variety of ice cream cakes, pies and rolls such as the Jubilee Roll-Registered Trademark- and Wattamelon Roll-Registered Trademark-. In addition, the Company licenses from Hershey the rights to feature in its signature desserts certain candy brands such as Almond Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-, Reeses Pieces-Registered Trademark-, Reeses-Registered Trademark- Peanut Butter Cups and York-Registered Trademark- Peppermint Patties. 33 BROAD, HIGH-QUALITY MENU. The Company has successfully capitalized on Friendly's reputation for high-quality, wholesome foods including the well-known $2.22 Breakfast, Big Beef-Registered Trademark- Hamburger, Fishamajig-Registered Trademark- Sandwich and Clamboat-Registered Trademark- Platter by extending these offerings into a broader product line including freshly-prepared omelettes, SuperMelt-TM- Sandwiches, Colossal Sirloin Burgers-TM-, tenderloin steaks and stir-fry entrees. Reflecting this increased menu variety, food products now account for over 70% of restaurant revenues, and guest check averages have increased significantly over the last five years. Friendly's also has an extensive Kid's Menu which encourages family dining due to the significant appeal to children of the Friendly's concept. MULTIPLE DAY-PART APPEAL. Due to the appeal of Friendly's frozen desserts, the Company generates approximately 35% of its restaurant revenues during the afternoon and evening snack periods (2:00 p.m. to 5:00 p.m. and 8:00 p.m. to closing), providing Friendly's with the highest share of snack day-part sales in the Northeast. Accordingly, the Company endeavors to maximize revenue across multiple day-parts by linking sales of its high-margin frozen desserts with its lunch and dinner entrees. The Company generates approximately 12%, 24% and 29% of restaurant revenues from breakfast, lunch and dinner, respectively. STRONG RESTAURANT AND RETAIL MARKET PENETRATION. The Company has the highest market share among full-service restaurants and a leading position in premium frozen dessert sales in the Northeast. The Company's strong restaurant and retail market penetration provides incremental revenues and cash flow, as multiple levels of visibility and availability provide cross promotion opportunities and enhance consumer awareness and trial of the Company's unique products while effectively targeting consumers for both planned and impulse purchases. For example, the new Colossal Sirloin Burger-TM- was introduced with a new 79 CENTS Caramel Fudge Blast-TM- Sundae during the spring of 1997. In addition to promoting sales of this new entree, this strategy increased consumer awareness and trial of the new sundae combination, which in turn supported the introduction of Caramel Fudge Nut Blast-TM- Sundae half gallons into restaurants and retail locations. VERTICALLY-INTEGRATED OPERATIONS. Friendly's vertically-integrated operations are designed to deliver the highest quality food and frozen desserts to its customers and to allow the Company to adapt to evolving customer tastes and preferences. The Company formulates new products and upgrades existing food and frozen desserts through its research and development group and controls all stages in the production of its frozen desserts through its two manufacturing facilities. In addition, the Company controls cost and product quality and efficiently manages inventory levels from point of purchase through restaurant delivery utilizing its three distribution facilities and fleet of 56 tractors and 81 trailers. Furthermore, Friendly's maximizes its purchasing power when sourcing materials and services for its restaurant and retail operations through its integrated purchasing department. MANAGEMENT EXPERIENCE AND EMPLOYEE RETENTION. The Company has a talented senior management team with extensive restaurant industry experience and an average tenure with the Company of 17 years. In addition, the Company minimizes turnover of both managers and line personnel through extensive employee training and retention programs. In 1996, the Company's turnover among its restaurant salaried management was approximately 24%, which was significantly lower than the industry average. BUSINESS STRATEGIES FRIENDLY'S OBJECTIVE IS TO CAPITALIZE ON ITS COMPETITIVE STRENGTHS TO GROW ITS RESTAURANT AND RETAIL OPERATIONS BY IMPLEMENTING THE FOLLOWING KEY BUSINESS STRATEGIES: UPGRADE MENU AND SELECTIVELY INTRODUCE NEW PRODUCTS. Friendly's strategy is to increase consumer awareness and restaurant patronage by continuously upgrading its menu and introducing new products. As part of this strategy, Friendly's dedicated research and development group regularly formulates proprietary new menu items and frozen desserts to capitalize on the evolving tastes and preferences of its customers. In the fall of 1996, the Company introduced a new dinner line which includes a high-quality steak entree, home-style chicken dinners, pot pies and stir-frys, as well as several premium frozen desserts including the 34 new Oreo-Registered Trademark- Brownie Sundae. Largely as a result of new premium items, guest check averages have increased 7.4% during the first nine months of 1997 as compared to the same period of 1996. REVITALIZE AND RE-IMAGE RESTAURANTS. Friendly's seeks to continue to grow restaurant revenues and cash flow through the ongoing revitalization and re-imaging of existing restaurants and to increase total restaurant revenues through the addition of new restaurants. The Company has revitalized approximately 633 restaurants since the beginning of 1989, increasing average restaurant revenues from $665,000 in 1989 to $863,000 in the twelve months ended September 28, 1997. Further, the Company has initiated its FOCUS 2000 program which includes an advanced re-imaging of restaurants and the installation of custom designed restaurant automation systems in a majority of its restaurants. In addition, as part of its ongoing capital spending program, the Company plans to refurbish substantially all of its restaurants every five to six years to further enhance customer appeal. The Company also expects to increase market share through the opening of four new Company-owned restaurants in 1997 (two of which have opened to date) and 10 new restaurants in 1998. ENHANCE THE FRIENDLY'S DINING EXPERIENCE. In addition to menu upgrades and restaurant re-imaging, the FOCUS 2000 program includes initiatives to improve food presentation and customer service. The Company believes that implementation of this program will create a consistent, enhanced Friendly's restaurant brand image. This strategy recognizes that food quality, dining atmosphere and attentive service all contribute to customer satisfaction. The Company maintains a consistently high standard of food preparation and customer service through stringent operational controls and intensive employee training. To help guarantee that employees perform in this manner, Friendly's maintains a dedicated training and development center where managers are thoroughly trained in customer service. EXPAND RESTAURANT BASE AND MARKET PENETRATION THROUGH HIGH-QUALITY FRANCHISEES. Friendly's is implementing a franchising strategy to further develop the Friendly's brand and grow both revenue and cash flow without the substantial capital required to build new restaurants. This strategy seeks to (i) expand its restaurant presence in under-penetrated markets, (ii) accelerate restaurant growth in new markets, (iii) increase marketing and distribution efficiencies and (iv) preempt the Company's competition from acquiring certain prime real estate sites. Friendly's will receive a royalty based on total franchisee revenues and revenues and earnings from the sale of its frozen desserts and other products to franchisees. INCREASE MARKET SHARE OF PREMIUM FROZEN DESSERTS. Capitalizing on its position as a recognized leader in premium frozen desserts, Friendly's seeks to increase its market share. The Company expects to build market share by expanding distribution beyond its 696 Company-owned and franchised restaurants and its more than 5,000 retail locations by (i) adding new locations, (ii) increasing shelf space in current locations through new product introductions and more prominent freezer displays and (iii) increasing consumer and trade merchandising. INTRODUCE MODIFIED FORMATS INTO NON-TRADITIONAL LOCATIONS. In order to capitalize on both planned and impulse purchases, the Company is leveraging the Friendly's brand name and enhancing consumer awareness by introducing modified formats of the Friendly's concept into non-traditional locations. These modified formats include (i) Friendly's Cafe, a quick service concept offering frozen desserts and a limited menu, (ii) Friendly's branded ice cream shoppes offering freshly-scooped and packaged frozen desserts and (iii) Friendly's branded display cases and novelty carts with packaged single-serve frozen desserts. The first Friendly's Cafe opened in October 1997. The Company supplies frozen desserts to non-traditional locations such as colleges and universities, sports facilities, amusement parks, secondary school systems and business cafeterias directly or through selected vendors pursuant to multi-year license agreements. EXTEND THE FRIENDLY'S BRAND INTERNATIONALLY. The Company's long-term international growth strategy is to utilize local partners and establish master franchise or licensee agreements to extend the brand internationally and to achieve profitable growth while minimizing capital investment. Currently, the Company's Friendly's International, Inc. subsidiary ("FII") participates in a licensing agreement with a South Korean enterprise to develop Friendly's "Great American" ice cream shoppes in that country. As of 35 September 28, 1997, the licensee and its sublicensees were operating 18 ice cream shoppes, and the Company expects such parties to operate 28 ice cream shoppes by the end of 1997. FII also sells the Company's frozen desserts in several chain restaurants, theaters and food courts in the United Kingdom. The Company selects its international markets based on the high quality of the Company's frozen desserts relative to locally-produced frozen desserts and the propensity of consumers in these regions to purchase American-branded products. RESTAURANT OPERATIONS MENU Friendly's believes it provides significant value to consumers by offering a wide variety of freshly-prepared, wholesome foods and frozen desserts at a reasonable price. The menu currently features over 100 items comprised of a broad selection of breakfast, lunch, dinner and afternoon and evening snack items. Breakfast items include specialty omelettes and breakfast combinations featuring eggs, pancakes and bacon or sausage. Breakfasts generally range from $2.00 to $6.00 and account for approximately 12% of average restaurant revenues. Lunch and dinner items include a new line of wrap sandwiches, entree salads, soups, super-melts, specialty burgers, appetizers including quesadillas, mozzarella cheese sticks and "Fronions," and stir-fry, chicken, pot pie, tenderloin steak and seafood entrees. These lunch and dinner items generally range from $4.00 to $9.00, and these day-parts account for approximately 53% of average restaurant revenues. Entree selections are complemented by Friendly's premium frozen desserts, including the Fribble-Registered Trademark-, the Company's signature thick shake, Happy Ending-Registered Trademark- Sundaes and fat-free Sorbet Smoothies. The Company's frozen desserts are an important component of the success of the Company's snack day-part which accounts for 35% of average restaurant revenues. RESTAURANT LOCATIONS AND PROPERTIES The table below identifies the location of the 696 restaurants operating as of September 28, 1997.
COMPANY-OWNED/LEASED ------------------------------------ FREESTANDING OTHER FRANCHISED TOTAL STATE RESTAURANTS RESTAURANTS (A) RESTAURANTS (B) RESTAURANTS - ----------------------------------------------------- --------------- ------------------- ------------------- --------------- Connecticut.......................................... 49 20 -- 69 Delaware............................................. -- 1 6 7 Florida.............................................. 13 2 -- 15 Maine................................................ 10 -- -- 10 Maryland............................................. 3 7 22 32 Massachusetts........................................ 116 37 -- 153 Michigan............................................. 1 -- -- 1 New Hampshire........................................ 14 6 -- 20 New Jersey........................................... 47 18 -- 65 New York............................................. 130 34 -- 164 Ohio................................................. 57 3 -- 60 Pennsylvania......................................... 51 13 -- 64 Rhode Island......................................... 8 -- -- 8 Vermont.............................................. 7 3 -- 10 Virginia............................................. 10 2 6 18 --- --- --- --- Total............................................ 516 146 34 696
- ------------------------ (a) Includes primarily malls and strip centers. (b) The franchised restaurants (representing 30 freestanding and four other restaurants) have been leased or subleased to DavCo pursuant to the DavCo Agreement. See "Prospectus Summary--Recent Developments." 36 The 546 freestanding restaurants, including 30 franchised to DavCo, range in size from approximately 2,600 square feet to approximately 5,000 square feet. The 150 mall and strip center restaurants, including four franchised to DavCo, average approximately 3,000 square feet. Of the 662 restaurants operated by the Company at September 28, 1997, the Company owned the buildings and the land for 279 restaurants, owned the buildings and leased the land for 145 restaurants, and leased both the buildings and the land for 238 restaurants. The Company's leases generally provide for the payment of fixed monthly rentals and related occupancy costs (e.g. property taxes, common area maintenance and insurance). Additionally, most mall and strip center leases require the payment of common area maintenance charges and incremental rent of between 3.0% and 6.0% of the restaurant's sales. RESTAURANT ECONOMICS During the twelve-month period ended September 28, 1997, average revenue per restaurant was $863,000, average restaurant cash flow was $153,000 (after rent expense of $20,000) and average restaurant operating income was $121,000. Average cash flow represents operating income before depreciation and amortization. Average revenue per restaurant for the 232 freestanding restaurants with more than 100 seats was $1,099,000, average revenue per restaurant for the 285 freestanding restaurants with less than 100 seats was $694,000 and average revenue per restaurant for the 145 other restaurants was $818,000. The Company has opened 12 new restaurants since the beginning of 1994, nine of which had been operating for at least 12 months as of September 28, 1997. Such nine restaurants, which had an average of 136 seats, generated average revenue per restaurant of $1,201,000, average restaurant cash flow of $186,000 (after rent expense of $91,000) and average restaurant operating income of $130,000. The average cash investment to open such nine restaurants (all of which were conversions) was approximately $460,000, excluding pre-opening expenses, or $1,394,000 including rent expense capitalized at 9.0%. Pre-opening expenses were approximately $85,000 per restaurant. The Company plans to continue to convert restaurants and estimates that conversions will cost $500,000 to $600,000 per restaurant, excluding land and pre-opening expenses. The Company converted a 178-seat restaurant in Burlington, Vermont in December 1996 at a cost of $540,000, or $1,568,000 including rent expense capitalized at 9.0%. This restaurant has achieved average weekly revenues of $36,000 through September 28, 1997. The Company also converted a 136-seat restaurant in Berlin, Vermont in September 1997 at a cost of approximately $500,000, or approximately $972,000 including rent expense capitalized at 9.0%. While conversions generally cost less than new construction, the Company plans to selectively construct new restaurants when the anticipated return is sufficient to warrant the increased cost of new construction. The Company has developed two new freestanding restaurant prototypes for construction, including 108-seat and 156-seat prototypes, which are anticipated to cost approximately $730,000 and $780,000 per restaurant, respectively, excluding land and pre-opening expenses. Pre-opening expenses are estimated to be $85,000 per restaurant. The Company opened its first 156-seat prototype restaurant in Waterville, Maine in July 1997 at a cost of $800,000, or $1,080,000 including rent expense capitalized at 9.0%. CAPITAL INVESTMENT PROGRAM A significant component of the Company's capital investment program is the FOCUS 2000 initiative which is designed to establish a consistent, enhanced Friendly's brand image across the Company's entire restaurant operations. The Company's capital spending strategy seeks to increase comparable restaurant revenues and restaurant cash flow through the on-going revitalizing and re-imaging of existing restaurants and to increase total restaurant revenues through the addition of new restaurants. The following illustrates the key components of the Company's capital spending program. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Description of New Credit Facility." 37 RESTAURANT RE-IMAGING. The Company expects to complete the re-imaging of 70 restaurants in 1997 (12 of which have been completed to date) at an estimated cost of $120,000 per restaurant (not including $850,000 of one time costs related to development of the prototype). This cost typically includes interior and exterior redecoration and a new exterior lighting package. The Company expects to complete the re-imaging of approximately 110 restaurants during 1998. NEW RESTAURANT CONVERSION AND CONSTRUCTION. The Company has converted one restaurant in 1997 at a cost of approximately $500,000. The Company expects to construct three new restaurants in 1997 (one of which has been completed to date) at an estimated cost of approximately $800,000 per restaurant, excluding land and pre-opening expenses. The Company expects to complete the conversion or construction of approximately ten restaurants during 1998. SEATING CAPACITY EXPANSION PROGRAM. Since the TRC Acquisition and through September 28, 1997, the Company has expanded seating capacity by an average of 50 seats at 26 restaurants at an average cost of $292,000 per restaurant. Revenue per restaurant increased approximately 24% in the full year following completion of this expansion compared to the comparable prior period. The Company expects to complete the expansion of seven restaurants in 1997 (five of which have been completed to date) at an estimated cost of $244,000 per restaurant. This cost typically includes adding 50 seats per restaurant, relocating certain equipment and increasing parking capacity where necessary. The Company expects to complete the expansion of approximately four restaurants during 1998. INSTALLATION OF RESTAURANT AUTOMATION SYSTEMS. Since the TRC Acquisition and through September 28, 1997, the Company has installed touch-screen point of sale ("POS") register systems in approximately 340 restaurants at an average cost of $34,000 per restaurant. These POS register systems are designed to improve revenue realization, food cost management and labor scheduling while increasing the speed and accuracy of processing customer orders. The Company expects to install POS register systems in approximately 40 restaurants during 1998. FRANCHISING PROGRAM The Company recently initiated a franchising strategy to expand its restaurant presence in under-penetrated markets, accelerate restaurant growth in new markets, increase marketing and distribution efficiencies and preempt competition by acquiring restaurant locations in the Company's targeted markets. With the substantial completion of the Company's restaurant revitalization program, the development and initial deployment of its two new freestanding restaurant prototypes and the successful introduction of its new dinner line, the Company believes it is in a position to maximize the value of its brand appeal to prospective franchisees. The Company's wholly owned subsidiary, Friendly's Restaurants Franchise, Inc. ("FRFI") commenced operations in 1996 for the purpose of franchising various restaurant concepts. Since it began operations, FRFI has developed and now offers a franchise program for both Friendly's restaurants and Friendly's Cafes. The Company seeks franchisees who have related business experience, capital adequacy to build-out the Friendly's concept and no operations which have directly competitive restaurant or food concepts. On July 14, 1997, the Company entered into the DavCo Agreement pursuant to which DavCo purchased certain assets and rights in 34 existing Friendly's restaurants in Maryland, Delaware, the District of Columbia and northern Virginia, committed to open an additional 74 restaurants over the next six years and, subject to the fulfillment of certain conditions, further agreed to open 26 additional restaurants, for a total of 100 new restaurants in this franchising region over the next ten years. QUALITY CONTROL PROGRAMS The Company's high quality standards are promoted through strict product specifications, guest service programs and defined daily operating systems and procedures for maintenance, cleanliness and safety. Policy and operating manuals and video support materials for employee training are maintained in all Friendly's restaurants. The Company uses a variety of guest feedback systems to measure, monitor and 38 react to service performance including comment cards, "800" telephone call-in lines, guest commentary follow-up systems, focus groups and an independent quarterly consumer tracking study conducted by National Purchase Diary, Inc. The Company's customer service center is implementing a chainwide program to receive and log customer feedback by restaurant and to report monthly to field management. All levels of field management are directly responsible for and evaluated according to guest satisfaction levels. CARRYOUT OPERATIONS Through dedicated carryout areas, Friendly's restaurants offer the Company's full line of frozen desserts and certain of its food menu items. Reserved parking is available at many of the Company's free-standing restaurants to facilitate quick carryout service. Approximately 15% of the Company's average freestanding restaurant revenues are derived from its carryout business with a significant portion of these sales occurring during the afternoon and evening snack periods. Of this 15%, approximately 5% comes from sales of packaged frozen desserts in display cases within its restaurants. RETAIL AND RELATED OPERATIONS RETAIL OPERATIONS In 1989, the Company extended its premium packaged frozen dessert line from its restaurants into retail locations. The Company has profitably grown its revenue from the sale of such products to retail outlets from $1.4 million in 1989 to $60.1 million in the twelve months ended September 28, 1997. The Company offers a branded product line that includes approximately 60 half gallon varieties featuring premium ice cream shoppe flavors and unique sundae combinations, low and no fat frozen yogurt, low fat ice cream and sherbet. Specialty flavors include Royal Banana Split, Cappuccino Dream-TM- and Caramel Fudge Nut Blast-TM-, and proprietary products include the Jubilee Roll-Registered Trademark-, Wattamelon Roll-Registered Trademark- and Friendly's branded ice cream cakes and pies. The Company also licenses from Hershey the right to feature certain candy brands including Almond Joy-Registered Trademark-, Mr. Goodbar-Registered Trademark-, Reese's Pieces-Registered Trademark-, Reese's-Registered Trademark- Peanut Butter Cups and York-Registered Trademark- Peppermint Patties on packaged sundae cups and pints. See "Licenses and Trademarks." The Company focuses its marketing and distribution efforts in areas where it has higher restaurant penetration and consumer awareness. During the initial expansion of its retail business in 1989 and 1990, Albany, Boston and Hartford/Springfield were primary markets of opportunity, currently with 35, 118 and 95 restaurant locations, respectively. Targeting other markets with high growth potential and strong Friendly's brand awareness, the Company added the New York and Philadelphia markets, currently with 135 and 64 restaurants, respectively, to its retail distribution efforts in 1992 and 1993. According to recent A.C. Nielsen reports, the Company currently maintains a weighted average market share of approximately 11% in the Albany, Boston and Hartford/Springfield markets and 4% in the New York and Philadelphia markets. The Company expects to continue building its retail distribution business by increasing market share in its current retail markets. In these markets, the Company intends to increase shelf space with existing accounts and add new accounts by (i) capitalizing on its integrated restaurant and retail consumer advertising and promotion programs, (ii) continuing new product introductions and (iii) improving trade merchandising initiatives. Additionally, the Company expects to continue to selectively enter new markets where its brand awareness is high according to market surveys. In Pittsburgh, where the Company currently has no restaurants, the Company has a packaged frozen dessert market share of approximately 4%, according to A.C. Nielsen. The Company has developed a broker/distributor network designed to protect product quality through proper product handling and to enhance the merchandising of the Company's frozen desserts. The Company's experienced sales force manages this network to serve specific retailer needs on a market-by- 39 market basis. In addition, the Company's retail marketing and sales departments coordinate market development plans and key account management programs. NON-TRADITIONAL LOCATIONS In order to capitalize on both planned and impulse purchases, the Company is leveraging the Friendly's brand name and enhancing consumer awareness by introducing modified formats of the Friendly's concept into non-traditional locations. These modified formats include (i) Friendly's Cafe, a quick service concept offering frozen desserts and a limited menu, (ii) Friendly's branded ice cream shoppes offering freshly-scooped and packaged frozen desserts and (iii) Friendly's branded display cases and novelty carts with packaged single-serve frozen desserts. The first Friendly's Cafe opened in October 1997. The Company supplies frozen desserts to non-traditional locations such as colleges and universities, sports facilities, amusement parks, secondary school systems and business cafeterias directly or through selected vendors pursuant to multi-year license agreements. INTERNATIONAL OPERATIONS The Company, through its FII subsidiary, has a master license agreement with a South Korean enterprise to develop Friendly's "Great American" ice cream shoppes offering freshly-scooped and packaged frozen desserts. As of September 28, 1997, the licensee and its sublicensees were operating 18 ice cream shoppes, and the Company expects such parties to operate 28 ice cream shoppes by the end of 1997. FII also has various licensing arrangements with several companies in the United Kingdom under which certain of the Company's frozen desserts are distributed in the United Kingdom. The Company's strategy in the United Kingdom is to sell Friendly's branded frozen deserts in full and quick-service restaurants, movie theaters, railway and bus stations, shopping malls and airport locations pursuant to license agreements. Non-restaurant locations will vary from full dipping stations to sundae station kiosks or sundae carts. In addition, the Company's products will be distributed to selected retailers for resale. In addition, the Company is a 50% partner in a joint venture in Shanghai, China which has manufactured and distributed frozen desserts on a limited basis. The joint venture is currently seeking additional distribution for its products in China. In markets where a capital investment by the Company is required to introduce its brand, the Company seeks to monetize such investment by entering into franchising or licensing arrangements, and subsequently to redeploy its capital, if necessary, into new international markets. The Company believes that there are significant growth opportunities within South Korea, the United Kingdom and China, as well as in other countries, in particular those within the Pacific Rim. MARKETING The Company's marketing strategy is to continue to strengthen Friendly's brand equity and further capitalize on its strong customer awareness to profitably build revenues across all businesses. The primary advertising message, built around its "Leave room for the ice cream-TM-" slogan, focuses on introducing new lunch and dinner products or line extensions in combination with unique frozen desserts. For example, in 1996, Friendly's introduced a new line of steak dinners and promoted trial of the line with a free Happy Ending-Registered Trademark- Sundae. Management utilizes this strategy to encourage consumer trial of new products and increase the average guest check while reinforcing Friendly's unique food-with-ice-cream experience. The Company's food-with-ice-cream promotions also build sales of packaged frozen desserts in its restaurants and in retail locations. The Company's media plan is designed to build awareness and increase trial among key target audiences while optimizing spending by market based on media cost efficiencies. The Company classifies markets based upon restaurant penetration and the resulting advertising and promotion costs per restaurant. The Company's 19 most highly-penetrated markets are supported with regular spot television advertisements from March through December. The Company augments its marketing efforts in these markets with radio advertising to target the breakfast day-part or to increase the frequency of the 40 promotional message. In addition, the Company supports certain of these highly-penetrated markets (Albany, Boston, Hartford-Springfield and Providence) during the peak summer season with additional television media focusing on freshly-scooped and packaged frozen desserts. In its secondary markets, the Company utilizes more cost-effective local store marketing initiatives such as radio, direct mail and newspaper advertising. All of the Company's markets are supported with an extensive promotional coupon program. The Company believes that its integrated restaurant and retail marketing efforts provide a significant competitive advantage supporting development of its retail business. Specifically, the retail business benefits from the awareness and trial of Friendly's product offerings generated by 32 weeks of food-with-ice-cream advertising and couponing efforts. The Company believes that this approach delivers a significantly higher level of consumer exposure and usage compared to the Company's packaged frozen dessert competitors which have only retail distribution. In turn, sales of the Company's products through more than 5,000 retail locations, supported by trade merchandising efforts, build incremental awareness and usage of Friendly's which management believes benefits the restaurants. The Company estimates that advertising and promotion expenditures will be approximately $20 million for 1997. MANUFACTURING The Company produces substantially all of its frozen desserts in two Company-owned manufacturing plants which employ a total of approximately 300 people. The Wilbraham, Massachusetts plant occupies approximately 41,000 square feet of manufacturing space while the Troy, Ohio plant utilizes approximately 18,000 square feet. During 1996, the combined plants operated at an average capacity of 68.0% and produced (i) over 17.0 million gallons of ice cream, sherbets and yogurt in bulk, half-gallons and pints, (ii) nine million sundae cups, (iii) 2.5 million frozen dessert rolls, pies and cakes and (iv) more than 1.4 million gallons of fountain syrups and toppings. The Company, through its Shanghai, China joint venture, also owns a 13,000 square foot ice cream manufacturing facility. The quality of the Company's products is important, both to sustain Friendly's image and to enable the Company to satisfy customer expectations. Wherever possible, the Company "engineers in" quality by installing modern processes such as computerized mix-making equipment and monitoring devices to ensure all storage tanks and rooms are kept at proper temperatures for maximum quality. PURCHASING AND DISTRIBUTION In conjunction with the Company's product development department, the Company's purchasing department evaluates the cost and quality of all major food items on a quarterly basis and purchases these items through numerous vendors with which it has long-term relationships. The Company contracts with vendors on an annual, semiannual, or monthly basis depending on the item and the opportunities within the marketplace. In order to promote competitive pricing and uniform vendor specifications, the Company contracts directly for such products as produce, milk and bread and other commodities and services. The Company also minimizes the cost of all restaurant capital equipment by purchasing directly from manufacturers or pooling volumes with master distributors. The Company owns two distribution centers and leases a third which allow the Company to control quality, costs and inventory from the point of purchase through restaurant delivery. The Company distributes most product lines to its restaurants, and its packaged frozen desserts to its retail customers, from warehouses in Chicopee and Wilbraham, Massachusetts and Troy, Ohio with a combined non-union workforce of approximately 250 employees. The Company's truck fleet delivers all but locally-sourced produce, milk and selected bakery products to its restaurants at least weekly, and during the highest-sales periods, delivers to over 50% of Friendly's restaurants twice-per-week. The Chicopee, Wilbraham and Troy warehouses encompass 54,000 square feet, 109,000 square feet and 42,000 square feet, respectively. The Company believes that these distribution facilities operate at or above industry standards with respect to timeliness and accuracy of deliveries. 41 The Company has distributed its products since its inception to protect the product integrity of its frozen desserts. The Company delivers products to its restaurants on its own fleet of 56 tractors and 81 trailers which display large-scale images of the Company's featured products. The entire fleet is specially built to be compatible with storage access doors, thus protecting frozen desserts from "temperature shock." Recently acquired trailers have an innovative design which provides individual temperature control for three distinct compartments. To provide additional economies to the Company, the truck fleet backhauls on over 50% of its delivery trips, bringing the Company's purchased raw materials and finished products back to the distribution centers. HUMAN RESOURCES AND TRAINING The average Friendly's restaurant employs between two and four salaried team members, which may include one General Manager, one Assistant Manager, one Guest Service Supervisor and one Manager-in-Training. The General Manager is directly responsible for day-to-day operations. General Managers report to a District Manager who typically has responsibility for an average of seven restaurants. District Managers report to a Division Manager who typically has responsibility for approximately 50 restaurants. Division Managers report to a Regional Vice President who typically has responsibility for six or seven Division Managers covering approximately 350 restaurants. The average Friendly's restaurant is staffed with four to ten employees per shift, including the salaried restaurant management. Shift staffing levels vary by sales volume level, building configuration and time of day. The average restaurant typically utilized approximately 37,500 hourly-wage labor hours in 1996 in addition to salaried management. To maintain its high service and quality standards, Friendly's has developed its Restaurant Leadership Team ("RLT"). The RLT is comprised of highly-qualified management employees, each of whom has received extensive training in Company policies and procedures, as well as applicable federal, state and local regulations. This team approach helps to ensure that the Company has the strong leadership and management staff required to efficiently operate Friendly's restaurants, provide quality service to customers and develop a pool of well-qualified management candidates. These management candidates undergo extensive training at the Company's dedicated training and development center. Moreover, the Company has significantly improved its human resources training to include sexual harassment, racial discrimination, diversity, employment practices, government regulations, selection and assessment and other programs. The Company also requires its District and Division Managers to participate in training and development programs, provides courses to improve management skills and offers development support for its headquarters employees. EMPLOYEES The total number of employees at the Company varies between 24,000 and 28,000 depending on the season of the year. As of September 28, 1997, the Company employed approximately 24,000 employees, of which approximately 23,000 were employed in Friendly's restaurants (including 120 in field management), approximately 550 were employed at the Company's two manufacturing and three distribution facilities and approximately 450 were employed at the Company's corporate headquarters and other offices. None of the Company's employees is a party to a collective bargaining agreement. HEADQUARTERS AND OTHER NON-RESTAURANT PROPERTIES In addition to the Company's restaurants, the Company owns (i) an approximately 260,000 square foot facility on 46 acres in Wilbraham, Massachusetts which houses the corporate headquarters, a manufacturing facility and a warehouse, (ii) an approximately 77,000 square foot office, manufacturing and warehouse facility on 13 acres in Troy, Ohio and (iii) an approximately 18,000 square foot restaurant construction and 42 maintenance service facility located in Wilbraham, Massachusetts. The Company leases (i) an approximately 60,000 square foot distribution facility in Chicopee, Masschusetts, (ii) an approximately 38,000 square foot restaurant construction and maintenance support facility in Ludlow, Massachusetts and (iii) on a short-term basis, space for its division and regional offices, its training and development center and other support facilities. LICENSES AND TRADEMARKS The Company is the owner or licensee of the trademarks and service marks (the "Marks") used in its business. The Marks "Friendly-Registered Trademark-" and "Friendly's-Registered Trademark-" are owned by the Company pursuant to registrations with the U.S. Patent and Trademark office. Upon the sale of the Company by Hershey in 1988, all of the Marks used in the Company's business at that time which did not contain the word "Friendly" as a component of such Marks (the "1988 Non-Friendly Marks"), such as Fribble-Registered Trademark-, Fishamajig-Registered Trademark- and Clamboat-Registered Trademark- were licensed by Hershey to the Company. The 1988 Non-Friendly Marks license has a term of 40 years expiring on September 2, 2028. Such license included a prepaid license fee for the term of the license which is renewable at the Company's option for an additional term of 40 years and has a license renewal fee of $20.0 million. Hershey also entered into non-exclusive licenses with the Company for certain candy trademarks used by the Company in its frozen dessert sundae cups (the "Cup License") and pints (the "Pint License"). The Cup License and Pint License automatically renew for unlimited one-year terms subject to certain nonrenewal rights held by both parties. Hershey is subject to a noncompete provision in the sundae cup business for a period of two years if the Cup License is terminated by Hershey without cause, provided that the Company maintains its current level of market penetration in the sundae cup business. However, Hershey is not subject to a noncompete provision if it terminates the Pint License without cause. The Company also has a non-exclusive license agreement with Leaf, Inc. ("Leaf") for use of the Heath-Registered Trademark- Bar candy trademark. The term of the royalty-free Leaf license continues indefinitely subject to termination by Leaf upon 60 days notice. Excluding the Marks subject to the licenses with Hershey and Leaf, the Company is the owner of its Marks. COMPETITION The restaurant business is highly competitive and is affected by changes in the public's eating habits and preferences, population trends and traffic patterns, as well as by local and national economic conditions affecting consumer spending habits, many of which are beyond the Company's control. Key competitive factors in the industry are the quality and value of the food products offered, quality and speed of service, attractiveness of facilities, advertising, name brand awareness and image and restaurant location. Each of the Company's restaurants competes directly or indirectly with locally-owned restaurants as well as restaurants with national or regional images, and to a limited extent, restaurants operated by its franchisees. A number of the Company's significant competitors are larger or more diversified and have substantially greater resources than the Company. The Company's retail operations compete with national and regional manufacturers of frozen desserts, many of which have greater financial resources and more established channels of distribution than the Company. Key competitive factors in the retail food business include brand awareness, access to retail locations, price and quality. GOVERNMENT REGULATION The Company is subject to various Federal, state and local laws affecting its business. Each Friendly's restaurant is subject to licensing and regulation by a number of governmental authorities, which include health, safety, sanitation, building and fire agencies in the state or municipality in which the restaurant is located. Difficulties in obtaining or failures to obtain required licenses or approvals, or the loss of such licences and approvals once obtained, can delay, prevent the opening of, or close, a restaurant in a 43 particular area. The Company is also subject to Federal and state environmental regulations, but these have not had a material adverse effect on the Company's operations. The Company's relationships with its current and potential franchisees is governed by the laws of its several states which regulate substantive aspects of the franchisor-franchisee relationship. Substantive state laws that regulate the franchisor-franchisee relationship presently exist or are being considered in a substantial number of states, and bills have been introduced in Congress (one of which is now pending) which would provide for Federal regulation of substantive aspects of the franchisor-franchisee relationship. These current and proposed franchise relationship laws limit, among other things, the duration and scope of non-competition provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate sources of supply. The Company's restaurant operations are also subject to Federal and state laws governing such matters as wages, working conditions, citizenship requirements and overtime. Some states have set minimum wage requirements higher than the Federal level, and the Federal government recently increased the Federal minimum wage. In September 1997, the second phase of an increase in the minimum wage was implemented in accordance with the Federal Fair Labor Standards Act of 1996. Significant numbers of hourly personnel at the Company's restaurants are paid at rates related to the Federal minimum wage and, accordingly, increases in the minimum wage will increase labor costs at the Company's restaurants. Other governmental initiatives such as mandated health insurance, if implemented, could adversely affect the Company as well as the restaurant industry in general. The Company is also subject to the Americans with Disabilities Act of 1990, which, among other things, may require certain minor renovations to its restaurants to meet federally-mandated requirements. The cost of these renovations is not expected to be material to the Company. LEGAL PROCEEDINGS From time to time the Company is named as a defendant in legal actions arising in the ordinary course of its business. The Company is not party to any pending legal proceedings other than routine litigation incidental to its business. The Company does not believe that the resolutions of these claims should have a material adverse effect on the Company's financial condition or results of operations. 44 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY The executive officers and directors of the Company and their respective ages and positions with the Company are as follows:
NAME AGE POSITION WITH COMPANY - ------------------------------ --- --------------------------------------------------------------------------- Donald N. Smith 57 Chairman, Chief Executive Officer and President Paul J. McDonald 53 Senior Executive Vice President, Chief Administrative Officer and Assistant Secretary Joseph A. O'Shaughnessy 61 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 39 Vice President, Marketing Henry V. Pettis III 52 Vice President, Franchising and Operations Services George G. Roller 49 Vice President, Finance, Chief Financial Officer and Treasurer Garrett J. Ulrich 46 Vice President, Human Resources Michael J. Daly* 55 Director Steven L. Ezzes 50 Director Barry Krantz* 53 Director Charles A. Ledsinger, Jr. 47 Director Burton J. Manning* 65 Director Gregory L. Segall* 34 Director
* Messrs. Krantz and Segall, currently on the Board of Directors as the nominees of the lenders under the Old Credit Facility, will be replaced as directors by Messrs. Daly and Manning upon consummation of the Recapitalization. DONALD N. SMITH has been Chairman, Chief Executive Officer and President of the Company since September 1988. Mr. Smith has also been Chairman of the Board and Chief Executive Officer of TRC and Perkins since November 1985. Prior to joining TRC, Mr. Smith was President and Chief Executive Officer for Diversifoods, Inc. from 1983 to October 1985. From 1980 to 1983, Mr. Smith was Senior Vice President, PepsiCo., Inc. and was President of its Food Service Division. He was responsible for the operations of Pizza Hut Inc. and Taco Bell Corp., as well as North American Van Lines, Lee Way Motor Freight, Inc., PepsiCo. Foods International and La Petite Boulangerie. Prior to 1980, Mr. Smith was President and Chief Executive Officer of Burger King Corporation and Senior Executive Vice President and Chief Operations Officer for McDonald's Corporation. PAUL J. MCDONALD has been Senior Executive Vice President, Chief Administrative Officer and Assistant Secretary since January 1996. Mr. McDonald has been employed in various capacities with the Company since 1976. Mr. McDonald has held the positions of Director of Management Information Systems, Vice President/Controller, Vice President Corporate Development and Vice President, Finance and Chief Financial Officer. Mr. McDonald is a certified public accountant. 45 JOSEPH A. O'SHAUGHNESSY has been Senior Executive Vice President since October 1988. Mr. O'Shaughnessy has been employed in various capacities with the Company since 1957. Mr. O'Shaughnessy's duties have included District and Division Manager, Director and Vice President of Operations and Executive Vice President. LARRY W. BROWNE has been Executive Vice President, Corporate Finance, General Counsel and Secretary of the Company since September 1988. Mr. Browne has also been President and Managing Director of Friendly's International, Inc. since 1996. Mr. Browne has been the Executive Vice President, Corporate Finance, General Counsel and Secretary of TRC since November 1985 and was with Perkins from 1985 until 1996, most recently holding the position of Senior Vice President, Corporate Finance. GERALD E. SINSIGALLI has been President, Food Service Division of the Company since January 1989. Mr. Sinsigalli has been employed in various capacities with the Company since 1965. Mr. Sinsigalli's duties have included District and Division Manager, Director and Vice President of Operations and Senior Vice President. DENNIS J. ROBERTS has been Senior Vice President, Restaurant Operations of the Company since January 1996. Mr. Roberts has been employed in various capacities with the Company since 1969. Mr. Roberts' duties have included Restaurant, District and Division Manager, Regional Training Manager, Director and Vice President of Restaurant Operations. SCOTT D. COLWELL has been Vice President, Marketing of the Company since January 1996. Mr. Colwell has been employed in various capacities with the Company since 1982 including Director, New Business Development; Senior Director, Marketing and Sales and Senior Director, Retail Business. HENRY V. PETTIS III has been employed by the Company since 1990 and became Vice President, Franchising and Operations Services in 1996. Mr. Pettis was President and Chief Executive Officer of Florida Food Industries from 1988 to 1990. GEORGE G. ROLLER has been Vice President, Finance and Chief Financial Officer and Treasurer of the Company since January 1996. Mr. Roller was Vice President and Treasurer of the Company from 1989 until January 1996. Mr. Roller is a certified public accountant. GARRETT J. ULRICH has been Vice President, Human Resources since September 1991. Mr. Ulrich held the position of Vice President, Human Resources for Dun & Bradstreet Information Services, North America from 1988 to 1991. From 1978 to 1988, Mr. Ulrich held various Human Resource executive and managerial positions at Pepsi Cola Company, a division of PepsiCo. MICHAEL J. DALY will become a Director of the Company upon consummation of the Recapitalization. Mr. Daly has been President and CEO of Baystate Health System since December 1981. STEVEN L. EZZES was reelected as a Director of the Company in December 1995. Mr. Ezzes previously served as a Director of the Company from January 1991 to May 1992. Mr. Ezzes has been a Managing Director of Scotia Capital Markets (USA), an investment banking firm, since November 1996. Prior to that he was a partner of the Airlie Group, a private investment firm, since 1988. Mr. Ezzes has also been a Managing Director of Lehman Brothers, an investment banking firm. BARRY KRANTZ has been a Director of the Company since April 1996. From January 1994 to August 1995, Mr. Krantz served as President and Chief Operating Officer of Family Restaurants, Inc. Mr. Krantz served at Restaurant Enterprises Group, Inc. from December 1988 until January 1994 where he held the positions of Chief Operating Officer and President of the Family Restaurant Division. CHARLES 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 46 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. 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. 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 shall be Messrs. Ledsinger and Manning. The Nominating Committee is responsible for nominating individuals to stand for election to the Board of Directors. Upon consummation of the Recapitalization, Messrs. Daly, Ezzes and Smith will be the members of the Nominating Committee. The Company's Restated Articles empower the Board of Directors to fix the number of Directors and to fill any vacancies on the Board of Directors. 47 Each Director of the Company who is not an employee of the Company will receive a fee of $2,500 per month and $1,500 per Board of Directors and special Board of Directors meeting attended, plus expenses. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION After consideration of the recommendations of Mr. Smith, compensation matters of the Company are currently determined by Messrs. Ezzes, Segall, Krantz and Ledsinger, members of the Company's Board of Directors. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The Summary Compensation Table below sets forth the annual base salary and other annual compensation paid during the last three fiscal years to the Company's chief executive officer and each of the other four most highly compensated executive officers whose cash compensation exceeded $100,000 in a combination of salary and bonus (the "named executive officers"). During 1994, 1995 and 1996, no long-term compensation was paid to the named executive officers.
ANNUAL COMPENSATION ------------------------------------------------------ RESTRICTED STOCK OTHER ALL OTHER NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS AWARDS(A) COMPENSATION COMPENSATION - ---------------------------------- ------------- ---------- ---------- ----------- ----------------- ----------------- Donald N. Smith (b)............... 1996 $ 495,355 $ 150,000 $ 0 $ 0 $ 0 Chairman, Chief Executive 1995 472,640 Officer and President 1994 450,736 Larry W. Browne................... 1996 265,822 30,000 201 0 0 Executive Vice President, 1995 257,788 Corporate Finance, General 1994 249,619 Counsel and Secretary Joseph A. O'Shaughnessy........... 1996 255,974 37,000 201 0 0 Senior Executive Vice President 1995 253,348 1994 245,720 Gerald E. Sinsigalli.............. 1996 249,552 40,000 201 0 0 President, Food Service Division 1995 239,646 1994 229,582 Paul J. McDonald.................. 1996 246,145 47,000 201 0 0 Senior Executive Vice President, 1995 236,780 Chief Administrative Officer and 1994 213,076 Assistant Secretary
- ------------------------ (a) Represents the value of restricted stock awarded on March 25, 1996 under the Company's management stock plan (the "Management Stock Plan"), which was issued in substitution of stock rights awarded under a subsequently terminated stock rights plan. As of December 29, 1996, Messrs. Browne, O'Shaughnessy, Sinsigalli and McDonald each had 3,765 shares with a value of $151 as of such date. Twenty-five percent of the shares of restricted stock vested on December 29, 1996 upon the attainment of a minimum operating cash flow target. The remaining shares of restricted stock will vest upon consummation of the Recapitalization. No dividends were payable on the restricted shares. (b) The Company paid a management fee to TRC in the amount of $800,000, $785,000 and $773,000 in 1996, 1995 and 1994, respectively. From these fees, TRC paid Mr. Smith the salary and bonus amounts listed above. Mr. Smith serves as Chairman, Chief Executive Officer and President of the Company and as Chairman and Chief Executive Officer of Perkins and, consequently, devotes a portion of his time to the affairs of each of the Company and Perkins. 48 PENSION PLAN TABLE The following table sets forth the estimated annual benefits payable, based on the indicated credited years of service and the indicated average annual remuneration used in calculating benefits, under the Pension Plan (as defined below).
ESTIMATED BENEFIT BASED ON YEARS OF SERVICE (A) ---------------------------------------------------------- REMUNERATION 15 20 25 30 35 - ------------- ---------- ---------- ---------- ---------- ---------- $ 125,000 $ 11,171 $ 17,544 $ 24,444 $ 31,475 $ 39,031 150,000 13,405 21,053 29,333 37,770 46,837 175,000 15,639 24,562 34,222 44,065 54,643 200,000 17,873 28,071 39,111 50,360 62,451 300,000 26,809 42,106 58,664 75,539 93,675 400,000 35,746 56,142 78,221 100,720 124,901 500,000 44,682 70,177 97,775 125,899 156,123 600,000 53,619 84,214 117,330 151,078 187,350 700,000 62,555 98,249 136,885 176,259 218,573
- ------------------------------ (a) Benefits under the Friendly Ice Cream Corporation Cash Balance Pension Plan (the "Pension Plan") are generally determined based on the value of a participant's cash balance account under the plan. Each year, a percentage of compensation (limited to $150,000 for 1996 in accordance with rules promulgated under the Internal Revenue Code of 1986 (the "Code")) is contributed to an individual's cash balance account under the Pension Plan based on his years of credited service. Interest credits are also contributed to each cash balance account annually. The cash balance formula was implemented effective January 1, 1992, at which time the accrued benefits of participants were converted to the opening balance in the cash balance account. The above amounts are annual straight life annuity amounts (which are not reduced for social security benefits) payable upon retirement at age 65 and assume salary increases of 5.0% per year, interest credits of 5.0% per year and that the cash balance formula under the Pension Plan has always been in effect. The foregoing amounts also reflect amounts attributable to benefits payable under the Friendly Ice Cream Corporation Supplemental Executive Retirement Plan, (the "SERP"), which provides benefits to the covered individuals which cannot be provided under the Pension Plan due to the certain limitations of the Internal Revenue Code, including the limitation on compensation. The SERP was implemented effective as of January 1, 1995. Mr. Smith did not become a participant in the SERP until January 1, 1996. As of January 1, 1997, Messrs. Smith, Browne and McDonald had 8, 8 and 21 years of credited service, respectively, under the Pension Plan. Benefits under the Pension Plan for Messrs. O'Shaughnessy and Sinsigalli are determined primarily on final compensation and years of credited service although such individuals would be entitled to a benefit under the formula described above if such formula resulted in a larger benefit. As of January 1, 1996, the estimated annual benefit payable upon retirement at age 65 (expressed in the form of a straight life annuity) for Messrs. O'Shaughnessy and Sinsigalli is $63,825 and $89,773, respectively, taking into account benefits provided to such individuals under the SERP. As of January 1, 1997, Messrs. O'Shaughnessy and Sinsigalli had 40 and 32 years of credited service, respectively, under the Pension Plan. LIMITED STOCK COMPENSATION PROGRAM In connection with the Common Stock Offering, the Company established a program pursuant to which a one-time award of Common Stock will be made to approximately 70 employees of the Company in recognition of their services to the Company (the "Limited Stock Compensation Program"). Approximately 300,000 shares of Common Stock will be awarded under the program (after giving effect to the Recapitalization). The Common Stock awards will vest upon consummation of the Common Stock Offering, however, the shares will be subject to transfer restrictions for a period of four years. The shares will become transferable on a pro rata basis on the first through fourth anniversaries of the Common Stock Offering. Messrs. O'Shaughnessy, Sinsigalli and McDonald will be awarded 14,011, 17,284 and 17,284 shares respectively under the program. Under a separate component of the Limited Stock Compensation Program, Mr. Smith will be awarded approximately 100,742 shares of Common Stock which will vest upon consummation of the Common Stock Offering. This one-time award was made in recognition of his services to the Company. See "Shares Eligible for Future Sale." 49 RESTRICTED STOCK PLAN The Company currently maintains a restricted stock plan for the benefit of eligible employees. All outstanding awards under such restricted stock plan will vest upon consummation of the Common Stock Offering, and no new awards will be issued under that plan. Prior to the Common Stock Offering, the Company will adopt a new restricted stock plan (the "Restricted Stock Plan"), pursuant to which 375,000 shares of Common Stock will be reserved for issuance, subject to adjustment in the case of certain corporate transactions affecting the number or type of shares of outstanding common stock. The Restricted Stock Plan will provide for the award of Common Stock, the vesting of which will be subject to such conditions and limitations as shall be established by the Board of Directors, which may include conditions relating to continued employment with the Company or the achievement of performance measures. Unless the Board of Directors determines otherwise, any shares of restricted stock which are not vested upon the participant's termination of employment with the Company shall be forfeited. Upon a change in control of the Company, all restrictions on outstanding shares of restricted stock shall lapse and such shares shall become nonforfeitable. The Restricted Stock Plan shall be administered by the Board of Directors, which shall have the authority to determine the employees who will receive awards under the Restricted Stock Plan and the terms and conditions of such awards. Approximately 70 employees of the Company who are classified as salary grade 109 and above will initially be eligible for participation in the Restricted Stock Plan. The Board of Directors, in its sole discretion, may designate other employees and persons providing material services to the Company as eligible for participation in the Restricted Stock Plan. STOCK OPTION PLAN The Company does not currently maintain a stock option plan, although certain employees of the Company participated in a previously terminated stock rights plan. See Note 13 of Notes to Consolidated Financial Statements. In connection with the Common Stock Offering, the Company will adopt a stock option plan (the "Stock Option Plan"), pursuant to which approximately 400,000 shares of Common Stock will be reserved for issuance, subject to adjustment in the case of certain corporate transactions affecting the number or type of shares of outstanding Common Stock. The Stock Option Plan will provide for the issuance of nonqualified stock options and incentive stock options which are intended to satisfy the requirements of section 422 of the Code and stock appreciation rights. The Stock Option Plan will be administered by the Board of Directors. The Board of Directors will determine the employees who will receive awards under the Stock Option Plan and the terms of such awards. The award of a stock option will entitle the recipient thereof to purchase a specified number of shares of Common Stock at the exercise price specified by the Board of Directors. The award of a stock appreciation right entitles the recipient thereof to a payment equal to the excess of the fair market value of a share of Common Stock on the date of exercise over the exercise price specified by the Board of Directors. The exercise price of a stock option or stock appreciation right shall not be less than the fair market value of a share of Common Stock on the date the stock option or stock appreciation right is granted. The Board of Directors may delegate its authority under the Stock Option Plan to a committee of the Board of Directors. Stock options and stock appreciation rights shall become exercisable in accordance with the terms established by the Board of Directors, which terms may relate to continued service with the Company or attainment of performance goals. Stock options awarded in connection with the Common Stock Offering will become exercisable over a five-year period, subject to the optionee's continued employment with the Company. All awards under the Stock Option Plan will become fully vested and exercisable upon a change in control of the Company. 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, 50 may designate other employees and persons providing material services to the Company as eligible for participation in the Stock Option Plan. Generally, a participant who is granted a stock option or stock appreciation right will not be subject to federal income tax at the time of the grant, and the Company will not be entitled to a corresponding tax deduction. Upon the exercise of a nonqualified stock option, generally the difference between the option price and the fair market value of the Common Stock will be considered ordinary income to the participant, and generally the Company will be entitled to a tax deduction. Upon exercise of an incentive stock option, no taxable income will be recognized by the participant, and the Company will not be entitled to a tax deduction. However, if the Common Stock purchased upon exercise of the incentive stock option is sold within two years of the option's grant date or within one year after the exercise, then the difference, with certain adjustments, between the fair market value of the Common Stock at the date of exercise and the option price will be considered ordinary income to the participant, and generally the Company will be entitled to a tax deduction. If the participant disposes of the Common Stock after such holding periods, any gain or loss upon such disposition will be treated as a capital gain or loss and the Company will not be entitled to a deduction. Upon exercise of a stock appreciation right, the participant will recognize ordinary income in an amount equal to the payment received, and generally the Company will be entitled to a corresponding tax deduction. 51 OWNERSHIP OF COMMON STOCK The following table sets forth certain information regarding beneficial ownership of (i) the Class A and Class B common shares of the Company prior to the Recapitalization, and (ii) the Common Stock, after giving effect to the Common Stock Offering, by (a) each person who is known by the Company to own beneficially more than 5% of the outstanding (1) Class A and Class B common shares as of October 15, 1997 or (2) shares of the Common Stock after giving effect to the Common Stock Offering, (b) each director of the Company, (c) each of the named Executive Officers and (d) all Directors and Executive Officers of the Company as a group.
COMMON SHARES BENEFICIALLY OWNED COMMON STOCK BENEFICIALLY PRIOR TO THE RECAPITALIZATION --------------------------------------- OWNED AFTER THE RECAPITALIZATION (A) NUMBER -------------------------- ------------------------ PERCENTAGE PERCENTAGE NAME CLASS A (B) CLASS B (B) OF TOTAL NUMBER OF TOTAL - ---------------------------------------------------- ----------- ----------- ------------- ----------- ------------- Donald N. Smith..................................... 759,680 -- 30.7% 736,164 10.3% Equitable........................................... 256,375 -- 10.4 151,349 2.1 Larry W. Browne..................................... 28,702 -- 1.2 21,130 * Paul J. McDonald.................................... 7,726 -- * 26,031 * Joseph A. O'Shaughnessy............................. 7,726 -- * 13,747 * Gerald E. Sinsigalli................................ 7,726 -- * 26,031 * Michael J. Daly (c)................................. -- -- * -- * Steven L. Ezzes..................................... -- -- * -- * Barry Krantz (c).................................... -- -- * 924 * Charles A. Ledsinger, Jr............................ -- -- * -- * Burton J. Manning (c)............................... -- -- * -- * Gregory L. Segall (c)............................... -- -- * 924 * All directors and Executive Officers as a group (14 persons).......................................... 843,012 -- 34.1 934,544 13.1 Lenders under Old Credit Facility (d)(e)............ -- 1,187,503 48.0 701,036 9.8
- ------------------------ * Represents less than 1% of the outstanding (i) Class A and Class B common shares prior to the Recapitalization and (ii) Common Stock after the Recapitalization. (a) Gives effect to the Common Stock Offering, and the following, which will occur in connection with the Recapitalization: (i) the return of 124,258, 105,026, 8,593, 486,467 and 51,398 shares of Common Stock to the Company by Mr. Smith, Equitable, Mr. Browne, the lenders under the Old Credit Facility and the other existing non-management shareholders, respectively, (ii) the issuance of 100,742 and 300,000 of such shares to Mr. Smith and certain members of management under the Company's Limited Stock Compensation Program, respectively and (iii) the issuance of 27,113 shares of Common Stock under the Management Stock Plan. Of the 300,000 shares issued under the Limited Stock Compensation Program, 17,284, 5,000, 17,284 and 114,532 shares have been allocated to Messrs. McDonald, O'Shaughnessy, Sinsigalli and to all directors and executive officers as a group, respectively. Of the 27,113 shares of Common Stock to be issued under the Management Stock Plan, each of Messrs. Browne, McDonald, O'Shaughnessy and Sinsigalli is to receive 1,021 shares. Does not reflect 400,000 shares and 375,000 shares reserved for issuance under the Stock Option Plan and Restricted Stock Plan, respectively. It is anticipated that approximately 30,000 shares of Common Stock will be issued to Directors and Executive Officers as a group under the Restricted Stock Plan shortly after the consummation of the Recapitalization. See "Shares Eligible for Future Sale" and Note 17 of Notes to Consolidated Financial Statements. (b) In connection with the Recapitalization, each outstanding Class A common share and Class B common share of the Company will be converted into one share of Common Stock. (c) Messrs. Krantz and Segall, currently on the Board of Directors as nominees of the lenders under the Old Credit Facility, will be replaced as Directors by Messrs. Daly and Manning upon consummation of the Recapitalization. See "Management." (d) Prior to the Recapitalization, the Bank of Boston, as agent for the lenders under the Old Credit Facility, held the Class B common shares for the benefit of the lenders under the Old Credit Facility, having received Class B common shares of the Company in 1996 in connection with the restructuring of the Old Credit Facility. In connection with the Recapitalization, these shares will automatically convert into shares of Common Stock and will be distributed to the then existing lenders under the Old Credit Facility pro rata according to the respective amounts of indebtedness thereunder held by them. See Note 7 of Notes to Consolidated Financial Statements. (e) Foothill Capital Corporation, Baker Nye Special Credits, Inc., D K Acquisition Partners, L.P., Contrarian Capital Advisors, L.L.C., CoMac Partners L.P., CoMac International N.V., Tribeca Investments L.L.C., Carl Marks Management Company, L.P., Sanwa Business Credit Corporation, Halcyon Distressed Securities L.P., Bedrock Asset Trust I and Morgan Stanley & Co. International Limited, each of which is a lender under the Old Credit Facility, and Equitable, Quidnet Partners, BMA Limited Partnership, Mr. Browne and Peter Joost, other stockholders of the Company, have granted to the Underwriters a 30-day option to purchase 86,790, 11,680, 65,367, 8,970, 23,316, 8,970, 24,919, 57,286, 15,246, 48,409, 12,274, 15,066, 151,349, 46,893, 19,085, 21,130 and 8,092 shares of Common Stock beneficially owned by such lenders and other stockholders, respectively, as part of the Underwriters' over-allotment option. If such over-allotment option is exercised in full, the lenders under the Old Credit Facility would beneficially own 4.5%, and such other stockholders would no longer beneficially own any, of the outstanding Common Stock. See "Underwriting." 52 CERTAIN TRANSACTIONS The Company's policy is to only enter into a transaction with an affiliate in the ordinary course of, and pursuant to the reasonable requirements of, its business and upon terms that are no less favorable to the Company than could be obtained if the transaction was entered into with an unaffiliated third party. Set forth below is a description of certain transactions between the Company and its affiliates during 1994, 1995 and 1996 and ongoing transactions between the Company and its affiliates. The Company believes that the terms of such transactions were or are no less favorable to the Company than could have been obtained if the transaction was entered into with an unaffiliated third party. In March 1996, the Company's pension plan acquired three restaurant properties from the Company. The land, buildings and improvements were purchased by the plan at their appraised value of $2.0 million and are located in Connecticut, Vermont and Virginia. Simultaneously with the purchase, the pension plan leased back the three properties to the Company at an aggregate annual base rent of $214,000 for the first five years and $236,000 for the following five years. The pension plan was represented by independent legal and financial advisors. In 1993, the Company subleased certain land, buildings, and equipment from Perkins Restaurants Operating Company, L.P. ("Perkins"), a subsidiary of TRC. During 1996, 1995 and 1994, rent expense related to the subleases was approximately $278,000, $266,000 and $245,000, respectively. During 1996 and 1995, an insurance subsidiary of TRC, Restaurant Insurance Corporation ("RIC"), assumed from a third party insurance company reinsurance premiums related to insurance liabilities of the Company of approximately $4.2 million and $6.4 million, respectively. In addition, RIC had reserves of approximately $13.0 million and $12.8 million related to Company claims at December 29, 1996 and December 31, 1995, respectively. On March 19, 1997, the Company acquired all of the outstanding shares of common stock of RIC from TRC for $1.3 million in cash and a $1.0 million promissory note payable to TRC bearing interest at an annual rate of 8.25%. The promissory note and accrued interest aggregating approximately $1.0 million was paid on June 30, 1997. RIC, which was formed in 1993, reinsures certain of the Company's risks (i.e. workers' compensation, employer's liability, general liability and product liability) from a third party insurer. In fiscal 1994, TRC Realty Co. (a subsidiary of TRC) entered into a 10-year operating lease for an aircraft, for use by both the Company and Perkins. The Company shares equally with Perkins in reimbursing TRC Realty Co. for leasing, tax and insurance expenses. In addition, the Company also incurs actual usage costs. Total expense for 1996, 1995 and 1994 was approximately $590,000, $620,000 and $336,000, respectively. The Company purchases certain food products used in the normal course of business from a division of Perkins. For 1996, 1995 and 1994, purchases were approximately $1.4 million, $1.9 million and $1.3 million, respectively. The Company currently pays TRC an annual management fee pursuant to a management fee letter agreement between the Company and TRC dated March 19, 1996 (the "TRC Management Contract"). The fee serves as compensation for (i) the services performed by Mr. Smith for the benefit of the Company (ii) office and secretarial services attributable to the Company and (iii) other related expenses. TRC was paid $800,000, $785,000 and $773,000 for such management services in 1996, 1995 and 1994, respectively. See "Management--Executive Compensation." During 1996, the Company incurred approximately $69,000 of expense related to fees and other reimbursements to the two board of directors members who represented the Company's lenders. In addition, for 1996, 1995 and 1994, the Company expensed approximately $196,000, $763,000 and $200,000, respectively, for fees paid to the lenders' agent bank. 53 The Company is a party to two agreements with TRC relating to taxes. In connection with the distribution by TRC to its shareholders of the Common Stock in the Company immediately prior to the 1996 bank restructuring, the Company entered into a Tax Disaffiliation Agreement dated March 25, 1996. Under the Tax Disaffiliation Agreement, TRC must indemnify the Company for all income taxes during periods when the Company and its affiliates were includible in a consolidated federal income tax return with TRC and for any income taxes due as a result of the Company ceasing to be a member of the TRC consolidated group. TRC does not retain any liability for periods when the Company and its affiliates were not includible in the TRC consolidated federal income tax return and the Company must indemnify TRC if any such income taxes are assessed against TRC. TRC also does not indemnify the Company for a reduction of the Company's existing NOLs or for NOLs previously utilized by TRC. The Tax Disaffiliation Agreement terminates 90 days after the statute of limitations expires for each tax covered by the agreement including unfiled returns as if such returns had been filed by the appropriate due date. The Company also entered into a Tax Responsibility Agreement dated as of March 19, 1997 in connection with the sale of RIC to the Company. Under the Tax Responsibility Agreement, the Company must indemnify TRC for any income taxes that are assessed against TRC as a result of the operations of RIC. The Tax Responsibility Agreement terminates 90 days after the statute of limitations expires for each tax covered by the agreement. DESCRIPTION OF NEW CREDIT FACILITY The Company has entered into a commitment letter with Societe Generale relating to a $175 million senior secured credit facility to be entered into contingent upon completion of the Offerings (the "New Credit Facility"). The following description, which sets forth the material terms of the New Credit Facility, does not purport to be complete and is qualified in its entirety by reference to the agreements setting forth the principal terms of the New Credit Facility, which will be filed as exhibits to the Registration Statement of which this Prospectus is a part. 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) and (ii) 100% of the aggregate net proceeds from asset sales not in the ordinary course of business and certain insurance claim proceeds, in each case, 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. At the Company's option, loans may be prepaid at any time with certain notice and breakage cost provisions. 54 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 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 LIBOR (as defined in the New Credit Facility), plus a margin ranging from 2.25% to 2.75%, or the Alternative Base Rate (as defined in the New Credit Facility), plus a margin ranging from 0.75% to 1.25%. The Alternative Base Rate is the greater of (a) Societe Generale's Prime Rate or (b) the Federal Funds Rate plus 0.50%. It is expected that after the first twelve calendar months of the New Credit Facility, pricing reductions will be available in certain circumstances. The New Credit Facility will contain a number of significant covenants that among other things, will operate as limitations on indebtedness; liens; guarantee obligations; mergers; consolidations, formation of subsidiaries, liquidations and dissolutions; sales of assets; leases; payments of dividends; capital expenditures; investments; optional payments and modifications of subordinated and other debt instruments; transactions with affiliates; sale and leaseback transactions; changes in fiscal year; negative pledge clauses; changes in lines of business; and the ability to amend material agreements. In addition, under the New Credit Facility, the Company will be required to comply with specified minimum fixed charge coverage ratios, interest expense coverage ratios, cash flow leverage ratios and minimum net worth requirements. DESCRIPTION OF SENIOR NOTES Concurrent with consummating the Common Stock Offering and entering into the New Credit Facility, the Company is offering to the public $175 million aggregate principal amount of its Senior Notes due 2007. The consummation of the Common Stock Offering and the Senior Note Offering and the closing with respect to the New Credit Facility are each contingent upon the others. Interest on the Senior Notes will be payable semi-annually on and of each year, commencing on , 1998. The Senior Notes will mature on , 2007 unless previously redeemed. The Senior Notes will be redeemable, in whole or in part, at the option of the Company, at any time on or after , 2002, at specified declining redemption prices, plus accrued and unpaid interest thereon, if any, to the date of redemption. In addition, on or prior to , 2000, the Company may redeem, at any time and from time to time, up to $60 million of the aggregate principal amount of the Senior Notes at a redemption price of % of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of redemption, with the net cash proceeds from one or more qualified equity offerings; provided, however, that at least $115 million of the aggregate principal amount of the Senior Notes remains outstanding following each such redemption. Upon the occurrence of a change of control, each holder of Senior Notes may require the Company to repurchase such holder's Senior Notes, in whole or in part, at a repurchase price of 101% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the repurchase date. The Company will also be obligated in certain circumstances to offer to repurchase Senior Notes at a purchase price of 100% of the principal amount thereof, plus accrued interest, with the net available cash from certain asset sales and dispositions. The Senior Notes will be unsecured, senior obligations of the Company, will rank PARI PASSU in right of payment with all existing and future senior indebtedness of the Company and will rank senior in right of payment to all existing and future subordinated indebtedness of the Company. The Senior Notes will be effectively subordinated to all existing and future secured indebtedness of the Company, including indebtedness under the New Credit Facility. The Senior Notes will be unconditionally guaranteed on a senior unsecured basis, by Friendly's Restaurants Franchise, Inc., the Company's franchise subsidiary and 55 may also be so guaranteed by certain subsidiaries of the Company created or acquired after consummation of the Recapitalization. The Indenture under which the Notes will be issued (the "Indenture") will contain certain covenants pertaining to the Company and its Restricted Subsidiaries (as defined in the Indenture), including but not limited to covenants with respect to the following matters: (i) limitations on indebtedness and preferred stock, (ii) limitations on restricted payments such as dividends, repurchases of the Company's or subsidiaries' stock, repurchases of subordinated obligations, and investments, (iii) limitations or restrictions on distributions from restricted subsidiaries, (iv) limitations on sales of assets and, subsidiary stock, (v) limitations on transactions with affiliates, (vi) limitations on liens, (vii) limitations on sales of subsidiary capital stock and (viii) limitations on mergers, consolidations and transfers of all or substantially all assets. However, all of these covenants are subject to a number of important qualifications and exceptions. The Indenture will contain customary events of default, including a cross-default provision triggered by the non-payment of outstanding indebtedness at stated final maturity or by the acceleration of outstanding indebtedness, in each case in excess of a specified amount. If an event of default occurs and is continuing under the Indenture, the trustee or the holders of at least 25% in aggregate principal amount of the outstanding Senior Notes may declare the principal of and accrued but unpaid interest on all the Senior Notes to be due and payable. If an event of default relating to certain events of bankruptcy, insolvency or reorganization of the Company occurs and is continuing, the principal of and accrued interest on all the Senior Notes will become immediately due and payable. Under certain circumstances, the holders of a majority in aggregate principal amount of the outstanding Senior Notes may rescind any such acceleration with respect to the Senior Notes and its consequences. DESCRIPTION OF CAPITAL STOCK Effective upon the filing of the Restated Articles prior to the consummation of the Common Stock Offering, the authorized capital stock of the Company will consist of 50,000,000 shares of Common Stock, $0.01 par value per share, and 1,000,000 shares of preferred stock, $0.01 par value per share (the "Preferred Stock"), which may be issued in one or more series. COMMON STOCK Holders of Common Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the shares of Common Stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor, subject to any preferential dividend rights of outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive ratably the net assets of the Company available after the payment of all debts and other liabilities and subject to the prior rights of any outstanding Preferred Stock. Holders of the Common Stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of Common Stock are, and the shares offered by the Company in the Common Stock Offering will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. Upon the closing of the Common Stock Offering, there will be no shares of Preferred Stock outstanding. PREFERRED STOCK Upon filing of the Restated Articles, the Board of Directors will be authorized, subject to certain limitations prescribed by law, without further stockholder approval, to issue from time to time up to an 56 aggregate of 1,000,000 shares of Preferred Stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each such series thereof, including the dividend rights, dividend rates, conversion rights, voting rights, terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of such series. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change of control of the Company. The Company has no present plans to issue any shares of Preferred Stock. See "Risk Factors--Effect of Certain Anti-Takeover Provisions." MASSACHUSETTS LAW AND CERTAIN PROVISIONS OF THE COMPANY'S RESTATED ARTICLES OF ORGANIZATION AND RESTATED BY-LAWS Following the Common Stock Offering, the Company expects that it will be subject to Chapter 110F of the Massachusetts General Laws, an anti-takeover law. In general, this statute prohibits a publicly held Massachusetts corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless (i) the interested stockholder obtains the approval of the Board of Directors prior to becoming an interested stockholder, (ii) the interested stockholder acquires 90% of the outstanding voting stock of the corporation (excluding shares held by certain affiliates of the corporation) at the time it becomes an interested stockholder, or (iii) the business combination is approved by both the Board of Directors and the holders of two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder). An "interested stockholder" is a person who, together with affiliates and associates, owns 5% or more of the outstanding voting stock of the corporation or, if the person is an affiliate or associate of the corporation, did own 5% or more of the outstanding voting stock of the corporation at any time within the prior three years. A "business combination" includes a merger, a stock or asset sale, and certain other transactions resulting in a financial benefit to the interested stockholder. The Company's Restated Articles and Restated By-Laws provide for a classified board of directors consisting of three classes as nearly equal in size as possible. In addition, the Restated Articles and Restated By-Laws provide that directors may be removed only for cause by the affirmative vote of (i) the holders of at least a majority of the shares issued outstanding and entitled to vote or (ii) a majority of the directors then in office. Under the Restated Articles and Restated By-Laws, the Board of Directors is empowered to fix the exact number of directors and any vacancy, however occurring, including a vacancy resulting from an enlargement of the Board, may only be filled by a vote of a majority of the directors then in office. The classification of the Board of Directors and the limitations on the removal of directors and filling of vacancies could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of the Company. See "Management--Executive Officers and Directors of the Company." The Restated By-Laws include a provision excluding the Company from the applicability of Massachusetts General Laws Chapter 110D, entitled "Regulation of Control Share Acquisitions." In general, this statute provides that any stockholder of a corporation subject to this statute who acquires 20% or more of the outstanding voting stock of a corporation may not vote such stock unless the stockholders of the corporation so authorize. The Board of Directors may amend the Company's Restated By-Laws at any time to subject the Company to this statute prospectively. The Restated By-Laws also require that a stockholder seeking to have any business conducted at a meeting of stockholders give notice to the Company prior to the scheduled meeting. The notice from the stockholder must describe the proposed business to be brought before the meeting and include information about the stockholder making the proposal, any beneficial owner on whose behalf the proposal is made and any other stockholder known to be supporting the proposal. The Restated By-Laws further provide that a special stockholders meeting may be called only by the Board of Directors, Chairman of the 57 Board of Directors or President of the Company. These provisions may discourage another person or entity from making a tender offer for the Common Stock, because such person or entity, even if it acquired a majority of the outstanding shares, would be able to take action as a stockholder (such as electing new directors or approving a merger) only at a duly called stockholders meeting. The Massachusetts General Laws provide generally that an amendment to the Articles of Organization which changes the authorized capital stock of a corporation requires the affirmative vote of a majority of the shares entitled to vote on any matter and any amendment which impairs or diminishes the rights of stockholders or any other amendment to the Articles of Organization requires the affirmative vote of two-thirds of the shares entitled to vote on any matter. Under Massachusetts law and the Restated By-Laws, the Board of Directors, upon the affirmative vote of a majority of the directors then in office, or the stockholders, upon the affirmative vote of a majority of the shares entitled to vote on any matter, may amend the Restated By-Laws, except that the Restated By-Laws provide that the anti-takeover provisions (described in the preceding three paragraphs) contained in the Restated By-Laws may not be amended by the stockholders except upon the affirmative vote of two-thirds of the shares entitled to vote on any matter. The Restated Articles and Restated By-Laws contain provisions to indemnify the Company's directors and officers to the fullest extent authorized by Massachusetts law against all expenses and liabilities reasonably incurred in connection with service for or on behalf of the Company. In addition, the Restated Articles provide that the directors of the Company will not be personally liable for monetary damages to the Company for breaches of their fiduciary duty as directors, unless they violated their duty of loyalty to the Company or its stockholders, acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived an improper personal benefit from their action as directors. STOCKHOLDER RIGHTS PLAN The Company's Board of Directors intends to enact a stockholder rights plan (the "Rights Plan") designed to protect the interests of the Company's stockholders in the event of a potential takeover for a price which does not reflect the Company's full value or which is conducted in a manner or on terms not approved by the Board of Directors as being in the best interests of the Company and its stockholders. The Rights Plan has certain anti-takeover effects, in that it will cause substantial dilution to a person or group that attempts to acquire a significant interest in the Company on terms not approved by the Board of Directors. Pursuant to the Rights Plan, upon the filing of the Restated Articles prior to the closing of the Common Stock Offering, the Board will declare a dividend distribution of one purchase right ("Right") for every outstanding share of Common Stock. The terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and The Bank of New York (the "Rights Agent"). The Rights Agreement provides for the issuance of one Right for every share of Common Stock issued and outstanding on the date the dividend is declared (the "Dividend Record Date") and for each share of Common Stock which is issued or sold after that date and prior to the Distribution Date (as defined below). Each Right entitles the holder to purchase from the Company one one-thousandth of a share of Series A Junior Preferred Stock, $0.01 par value, of the Company (the "Junior Preferred Stock"), at a price of $0.09 per one one-thousandth of a share, subject to adjustments in certain events. The Rights will expire on the date which is ten years from the Dividend Record Date (the "Expiration Date"), or upon the earlier redemption of the Rights, and are not exercisable until the Distribution Date. No separate Rights certificates will be issued at the present time. Until the Distribution Date (or earlier redemption or expiration of the Rights), (i) the Rights will be evidenced by the outstanding Common Stock certificates and will be transferred with and only with the Common Stock certificates, (ii) new Common Stock certificates issued after the Dividend Record Date upon transfer or new issuance of the Common Stock will contain a notation incorporating the Rights Agreement by reference and 58 (iii) the surrender for transfer of any Common Stock certificate will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. The Rights will separate from the Common Stock on the Distribution Date. Unless otherwise determined by a majority of the Continuing Directors (as defined below) then in office, the Distribution Date (the "Distribution Date") will occur on the earlier of (i) the tenth business day following the date of a public announcement that a person, together with its affiliates and associates, except as described below, has acquired or owns the rights to acquire beneficial ownership of 15% or more of the outstanding shares of Common Stock (collectively, an "Acquiring Person") (such date is referred to herein as the "Shares Acquisition Date") or (ii) the tenth business day following commencement of a tender offer or exchange offer that would result in any person, together with its affiliates and associates, owning 15% or more of the outstanding Common Stock. After the Distribution Date, separate certificates evidencing the Rights ("Rights Certificates") will be mailed to holders of record of the Common Stock as of the close of business on the Distribution Date and thereafter such separate Rights Certificates alone will evidence the Rights. The Board of Directors, by action of the Continuing Directors, may delay the distribution of the Certificates. The term "Continuing Directors" means (i) any member of the Company's Board of Directors who is not an Acquiring Person, or an affiliate, associate or representative of an Acquiring Person, or (ii) any person who subsequently becomes a member of the Board, who is not an Acquiring Person or an affiliate, associate or representative of an Acquiring Person, if such person's nomination for election or election to the Board is recommended or approved by a majority of Continuing Directors. The Rights Plan excludes Mr. Smith, Equitable, the Company's senior management and their respective affiliates from the definition of "Acquiring Person." If, at any time after the Dividend Record Date, any person or group of affiliated or associated persons (other than the Company and its affiliates) shall become an Acquiring Person, each holder of a Right will have the right to receive shares of Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a market value of two times the exercise price of the Right. Following the occurrence of any such event, any Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person shall immediately become null and void. Also, if the Company were acquired in a merger or other business combination, or if more than 50% of its assets or earning power were sold, each holder of a Right would have the right to exercise such Right and thereby receive common stock of the acquiring company with a market value of two times the exercise price of the Right. The Board of Directors may, at its option, at any time after any person becomes an Acquiring Person, exchange all or part of the then outstanding and exercisable Rights for shares of Common Stock at an exchange ratio of one share of Common Stock per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the Dividend Record Date (as the same may be adjusted, the "Exchange Ratio"). The Board of Directors however, may not effect an exchange at any time after any person (other than (i) the Company, (ii) any subsidiary of the Company, (ii) any employee benefit plan of the Company or of any subsidiary of the Company or (iv) any entity holding Common Stock for or pursuant to the terms of any such plan), together with all affiliates of such person, becomes the beneficial owner of 50% or more of the Common Stock then outstanding. Immediately upon the action of the Board of Directors ordering the exchange of any Rights and without any further action and without any notice, the right to exercise such Rights will terminate and the only right thereafter of a holder of such Rights will be to receive that number of shares of Common Stock equal to the number of such Rights held by the holder multiplied by the Exchange Ratio. The exercise price of the Rights, and the number of one one-thousandths of a share of Junior Preferred Stock or other securities or property issuable upon exercise of the Rights, are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision combination or reclassification of, the Junior Preferred Stock, (ii) upon the grant to holders of the Junior Preferred Stock of certain rights or warrants to subscribe for shares of the Junior Preferred Stock or 59 certain convertible securities at less than the current market price of the Junior Preferred Stock, or (iii) upon the distribution to holders of the Junior Preferred Stock of evidences of indebtedness or assets (excluding cash dividends paid out of the earnings or retained earnings of the Company and certain other distributions) or of subscription rights, or warrants (other than those referred to above). At any time prior to the tenth day (or such later date as may be determined by a majority of the Continuing Directors) after the Shares Acquisition Date, the Company, by a majority vote of the Continuing Directors, may redeem the Rights at a redemption price of $0.01 per Right, subject to adjustment in certain events (as the same may be adjusted, the "Redemption Price"). Immediately upon the action of the Continuing Directors electing to redeem the rights, the right to exercise the Rights will terminate, and the only right of the holders of Rights will be to receive the Redemption Price. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. The Rights Agreement may be amended by the Board of Directors at any time prior to the Distribution Date without the approval of the holders of the Rights. From and after the Distribution Date, the Rights Agreement may be amended by the Board of Directors without the approval of the holders of the Rights in order to cure any ambiguity, to correct any defective or inconsistent provisions, to change any time period for redemption or any other time period under the Rights Agreement or to make any other changes that do not adversely affect the interests of the holders of the Rights (other than any Acquiring Person or its affiliates and associates or their transferees). TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Company's Common Stock is The Bank of New York. SHARES ELIGIBLE FOR FUTURE SALE Prior to the Common Stock Offering, there has been no market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market following the Common Stock Offering could adversely affect the prevailing market price of the Common Stock. Upon completion of the Common Stock Offering, the Company will have 7,125,000 shares of Common Stock outstanding. Of these shares, the 5,000,000 shares sold in the Common Stock Offering will be freely tradeable without restriction under the Securities Act, except that any shares purchased by persons deemed to be "affiliates" of the Company, as that term is defined in Rule 144 ("Rule 144") under the Securities Act ("Affiliates"), generally may be sold only in compliance with the limitations of Rule 144 described below. The remaining 2,125,000 shares of Common Stock are deemed "restricted securities" (the "Restricted Shares") under Rule 144 because they were originally issued and sold by the Company in private transactions in reliance upon exemptions from the Securities Act. Under Rule 144, substantially all of these remaining Restricted Shares may become eligible for resale 90 days after the date the Company becomes subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended (the "Exchange Act") (i.e., 90 days after the consummation of the Common Stock Offering), and may be resold prior to such date only in compliance with the registration requirements of the Securities Act or pursuant to a valid exemption therefrom. However, the 2,125,000 shares are subject to the lock-up agreements described below. In general, under Rule 144, if a period of at least one year has elapsed between the later of the date on which "restricted securities" were acquired from the Company or an "affiliate" of the Company then the holder of such restricted securities is entitled to sell a number of shares within any three-month period that does not exceed the greater of (i) 1.0% (approximately 75,000 shares after the Common Stock Offering) of the then outstanding shares of the Common Stock or (ii) the average weekly reported volume 60 of trading of the Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements pertaining to the manner of such sales, notices of such sales and the availability of current public information concerning the Company. Affiliates of the Company may sell shares not constituting restricted shares in accordance with the foregoing volume limitations and other requirements but without regard to the one-year period. Under Rule 144(k), if a period of at least two years has elapsed between the later of the date on which restricted shares were acquired from the Company or the date on which they were acquired from an affiliate of the Company, a holder of such restricted shares who is not an affiliate of the Company at the time of the sale and has not been an affiliate of the Company for at least three months prior to the sale would be entitled to sell the shares immediately without regard to the volume limitations and other conditions described above. All executive officers and directors and the existing shareholders of the Company who, after the Common Stock Offering, will hold in the aggregate approximately 2,125,000 shares of Common Stock (1,500,158 shares if the Underwriters' over-allotment option is exercised in full), have agreed, pursuant to lock-up agreements, that they will not, without the prior written consent of NationsBanc Montgomery Securities, Inc., offer, sell, contract to sell or otherwise dispose of any shares of Common Stock beneficially owned by them for a period of 360 days after the date of this Prospectus, except that the lenders under the Old Credit Facility may sell (i) shares of Common Stock to other stockholders of the Company existing prior to the Common Stock Offering and (ii) any shares of Common Stock acquired by them in or after the Common Stock Offering, which shares are not "restricted securities" pursuant to Rule 144 under the Securities Act. The Company intends to file registration statements under the Securities Act to register (i) all shares of Common Stock issuable pursuant to the Company's Stock Option Plan and Restricted Stock Plan and (ii) certain shares of Common Stock to be issued under the Company's Management Stock Plan and Limited Stock Compensation Program. Subject to the completion of the 360-day period described above, shares of Common Stock issued under, or issued upon the exercise of awards issued under such plans and after the effective date of such registration statements, generally will be eligible for sale in the public market. See "Management--Executive Compensation" and "Ownership of Common Stock." The Company, its shareholders holding Class A and Class B common shares prior to the Recapitalization and certain warrant holders have entered into an amendment to an existing registration rights agreement providing that such shareholders may demand registration under the Securities Act, at any time within 18 months (the "Registration Period") after the end of the 360-day lock-up period commencing with the date of this Prospectus, of shares of the Company's Common Stock into which such Class A and Class B common shares are converted in connection with the Recapitalization or for which such warrants are exercised. The Company may postpone such a demand under certain circumstances. In addition, such shareholders may request the Company to include such shares of Common Stock in any registration by the Company of its capital stock under the Securities Act during the Registration Period. In addition, prior to the consummation of the Common Stock Offering, the Company and Mr. Smith intend to enter into a registration rights agreement providing Mr. Smith with a demand registration right covering his shares of Common Stock. See "Ownership of Common Stock." 61 UNDERWRITING The underwriters named below, represented by NationsBanc Montgomery Securities, Inc., Piper Jaffray Inc. and Tucker Anthony Incorporated (the "Representatives"), have severally agreed, subject to the terms and conditions contained in the underwriting agreement (the "Underwriting Agreement") by and among the Company and the Underwriters, to purchase from the Company the number of shares of Common Stock indicated below opposite their respective names at the initial public offering price less the underwriting discount set forth on the cover page of this Prospectus. The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters are committed to purchase all of such shares if they purchase any.
NUMBER OF UNDERWRITERS SHARES - ------------------------------------------------------------ ---------- NationsBanc Montgomery Securities, Inc. .................... Piper Jaffray Inc........................................... Tucker Anthony Incorporated................................. ---------- Total................................................... 5,000,000 ---------- ----------
The Representatives have advised the Company that the Underwriters propose initially to offer the shares of Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow to selected dealers a concession of not more than $ per share, and the Underwriters may allow to selected dealers, and such dealers may reallow, a concession of not more than $ per share to certain other dealers. After the Common Stock Offering, the public offering price and other selling terms may be changed by the Representatives. The Common Stock is offered subject to receipt and acceptance by the Underwriters, and to certain other conditions, including the right to reject an order in whole or in part. The Company, certain lenders under the Old Credit Facility and certain other stockholders of the Company have granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to a maximum of 750,000 additional shares of Common Stock to cover over-allotments, if any, at the same price per share as the initial 5,000,000 shares to be purchased by the Underwriters. To the extent that the Underwriters exercise this option, the Underwriters will be committed, subject to certain conditions, to purchase such additional shares in approximately the same proportion as set forth in the above table. The Underwriters may purchase such shares only to cover over-allotments made in connection with the Common Stock Offering. To the extent that such over-allotment option is not exercised in full, the Underwriters will purchase up to 125,158 of such shares of Common Stock from the Company pursuant to such option only after all of the 624,842 shares of Common Stock subject to such 62 option purchasable from the lenders under the Old Credit Facility and such other stockholders of the Company have been purchased. See "Ownership of Common Stock." The Underwriting Agreement provides that the Company will indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, as amended, or will contribute to payments the Underwriters may be required to make in respect thereof. The Representatives have informed the Company that the Underwriters do not expect to make sales of Common Stock offered by this Prospectus to accounts over which they exercise discretionary authority. Prior to the Common Stock Offering, there has been no public trading market for the Common Stock. Consequently, the initial public offering price will be determined by negotiations between the Representatives and the Company. Among the factors to be considered in such negotiations are the history of, and the prospects for, the Company and the industry in which it competes, an assessment of the Company's management, its past and present earnings and the trend of such earnings, the prospects for future earnings of the Company, the present state of the Company's development, the general condition of securities markets at the time of the Common Stock Offering and the market price of publicly traded stock of comparable companies in recent periods. The Company's executive officers, directors and certain principal stockholders have agreed that, for a period of 360 days from the date of this Prospectus, they will not offer, sell or otherwise dispose of any shares of their Common Stock or options to acquire shares of Common Stock without the prior written consent of NationsBanc Montgomery Securities, Inc. The Company has agreed not to sell any shares of Common Stock for a period of 90 days from the date of this Prospectus without the prior written consent of NationsBanc Montgomery Securities, Inc., except for shares issued pursuant to the exercise of options granted under employee stock option plans. Until the distribution of the Common Stock is completed, rules of the Securities and Exchange Commission (the "Commission") may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, the Representatives are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the Underwriters create a short position in the Common Stock in connection with the Common Stock Offering, i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus, the Representatives may reduce that short position by purchasing Common Stock in the open market. The Representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The Representatives may also impose a penalty bid on certain Underwriters and selling group members. This means that if the Representatives purchase shares of Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of the Common Stock Offering. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security. Neither the Company nor any of the Underwriters makes any representation or predictions as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. Societe Generale Securities Corporation, the lead underwriter of the Senior Note Offering, is providing certain advisory services in connection with the Recapitalization, for which it is receiving a fee. Societe Generale, an affiliate of Societe Generale Securities Corporation, is to be a lender under the New 63 Credit Facility and to act as arranger and administrative agent thereunder. See "Description of New Credit Facility." At the request of the Company, up to 250,000 shares of Common Stock offered hereby have been reserved for sale to certain individuals, including directors and employees of the Company and members of their families, and in management's discretion, to others with whom the Company has maintained long-standing and significant business relationships. The price of such shares to such parties will be the initial public offering price set forth on the cover of this Prospectus. The number of shares available to the general public will be reduced to the extent those parties purchase reserved shares. Any shares not so purchased will be offered hereby at the initial public offering price set forth on the cover of this Prospectus. The Equitable, which currently beneficially owns 10.4% of the outstanding common shares, is an affiliate of Donaldson, Lufkin & Jenrette Securities Corporation, a member of the National Association of Securities Dealers, Inc. (the "NASD") and an underwriter in the Common Stock Offering. As a result of the foregoing, the Common Stock Offering is subject to the provisions of Section 2720 of the Conduct Rules of the NASD (formerly Schedule E to the Bylaws of the NASD) ("Section 2720"). Accordingly, the underwriting terms for the Common Stock Offering will conform with the requirements set forth in Section 2720. In particular, the price at which the Common Stock is to be distributed to the public must be at a price no higher than that recommended by a "qualified independent underwriter" who has also participated in the preparation of this Prospectus and the Registration Statement of which this Prospectus is a part and who meets certain standards. In accordance with this requirement, NationsBanc Montgomery Securities, Inc. will serve in such role and will recommend the public offering price in compliance with the requirements of Section 2720. NationsBanc Montgomery Securities, Inc., in its role as qualified independent underwriter, has performed the due diligence investigations and reviewed and participated in the preparation of this Prospectus and the Registration Statement of which this Prospectus is a part. LEGAL MATTERS The validity of the securities offered hereby will be passed upon for the Company by Mayer, Brown & Platt, Chicago, Illinois. Certain legal matters with respect to the securities offered hereby will be passed upon for the Underwriters by Simpson Thacher & Bartlett (a partnership which includes professional corporations), New York, New York. EXPERTS The financial statements included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement (which term shall include any amendment thereto) on Form S-1 under the Securities Act, for the registration of the securities offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain items of which are omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock, reference is hereby made to the Registration Statement and the exhibits and schedules filed as a part thereof. Statements made in this Prospectus as to the contents of any contract, agreement or other document are not necessarily complete and, in each instance, reference is made to the copy of such document, filed as an exhibit to the Registration Statement, for a more complete description of the matter involved and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement and the exhibits 64 and schedules thereto filed by the Company with the Commission may be inspected, without charge, at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the following regional offices of the Commission: Seven World Trade Center, New York, New York 10048 and 500 West Madison Street, Chicago, Illinois 60661-2511. Copies of all or any portion of the Registration Statement may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees. The Company is not currently subject to the informational requirements of the Exchange Act. As a result of the Offerings, the Company will become subject to the informational requirements of the Exchange Act. The Company intends to furnish its stockholders with annual reports containing financial statements audited by independent accountants and with quarterly reports containing interim financial information for each of the first three quarters of each year. 65 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE --------- Report of Independent Public Accountants................................................................... F-2 Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 1995, December 29, 1996 and September 28, 1997 (unaudited)......................................................................................... F-3 Consolidated Statements of Operations for the Years Ended January 1, 1995, December 31, 1995 and December 29, 1996 and for the Nine Months Ended September 29, 1996 (unaudited) and September 28, 1997 (unaudited).................................................................................... F-4 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended January 1, 1995, December 31, 1995 and December 29, 1996 and for the Nine Months Ended September 28, 1997 (unaudited)......................................................................................... F-5 Consolidated Statements of Cash Flows for the Years Ended January 1, 1995, December 31, 1995 and December 29, 1996 and for the Nine Months Ended September 29, 1996 (unaudited) and September 28, 1997 (unaudited).................................................................................... F-6 Notes to Consolidated Financial Statements........................................................... F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Friendly Ice Cream Corporation: We have audited the accompanying consolidated balance sheets of Friendly Ice Cream Corporation and subsidiaries as of December 31, 1995 and December 29, 1996, and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 29, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Friendly Ice Cream Corporation and subsidiaries as of December 31, 1995 and December 29, 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 29, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Hartford, Connecticut February 14, 1997 (except with respect to the matter discussed in Note 16, as to which the date is July 14, 1997) F-2 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands)
SEPTEMBER 28, 1997 DECEMBER 31, DECEMBER 29, ------------- 1995 1996 ------------ ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents......................................................... $ 23,690 $ 18,626 $ 12,044 Restricted cash................................................................... -- -- 4,000 Trade accounts receivable......................................................... 5,233 4,992 7,863 Inventories....................................................................... 15,079 15,145 17,017 Deferred income taxes............................................................. 9,885 12,375 12,381 Prepaid expenses and other current assets......................................... 3,985 1,658 6,735 ------------ ------------ ------------- TOTAL CURRENT ASSETS................................................................ 57,872 52,796 60,040 RESTRICTED CASH..................................................................... -- -- 8,907 INVESTMENT IN JOINT VENTURE......................................................... -- 4,500 3,388 PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization............ 295,448 286,161 273,189 INTANGIBLES AND DEFERRED COSTS, net of accumulated amortization of $3,419, $4,790 and $5,858 (unaudited) at December 31, 1995, December 29, 1996 and September 28, 1997, respectively................................................................ 16,607 16,019 15,519 OTHER ASSETS........................................................................ 365 650 1,871 ------------ ------------ ------------- TOTAL ASSETS........................................................................ $ 370,292 $ 360,126 $ 362,914 ------------ ------------ ------------- ------------ ------------ ------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current maturities of long-term debt.............................................. $ 3,204 $ 1,289 $ 2,961 Current maturities of capital lease obligations................................... 6,466 6,353 4,778 Accounts payable.................................................................. 20,972 20,773 25,542 Accrued salaries and benefits..................................................... 13,525 13,855 14,130 Accrued interest payable.......................................................... 5,940 9,838 9,581 Insurance reserves................................................................ 6,605 3,973 6,773 Other accrued expenses............................................................ 15,838 17,415 14,170 ------------ ------------ ------------- TOTAL CURRENT LIABILITIES........................................................... 72,550 73,496 77,935 ------------ ------------ ------------- DEFERRED INCOME TAXES............................................................... 51,908 48,472 50,104 CAPITAL LEASE OBLIGATIONS, less current maturities.................................. 15,375 14,182 13,160 LONG-TERM DEBT, less current maturities............................................. 373,769 371,795 358,136 OTHER LONG-TERM LIABILITIES......................................................... 22,224 25,337 34,263 COMMITMENTS AND CONTINGENCIES (Notes 2, 6, 7, 8, 12, 15, 16 and 17) STOCKHOLDERS' EQUITY (DEFICIT): Common stock, $.01 par value - Class A, authorized 150,000, 150,000 and 4,000 shares at December 31, 1995, December 29, 1996 and September 28, 1997, respectively; 1,090,969, 1,285,384 and 1,285,384 (unaudited) shares issued and outstanding at December 31, 1995, December 29, 1996 and September 28, 1997, respectively......................... 11 13 13 Class B, authorized -0-, 2,000 and 2,000 shares at December 31, 1995, December 29, 1996 and September 28, 1997, respectively; -0-, 1,187,503 and 1,187,503 (unaudited) shares issued and outstanding at December 31, 1995, December 29, 1996 and September 28, 1997, respectively...................................... -- 12 12 Class C, authorized -0-, 2,000 and 2,000 shares at December 31, 1995, December 29, 1996 and September 28, 1997, respectively; -0- shares issued and outstanding at December 31, 1995, December 29, 1996 and September 28, 1997..... -- -- -- Additional paid-in capital........................................................ 46,842 46,905 46,905 Unrealized gain on investment securities, net of taxes............................ -- -- 130 Accumulated deficit............................................................... (212,387) (220,159) (217,796) Cumulative translation adjustment................................................. -- 73 52 ------------ ------------ ------------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT)................................................ (165,534) (173,156) (170,684) ------------ ------------ ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)................................ $ 370,292 $ 360,126 $ 362,914 ------------ ------------ ------------- ------------ ------------ -------------
The accompanying notes are an integral part of these consolidated financial statements. F-3 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except per share data)
FOR THE YEARS ENDED -------------------------------------------- FOR THE NINE MONTHS ENDED JANUARY 1, DECEMBER 31, DECEMBER 29, -------------------------------- 1995 1995 1996 SEPTEMBER 29, SEPTEMBER 28, ------------ -------------- -------------- 1996 1997 --------------- --------------- (UNAUDITED) (UNAUDITED) REVENUES................................... $ 631,014 $ 649,149 $ 650,807 $ 491,819 $ 508,033 COSTS AND EXPENSES: Cost of sales.......................... 179,793 192,600 191,956 143,388 147,105 Labor and benefits..................... 211,838 214,625 209,260 159,502 159,315 Operating expenses..................... 132,010 143,854 143,163 109,006 112,009 General and administrative expenses.... 38,434 40,705 42,721 31,948 32,775 Debt restructuring expenses (Note 5)... -- 3,346 -- -- -- Write-down of property and equipment (Note 6)............................. -- 4,006 227 -- 607 Depreciation and amortization.......... 32,069 33,343 32,979 25,127 24,226 GAIN ON SALE OF RESTAURANT OPERATIONS (NOTE 16)...................................... -- -- -- -- 2,303 ------------ -------------- -------------- --------------- --------------- OPERATING INCOME........................... 36,870 16,670 30,501 22,848 34,299 Interest expense, net of capitalized interest of $176, $62, $49, $44 (unaudited) and $27 (unaudited) and interest income of $187, $390, $318, $273 (unaudited) and $239 (unaudited) for the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the nine months ended September 29, 1996 and September 28, 1997, respectively......... 45,467 41,904 44,141 33,084 32,972 Equity in net loss of joint venture........ -- -- -- -- 1,112 ------------ -------------- -------------- --------------- --------------- INCOME (LOSS) BEFORE BENEFIT FROM (PROVISION FOR) INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE................................ (8,597 ) (25,234 ) (13,640 ) (10,236 ) 215 Benefit from (provision for) income taxes.................................... 4,661 (33,419 ) 5,868 4,442 (88 ) ------------ -------------- -------------- --------------- --------------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE........... (3,936 ) (58,653 ) (7,772 ) (5,794 ) 127 Cumulative effect of change in accounting principle, net of income tax expense of $1,554 (Note 10)......................... -- -- -- -- 2,236 ------------ -------------- -------------- --------------- --------------- NET INCOME (LOSS).......................... $ (3,936 ) $ (58,653 ) $ (7,772 ) $ (5,794 ) $ 2,363 ------------ -------------- -------------- --------------- --------------- ------------ -------------- -------------- --------------- --------------- PRO FORMA NET INCOME (LOSS) PER SHARE (NOTE 17) (UNAUDITED): Income (loss) before cumulative effect of change in accounting principle.... $ (1.09 ) $ (0.81 ) $ 0.02 Cumulative effect of change in accounting principle, net of income tax expense.......................... -- -- 0.31 -------------- --------------- --------------- Net income (loss)...................... $ (1.09 ) $ (0.81 ) $ 0.33 -------------- --------------- --------------- -------------- --------------- --------------- PRO FORMA AMOUNTS ASSUMING NEW PENSION METHOD IS RETROACTIVELY APPLIED: Net income (loss) (Note 10)............ $ (3,506 ) $ (58,134 ) $ (7,214 ) $ (5,375 ) $ 127 ------------ -------------- -------------- --------------- --------------- ------------ -------------- -------------- --------------- --------------- Net income (loss) per share (unaudited).......................... $ (1.01 ) $ (0.75 ) $ 0.02 -------------- --------------- --------------- -------------- --------------- --------------- PRO FORMA SHARES USED IN NET INCOME (LOSS) PER SHARE CALCULATION (NOTE 17) (UNAUDITED).............................. 7,125 7,125 7,125 -------------- --------------- --------------- -------------- --------------- ---------------
The accompanying notes are an integral part of these consolidated financial statements. F-4 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Dollar amounts in thousands)
COMMON STOCK -------------------------------------------------------------------------- CLASS A CLASS B CLASS C ADDITIONAL ---------------------- ---------------------- -------------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL --------- ----------- --------- ----------- ------------- ----------- --------------- BALANCE, JANUARY 2, 1994...... 1,090,969 $ 11 -- $ -- -- $ -- $ 46,822 Net loss.................... -- -- -- -- -- -- -- -- --------- --- --------- --- --- ------- BALANCE, JANUARY 1, 1995...... 1,090,969 11 -- -- -- -- 46,822 Net loss.................... -- -- -- -- -- -- -- Contribution of capital..... -- -- -- -- -- -- 20 -- --------- --- --------- --- --- ------- BALANCE, DECEMBER 31, 1995.... 1,090,969 11 -- -- -- -- 46,842 Net loss.................... -- -- -- -- -- -- -- Issuance of common stock to lenders................... -- -- 1,187,503 12 -- -- 38 Proceeds from exercise of warrants.................. 71,527 1 -- -- -- -- 21 Compensation expense associated with management stock plan................ 122,888 1 -- -- -- -- 4 Translation adjustment...... -- -- -- -- -- -- -- -- --------- --- --------- --- --- ------- BALANCE, DECEMBER 29, 1996.... 1,285,384 13 1,187,503 12 -- -- 46,905 Net income (unaudited)...... -- -- -- -- -- -- -- Change in unrealized gain on investment securities, net of tax (unaudited)........ -- -- -- -- -- -- -- Translation adjustment (unaudited)............... -- -- -- -- -- -- -- -- --------- --- --------- --- --- ------- BALANCE, SEPTEMBER 28, 1997 (unaudited).................. 1,285,384 $ 13 1,187,503 $ 12 -- $ -- $ 46,905 -- -- --------- --- --------- --- --- ------- --------- --- --------- --- --- ------- UNREALIZED GAIN ON INVESTMENT CUMULATIVE SECURITIES, ACCUMULATED TRANSLATION NET OF TAXES DEFICIT ADJUSTMENT TOTAL ------------------- ----------------- ------------------- --------- BALANCE, JANUARY 2, 1994...... $ -- $ (149,798) $ -- $(102,965) Net loss.................... -- (3,936) -- (3,936) --- ----------------- --- --------- BALANCE, JANUARY 1, 1995...... -- (153,734) -- (106,901) Net loss.................... -- (58,653) -- (58,653) Contribution of capital..... -- -- -- 20 --- ----------------- --- --------- BALANCE, DECEMBER 31, 1995.... -- (212,387) -- (165,534) Net loss.................... -- (7,772) -- (7,772) Issuance of common stock to lenders................... -- -- -- 50 Proceeds from exercise of warrants.................. -- -- -- 22 Compensation expense associated with management stock plan................ -- -- -- 5 Translation adjustment...... -- -- 73 73 --- ----------------- --- --------- BALANCE, DECEMBER 29, 1996.... -- (220,159) 73 (173,156) Net income (unaudited)...... -- 2,363 -- 2,363 Change in unrealized gain on investment securities, net of tax (unaudited)........ 130 -- -- 130 Translation adjustment (unaudited)............... -- -- (21) (21) --- ----------------- --- --------- BALANCE, SEPTEMBER 28, 1997 (unaudited).................. $ 130 $ (217,796) $ 52 $(170,684) --- ----------------- --- --------- --- ----------------- --- ---------
The accompanying notes are an integral part of these consolidated financial statements. F-5 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
FOR THE NINE FOR THE YEARS ENDED MONTHS ENDED ----------------------------------------- ------------- JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, 1995 1995 1996 1996 ----------- ------------- ------------- ------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).......................................... $ (3,936) $ (58,653) $ (7,772) $ (5,794) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of change in accounting principle...... -- -- -- -- Depreciation and amortization............................ 32,069 33,343 32,979 25,127 Write-down of property and equipment..................... -- 4,006 227 -- Deferred income tax (benefit) expense.................... (4,207) 33,419 (5,926) (4,442) (Gain) loss on asset retirements......................... (259) 595 (916) (303) Equity in net loss of joint venture...................... -- -- -- -- Changes in operating assets and liabilities: Receivables............................................ (2,071) 679 241 480 Inventories............................................ 1,635 (1,044) (66) (2,183) Other assets........................................... (1,603) 587 1,309 247 Accounts payable....................................... 2,333 (1,714) (199) 5,127 Accrued expenses and other long-term liabilities....... 14,420 16,572 6,286 5,378 ----------- ------------- ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 38,381 27,790 26,163 23,637 ----------- ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment........................ (29,507) (19,092) (24,217) (18,547) Proceeds from sales of property and equipment.............. 1,475 926 8,409 5,107 Purchases of investment securities......................... -- -- -- -- Proceeds from sales and maturities of investment securities............................................... -- -- -- -- Acquisition of Restaurant Insurance Corporation, net of cash acquired............................................ -- -- -- -- Advances to or investments in joint venture................ -- -- (4,500) (4,500) ----------- ------------- ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES...................... (28,032) (18,166) (20,308) (17,940) ----------- ------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Contribution of capital.................................... -- 20 -- -- Proceeds from exercise of stock purchase warrants.......... -- -- 22 22 Proceeds from borrowings................................... 67,629 80,162 48,196 32,196 Repayments of debt......................................... (69,338) (72,713) (52,084) (41,658) Repayments of capital lease obligations.................... (6,190) (7,293) (7,131) (5,484) ----------- ------------- ------------- ------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES........ (7,899) 176 (10,997) (14,924) ----------- ------------- ------------- ------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH...................... -- -- 78 -- ----------- ------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 2,450 9,800 (5,064) (9,227) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............... 11,440 13,890 23,690 23,690 ----------- ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 13,890 $ 23,690 $ 18,626 $ 14,463 ----------- ------------- ------------- ------------- ----------- ------------- ------------- ------------- SUPPLEMENTAL DISCLOSURES Interest paid.............................................. $ 29,430 $ 25,881 $ 36,000 $ 26,042 Capital lease obligations incurred......................... 7,767 3,305 5,951 3,570 Capital lease obligations terminated....................... 391 288 128 126 Conversion of accrued interest payable to debt............. 11,217 14,503 -- -- Issuance of common stock to lenders........................ -- -- 50 -- SEPTEMBER 28, 1997 ------------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).......................................... $ 2,363 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of change in accounting principle...... (2,236) Depreciation and amortization............................ 24,226 Write-down of property and equipment..................... 607 Deferred income tax (benefit) expense.................... 78 (Gain) loss on asset retirements......................... 1,077 Equity in net loss of joint venture...................... 1,112 Changes in operating assets and liabilities: Receivables............................................ (1,122) Inventories............................................ (1,872) Other assets........................................... 3,049 Accounts payable....................................... 4,769 Accrued expenses and other long-term liabilities....... (2,827) ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 29,224 ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment........................ (14,656) Proceeds from sales of property and equipment.............. 4,842 Purchases of investment securities......................... (8,181) Proceeds from sales and maturities of investment securities............................................... 316 Acquisition of Restaurant Insurance Corporation, net of cash acquired............................................ (35) Advances to or investments in joint venture................ (1,400) ------------- NET CASH USED IN INVESTING ACTIVITIES...................... (19,114) ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Contribution of capital.................................... -- Proceeds from exercise of stock purchase warrants.......... -- Proceeds from borrowings................................... 44,211 Repayments of debt......................................... (56,199) Repayments of capital lease obligations.................... (4,683) ------------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES........ (16,671) ------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH...................... (21) ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... (6,582) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............... 18,626 ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 12,044 ------------- ------------- SUPPLEMENTAL DISCLOSURES Interest paid.............................................. $ 30,236 Capital lease obligations incurred......................... 2,227 Capital lease obligations terminated....................... 141 Conversion of accrued interest payable to debt............. -- Issuance of common stock to lenders........................ --
The accompanying notes are an integral part of these consolidated financial statements. F-6 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 29, 1996 AND SEPTEMBER 28, 1997 IS UNAUDITED) 1. ORGANIZATION In September 1988, The Restaurant Company ("TRC") and another investor acquired Friendly Ice Cream Corporation ("FICC") for $297,500,000. Subsequent to the acquisition, Friendly Holding Corporation ("FHC") was organized to hold the outstanding common stock of FICC and in March 1996, FHC was merged into FICC. The accompanying consolidated financial statements include the accounts of FICC and its wholly-owned subsidiaries (collectively, "FICC"). Under the terms of the TRC acquisition financing agreements, warrants to purchase shares of FICC's common stock were issued to the lenders. These warrants were exercisable on or before September 2, 1998. In connection with FICC's debt restructuring in 1991 (see Note 7), these warrants were cancelled and one of the lenders was issued new warrants for 13,836 shares of FICC's (formerly FHC's) Class A Common Stock, subject to dilution, at an exercise price of $445,000 or $32.16 per share. These warrants expire on September 2, 1998. As of December 29, 1996 and September 28, 1997, none of these warrants had been exercised. As of December 29, 1996 and September 28, 1997, three classes of common stock were authorized: Class A ("voting"), Class B ("limited voting") and Class C ("non-voting"). Prior to the occurrence of a Special Rights Default (see Note 7), lenders with limited voting common stock have voting rights only for certain transactions as defined in the loan documents. Common stock held by the lenders will automatically convert to voting common stock upon an underwritten public offering by FICC of at least $30,000,000 (see Note 17). As of December 31, 1995, TRC owned 913,632 shares or 83.75% of FICC's voting common stock. In March 1996, TRC distributed its shares of FICC's voting common stock to TRC's shareholders and FICC deconsolidated from TRC. As of December 29, 1996, TRC's shareholders and FICC's lenders (see Note 7) owned 36.95% and 48.03%, respectively, of FICC's outstanding common stock. As part of the debt restructuring in 1991 (see Note 7), certain officers of FICC purchased 97,906 shares of Class A Common Stock and warrants convertible into an additional 71,527 shares of voting common stock for an aggregate purchase price of $55,550. These warrants were exercised on April 19, 1996 at an aggregate exercise price of $22,000. 2. NATURE OF OPERATIONS FICC owns and operates full-service restaurants in fifteen states. The restaurants offer a wide variety of reasonably priced breakfast, lunch and dinner menu items as well as frozen dessert products. FICC manufactures substantially all of the frozen dessert products it sells, which are also distributed to supermarkets and other retail locations. For the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the nine months ended September 29, 1996 and September 28, 1997, restaurant sales were approximately 93%, 91%, 92%, 92% and 90%, respectively, of FICC's revenues. As of January 1, 1995, December 31, 1995, December 29, 1996 and September 28, 1997, approximately 80%, 80%, 80% and 85% of FICC's owned restaurants were located in the Northeast United States. As a result, a severe or prolonged economic recession in this geographic area may adversely affect FICC more than certain of its competitors which are more geographically diverse. Commencing in 1997, FICC has franchised restaurants (see Note 16). F-7 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of FICC and its subsidiaries after elimination of intercompany accounts and transactions. FISCAL YEAR -- FICC's fiscal year ends on the last Sunday in December, unless that day is earlier than December 27 in which case the fiscal year ends on the following Sunday. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Future facts and circumstances could alter management's estimates with respect to the carrying value of long-lived assets and the adequacy of insurance reserves. REVENUE RECOGNITION -- FICC recognizes restaurant revenue upon receipt of payment from the customer and retail revenue upon shipment of product. Franchise royalty income, based on gross sales of franchisees, is payable monthly and is recorded on the accrual method as earned. Initial franchise fees are recorded upon completion of all significant services, generally upon opening of the restaurant. CASH AND CASH EQUIVALENTS -- FICC considers all investments with an original maturity of three months or less when purchased to be cash equivalents. INVENTORIES -- Inventories are stated at the lower of first-in, first-out cost or market. Inventories at December 31, 1995, December 29, 1996 and September 28, 1997 were (in thousands):
DECEMBER 31, DECEMBER 29, SEPTEMBER 28, 1995 1996 1997 ------------ ------------ ------------- Raw Materials.................................... $ 2,129 $ 1,436 $ 2,191 Goods In Process................................. 114 58 207 Finished Goods................................... 12,836 13,651 14,619 ------------ ------------ ------------- Total...................................... $ 15,079 $ 15,145 $ 17,017 ------------ ------------ ------------- ------------ ------------ -------------
INVESTMENT IN JOINT VENTURE -- In February 1996, FICC and another entity entered into a joint venture, Shanghai Friendly Food Co., Ltd., a Chinese corporation. FICC has a 50% ownership interest in the venture. Operations commenced in April 1997. FICC accounts for the investment using the equity method. As of September 28, 1997, FICC F-8 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) had a receivable for approximately $1.4 million from the joint venture related to advances made to the venture in 1997 and net accounts receivable of approximately $956,000. INVESTMENTS -- FICC, through its wholly-owned subsidiary Restaurant Insurance Corporation ("RIC") (see Note 4), invests in equity securities ($576,000 fair market value at September 28, 1997) which are included in other assets in the accompanying consolidated balance sheet. FICC classifies all of these investments as available for sale. Accordingly, these investments are reported at estimated fair market value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of related income taxes. RESTRICTED CASH -- RIC is required by the third party insurer of FICC to hold assets in trust whose value is at least equal to certain of RIC's outstanding estimated insurance claim liabilities. As of September 28, 1997, cash of $12,907,000 was restricted. PROPERTY AND EQUIPMENT -- Property and equipment are carried at cost except for impaired assets which are carried at fair value less cost to sell (see Note 6). Depreciation of property and equipment is computed using the straight-line method over the following estimated useful lives: Buildings--30 years Building improvements and leasehold improvements--20 years Equipment--3 to 10 years At December 31, 1995, December 29, 1996 and September 28, 1997, property and equipment included (in thousands):
DECEMBER 31, DECEMBER 29, SEPTEMBER 28, 1995 1996 1997 ------------ ------------ ------------- Land............................................. $ 77,765 $ 75,004 $ 74,022 Buildings and Improvements....................... 110,231 112,359 113,347 Leasehold Improvements........................... 37,703 39,120 38,850 Assets Under Capital Leases...................... 37,307 42,893 41,642 Equipment........................................ 206,266 216,536 209,269 Construction In Progress......................... 6,147 6,424 13,941 ------------ ------------ ------------- Property and Equipment........................... 475,419 492,336 491,071 Less: Accumulated Depreciation and Amortization................................... (179,971) (206,175) (217,882) ------------ ------------ ------------- Property and Equipment--Net...................... $ 295,448 $ 286,161 $ 273,189 ------------ ------------ -------------
Major renewals and betterments are capitalized. Replacements and maintenance and repairs which do not extend the lives of the assets are charged to operations as incurred. F-9 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LONG-LIVED ASSETS -- Effective January 2, 1995, FICC adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which had no impact. FICC reviews the license agreement for the right to use various trademarks and tradenames (see Note 5) for impairment on a quarterly basis. FICC recognizes an impairment has occurred when the carrying value of the license agreement exceeds the estimated future cash flows of the trademarked products. FICC reviews each restaurant property quarterly to determine which properties should be disposed of. This determination is made based on poor operating results, deteriorating property values and other factors. FICC recognizes an impairment has occurred when the carrying value of property exceeds its estimated fair value, which is estimated based on FICC's experience with similar properties and local market conditions, less costs to sell. (see Note 6). RESTAURANT CLOSURE COSTS -- Restaurant closure costs are recognized when a decision is made to close a restaurant. Restaurant closure costs include the cost of writing-down the carrying amount of a restaurant's assets to estimated fair market value, less costs of disposal, and the net present value of any remaining operating lease payments after the expected closure date. INSURANCE RESERVES -- FICC is self-insured through retentions or deductibles for the majority of its workers' compensation, automobile, general liability, product liability and group health insurance programs. Self-insurance amounts vary up to $500,000 per occurrence. Insurance with third parties, some of which is then reinsured through RIC (see Note 4), is in place for claims in excess of these self-insured amounts. RIC assumes 100% of the risk from $500,000 to $1,000,000 per occurrence for FICC's worker's compensation, general liability and product liability insurance. FICC and RIC's liability for estimated incurred losses are actuarially determined and recorded on an undiscounted basis. INCOME TAXES -- FICC accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. A valuation allowance is recorded for deferred tax assets whose realization is not likely. ADVERTISING -- FICC expenses production and other advertising costs the first time the advertising takes place. For the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the nine months ended September 29, 1996 and September 28, 1997, advertising expense was approximately $15,430,000, $17,459,000, $18,231,000, $13,854,000 and $15,270,000, respectively. F-10 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS -- Effective December 30, 1996, FICC adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", which had no effect. This statement requires that after a transfer of financial assets, an entity should recognize all financial assets and servicing assets it controls and liabilities it has incurred, derecognize financial assets when control has been surrendered, and derecognize liabilities when extinguished. This statement also provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings and is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share", which establishes new standards for computing and presenting earnings per share. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997 and earlier application is not permitted. Upon adoption, all prior period earnings per share data presented will be restated. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income (net income (loss) together with other non-owner changes in equity) and its components in a full set of general purpose financial statements. SFAS No. 130 is effective for financial statements issued for periods ending after December 15, 1997 and earlier application is permitted. Comprehensive income is not materially different than net income (loss) for all periods presented. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which requires disclosures for each segment of an enterprise that are similar to those required under current standards with the addition of quarterly disclosure requirements and a finer partitioning of geographic disclosures. SFAS No. 131 is effective for financial statements issued for periods ending after December 15, 1997 and earlier application is encouraged. Under the terms of the new standard, FICC will report segment information for restaurant and retail operations when material. RECLASSIFICATIONS -- Certain prior year amounts have been reclassified to conform with current year presentation. INTERIM FINANCIAL INFORMATION -- The accompanying financial statements as of September 28, 1997 and for the nine months ended September 29, 1996 and September 28, 1997 are unaudited, but, in the opinion of management, include all adjustments which are necessary for a fair presentation of the financial position and the results of operations and cash flows of FICC. Such adjustments consist solely of normal recurring accruals. Operating results for the nine months ended September 29, 1996 and September 28, 1997 are not necessarily indicative of the results that may be expected for the entire year due to the seasonality of the business. Historically, higher revenues and profits are experienced during the second and third fiscal quarters. F-11 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. ACQUISITION OF RESTAURANT INSURANCE CORPORATION On March 19, 1997, FICC acquired all of the outstanding shares of common stock of Restaurant Insurance Corporation ("RIC"), a Vermont corporation, from TRC for cash of $1,300,000 and a $1,000,000 promissory note payable to TRC bearing interest at an annual rate of 8.25%. The promissory note and accrued interest of approximately $1,024,000 was paid on June 30, 1997. RIC, which was formed in 1993, reinsures certain FICC risks (i.e. workers' compensation, employer's liability, general liability and product liability) from a third party insurer (see Note 12). The acquisition was accounted for as a purchase. Accordingly, the results of operations for RIC for the period subsequent to March 20, 1997 are included in the accompanying consolidated financial statements. No pro forma information is included since the effect of the acquisition is not material. The purchase price was allocated to net assets acquired based on the estimated fair market values at the date of acquisition. The purchase price was allocated as follows (in thousands): Cash and Cash Equivalents......................................... $ 2,265 Restricted Cash and Investments................................... 12,061 Receivables and Other Assets...................................... 3,090 Loss Reserves..................................................... (13,231) Other Liabilities................................................. (1,885) --------- $ 2,300 --------- ---------
5. INTANGIBLE ASSETS AND DEFERRED COSTS Intangible assets and deferred costs net of accumulated amortization as of December 31, 1995, December 29, 1996 and September 28, 1997 were (in thousands):
DECEMBER 31, DECEMBER 29, SEPTEMBER 28, 1995 1996 1997 ------------ ------------ ------------- License agreement for the right to use various trademarks and tradenames amortized over a 40 year life on a straight line basis... $ 15,231 $ 14,764 $ 14,415 Deferred financing costs amortized over the terms of the loans on an effective yield basis.......................................... 1,376 1,255 540 Deferred financing costs related to pending registration statement (see Note 17)........... -- -- 564 ------------ ------------ ------------- $ 16,607 $ 16,019 $ 15,519 ------------ ------------ ------------- ------------ ------------ -------------
In November 1994, FHC filed a Form S-1 Registration Statement and in 1995 elected not to proceed with the registration. Accordingly, previously deferred costs totaling $3,346,000 related to this registration were expensed during the year ended December 31, 1995. 6. WRITE-DOWN OF PROPERTY AND EQUIPMENT At December 31, 1995, December 29, 1996 and September 28, 1997, there were 81, 50 and 41 restaurant properties held for disposition, respectively. The restaurants held for disposition generally have F-12 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. WRITE-DOWN OF PROPERTY AND EQUIPMENT (CONTINUED) poor operating results, deteriorating property values or other adverse factors. FICC determined that the carrying values of certain of these properties exceeded their estimated fair values less costs to sell. Accordingly, during the year ended December 31, 1995, the carrying values of 51 properties were reduced by an aggregate of $4,006,000; during the year ended December 29, 1996, the carrying values of 6 properties were reduced by an aggregate of $227,000 and during the nine months ended September 28, 1997, the carrying values of 10 properties were reduced by an aggregate of $607,000. FICC plans to dispose of the 41 properties by December 31, 1998. The operating loss, prior to depreciation expense which is not reported at the restaurant level, for the properties held for disposition was $1,972,000, $1,129,000 and $769,000 for the years ended December 31, 1995 and December 29, 1996 and the nine months ended September 28, 1997, respectively. The carrying value of the properties held for disposition at December 31, 1995, December 29, 1996 and September 28, 1997 was approximately $7,491,000, $4,642,000 and $3,308,000, respectively. 7. DEBT Effective January 1, 1991, FICC and its lenders entered into an Amended and Restated Revolving Credit and Term Loan Agreement (the "Credit Agreement"), and effective January 1, 1996, the Credit Agreement was again amended and restated. In connection with the January 1, 1996 amendment (the "Amendment"), revolving credit loans and term loans totaling $373,622,000 at December 31, 1995 were converted to revolving credit loans of $38,549,000 and term loans of $335,073,000. For the year ended December 29, 1996 and the nine months ended September 28, 1997, interest was accrued on the revolving credit and term loans at an annual rate of 11%, with .5% of the accrued interest which is not currently payable being accrued and classified as other long-term liabilities in the accompanying consolidated balance sheet. The deferred interest will be waived if the revolving credit and term loans are repaid in full in cash on or before the due date. The deferred interest as of September 28, 1997 was approximately $3,302,000. Under the terms of the Amendment, as of December 29, 1996, principal of $371,678,000 is due on May 1, 1998. FICC may extend the due date to May 1, 1999 by paying a fee equal to 1% of the aggregate of the revolver commitment of $50,000,000, the letters of credit commitment (see below) and the principal amount of the term loan. FICC does not expect to generate sufficient cash flow to make all of the principal payments required by May 1, 1998; therefore, FICC will exercise its option to extend the due date to May 1, 1999 if the pending recapitalization is not consummated (see Note 17). Accordingly, these loans are classified as long-term in the accompanying consolidated financial statements. In connection with the Amendment, in March 1996 the lenders received 1,090,972 shares of FICC's Class B Common Stock, which represented 50% of the issued and outstanding equity of FICC. As a result of the issuance of stock under the Management Stock Plan (see Note 13) and the exercise of certain warrants (see Note 1), additional shares of FICC's Class B Common Stock were issued to the lenders in 1996 to maintain their minimum equity interest in FICC of 47.50% on a fully diluted basis in accordance with the Amendment. Total shares issued to the lenders as of December 29, 1996 were 1,187,503. The estimated fair market value of the shares issued of $50,000 was recorded as a deferred financing cost during the year ended December 29, 1996. Prior to the occurrence of a Special Rights Default (see below), lenders with limited voting stock may elect two of the five members to FICC's board of directors. In the event of a Special Rights Default, lenders with limited voting stock may appoint two additional directors to FICC's board. Additionally, in the event of a Special Rights Default, the lenders are entitled to receive F-13 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. DEBT (CONTINUED) additional shares of FICC's limited voting common stock thereby increasing their equity interest in FICC by 5% initially, with additional shares of limited voting common stock issued quarterly thereafter for a maximum of eight quarters. Each quarterly issuance of limited voting common stock would increase the lenders' equity interest in FICC by 2.5%. A Special Rights Default occurs if (i) FICC files for bankruptcy or enters into any insolvency proceeding, (ii) FICC fails to pay principal or interest on the revolving credit and term loans when due, (iii) FICC fails to comply with financial covenants for two consecutive quarters, or (iv) certain other conditions relating to ownership of FICC's subsidiaries and ownership of FICC are not met. As of September 28, 1997, a Special Rights Default had not occurred. Covenant violations prior to December 31, 1995 were waived by the lenders. The Amendment provided for new covenant requirements effective December 31, 1995 (see below). Under the terms of the Amendment, covenants require attainment of minimum earnings, as defined, debt service coverage ratios, as defined, and minimum net worth, as defined. Restrictions also have been placed on capital expenditures, asset dispositions, proceeds from asset dispositions, investments, pledging of assets, sale and leasebacks and the incurrence of additional indebtedness. The covenant requirements, as defined under the Amendment, and actual ratios/amounts as of and for the twelve months ended December 31, 1995 and December 29, 1996 and as of and for the twelve months ended September 28, 1997 were:
DECEMBER 31, 1995 DECEMBER 29, 1996 SEPTEMBER 28, 1997 -------------------------- -------------------------- --------------------------- REQUIREMENT ACTUAL REQUIREMENT ACTUAL REQUIREMENT ACTUAL ------------ ------------ ------------ ------------ ------------ ------------- Consolidated Earnings Before Interest, Taxes, Depreciation and Amortization, as defined.... $ 55,000,000 $ 58,094,000 $ 58,000,000 $ 64,001,000 $ 63,000,000 $ 73,352,000 Ratio of Consolidated Adjusted EBITDA to Consolidated Debt Service Payments................ .95 to 1 1.11 to 1 .73 to 1 .99 to 1 .82 to 1 1.25 to 1 Consolidated Net Worth............ $(168,000,000) $(165,534,000) $(181,000,000) $(173,156,000) $(186,000,000) $(170,684,000)
FICC has a commitment from a bank to issue letters of credit totaling $5,815,000 through May 1, 1998, or through May 1, 1999 if the Credit Agreement is extended. As of December 31, 1995, December 29, 1996 and September 28, 1997, total letters of credit issued were $5,815,000, $4,390,000 and $3,695,000, respectively. An annual fee of 2% is charged on the maximum drawing amount of each letter of credit issued. During the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the nine months ended September 29, 1996 and September 28, 1997, there were no drawings against the letters of credit. Under the terms of the Amendment, interest will be charged at 13.5%, compounded monthly, on drawings against letters of credit issued. F-14 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. DEBT (CONTINUED) Debt at December 31, 1995, December 29, 1996 and September 28, 1997 consisted of the following (in thousands):
DECEMBER 31, DECEMBER 29, SEPTEMBER 28, 1995 1996 1997 ------------ ------------ ------------- Revolving Credit Loan, 12% through December 31, 1995 and 11% thereafter; due May 1, 1998 unless FICC extends to May 1, 1999.................... $ 210,984 $ 36,605 $ 22,969 Term Loan, 8.5% compounded monthly through December 31, 1995 and 11% thereafter; due May 1, 1998 unless FICC extends to May 1, 1999..... 162,638 335,073 335,073 Insurance Premium Finance Loans, 5.55%-8.75%; due July 10, 1998-November 2, 1998................. 3,177 1,259 2,930 Other............................................ 174 147 125 ------------ ------------ ------------- 376,973 373,084 361,097 Less: Current Portion............................ 3,204 1,289 2,961 ------------ ------------ ------------- Total Long-Term Debt............................. $ 373,769 $ 371,795 $ 358,136 ------------ ------------ ------------- ------------ ------------ -------------
The revolving credit and term loans are collateralized by a lien on substantially all of FICC's assets and by a pledge of FICC's shares of its subsidiaries' stock. At December 29, 1996, aggregate future annual principal payments of debt, exclusive of capitalized leases (see Note 8), were: 1997, $1,289,000; 1998, $33,000; 1999, $371,715,000; and 2000, $47,000. The payments for the revolving credit and term loans are reflected in 1999, since, as discussed above, FICC will not repay the loans in 1998. At December 31, 1995, December 29, 1996 and September 28, 1997, the unused portion of the revolving credit loan was $11,451,000, $13,395,000 and $27,031,000, respectively. A 0.5% annual commitment fee was charged on the unused portions of the revolver and letters of credit commitments. The total average unused portions of the revolver and letters of credit commitments was $10,685,000, $12,796,000 and $13,359,000 for the years ended December 31, 1995 and December 29, 1996 and the nine months ended September 28, 1997, respectively. In October 1994, FICC paid a fee of approximately $3,582,000 to the lenders to facilitate a refinancing of the obligations under the Credit Agreement. This amount was included in interest expense for the year ended January 1, 1995 since, under the proposed refinancing, the Credit Agreement would have been repaid. FICC's revolving credit and term loans are not publicly traded and prices and terms of the few transactions which were completed are not available to FICC. Since no information is available on prices of completed transactions, the terms of the loans are complex and the relative risk involved is difficult to evaluate, management believes it is not practicable to estimate the fair value of the revolving credit and term loans without incurring excessive costs. Additionally, since the letters of credit are associated with the F-15 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. DEBT (CONTINUED) revolving credit and term loan agreement, management believes it is also not practicable to estimate the fair value of the letters of credit without incurring excessive costs. 8. LEASES As of December 31, 1995, December 29, 1996 and September 28, 1997, FICC operated 735, 707 and 662 restaurants, respectively. These operations were conducted in premises owned or leased as follows:
DECEMBER 31, DECEMBER 29, SEPTEMBER 28, 1995 1996 1997 ----------------- ----------------- ----------------- Land and Building Owned.......................... 313 296 279 Land Leased and Building Owned................... 164 161 145 Land Leased and Building Leased.................. 258 250 238 --- --- --- 735 707 662 --- --- --- --- --- ---
Restaurants in shopping centers are generally leased for a term of 10 to 20 years. Leases of freestanding restaurants generally are for a 15 or 20 year lease term and provide for renewal options for three or four five-year renewals. Most leases provide for minimum payments plus a percentage of sales in excess of stipulated amounts. Additionally, FICC leases certain restaurant equipment over lease terms from three to seven years. Future minimum lease payments under non-cancellable leases with an original term in excess of one year as of December 29, 1996 were (in thousands):
OPERATING CAPITAL YEAR LEASES LEASES - ------------------------------------------------------------------------ ----------- --------- 1997.................................................................... $ 13,366 $ 8,446 1998.................................................................... 12,524 6,445 1999.................................................................... 11,635 3,429 2000.................................................................... 10,277 2,354 2001.................................................................... 8,401 1,815 2002 and thereafter..................................................... 26,096 7,163 ----------- --------- Total Minimum Lease Payments............................................ $ 82,299 29,652 ----------- Less: Amounts Representing Interest..................................... 9,117 --------- Present Value of Minimum Lease Payments................................. $ 20,535 --------- ---------
F-16 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. LEASES (CONTINUED) Capital lease obligations reflected in the accompanying consolidated balance sheets have effective rates ranging from 8% to 12% and are payable in monthly installments through 2016. Maturities of such obligations at December 29, 1996 were (in thousands):
YEAR AMOUNT - --------------------------------------------------------------- --------- 1997........................................................... $ 6,353 1998........................................................... 4,967 1999........................................................... 2,371 2000........................................................... 1,539 2001........................................................... 1,187 2002 and thereafter............................................ 4,118 --------- Total.................................................... $ 20,535 --------- ---------
Rent expense included in the accompanying consolidated financial statements for operating leases was (in thousands):
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28, 1995 1995 1996 1996 1997 ----------- ------------ ------------ ------------- ------------- Minimum Rentals....... $ 14,767 $ 15,175 $ 16,051 $ 12,229 $ 12,456 Contingent Rentals.... 2,003 2,012 1,918 1,292 1,164 ----------- ------------ ------------ ------------- ------------- Total........... $ 16,770 $ 17,187 $ 17,969 $ 13,521 $ 13,620 ----------- ------------ ------------ ------------- ------------- ----------- ------------ ------------ ------------- -------------
9. INCOME TAXES Prior to March 23, 1996 (see below), FICC and its subsidiaries were included in the consolidated Federal income tax return of TRC. Under a tax sharing agreement between TRC and FICC (formerly FHC) (the "TRC/FICC Agreement"), FICC and its subsidiaries (the "FICC Group") were obligated to pay TRC its allocable share of the TRC group tax liability, determined as if the FICC Group were filing a separate consolidated income tax return. On March 23, 1996, TRC distributed its shares of FICC's voting common stock to TRC's shareholders (see Note 1), the FICC Group deconsolidated from the TRC group and the TRC/FICC Agreement expired. In addition, on March 26, 1996, shares of Class B Common Stock were issued to FICC's lenders which resulted in an ownership change pursuant to Internal Revenue Code Section 382. As a result of the deconsolidation from TRC, the FICC Group is required to file two short year Federal income tax returns for 1996. For the period from January 1, 1996 through March 23, 1996, the FICC Group was included in the consolidated Federal income tax return of TRC and for the period from March 24, 1996 through December 29, 1996, the FICC Group filed a consolidated return for its group only. Under the TRC/FICC Agreement, NOLs generated by the FICC Group and utilized or allocated to TRC were available to the FICC Group on a separate company basis to carryforward. Pursuant to the TRC/FICC Agreement, as of March 23, 1996, $99,321,000 of carryforwards would have been available to the FICC Group to offset future taxable income of the FICC Group. However, as a result of the deconsolidation from TRC, the deferred tax asset of approximately $23 million related to the $65,034,000 of NOLs utilized by TRC was written off. Approximately $19.0 million of the write-off was recorded in F-17 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES (CONTINUED) fiscal 1995, which amount approximated the benefit of NOLs utilized by TRC as of December 31, 1995, and the balance was recorded in fiscal 1996, which amount approximated the benefit of the NOLs utilized by TRC for the period from January 1, 1996 to the deconsolidation. Additionally, as a result of the change in ownership and Section 382 limitation, a valuation allowance of approximately $10 million has been placed on $29,686,000 of the $34,287,000 remaining Federal NOL carryforwards generated for the period prior to March 23, 1996. The amount of pre-change NOLs not reserved for represents the amount of NOLs which have become available as a result of FICC realizing gains which were unrealized as of the date of the ownership change. FICC will reduce the valuation allowance on pre-change NOLs if they become available to FICC via realization of additional unrealized gains. FICC does not believe that it is more likely than not that such NOLs will become available, and therefore the valuation allowance is appropriate. For the period from March 23, 1996 to December 29, 1996, FICC generated a net operating loss carryforward of $5,765,000. Due to restrictions similar to Section 382 in most of the states FICC operates in and short carryforward periods, FICC has fully reserved for all state NOL carryforwards generated through March 26, 1996 as of December 29, 1996. The benefit from (provision for) income taxes for the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and the nine months ended September 29, 1996 and September 28, 1997 was as follows (in thousands):
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28, 1995 1995 1996 1996 1997 ----------- ------------ ------------- ------------- ------------- Current Benefit (Provision) Federal.............................. $ 454 $ -- $ -- $ -- $ -- State................................ -- -- -- -- -- Foreign.............................. -- -- (58) -- (10) ----------- ------------ ------ ------ ------ Total Current Benefit (Provision)...... 454 -- (58) -- (10) ----------- ------------ ------ ------ ------ Deferred Benefit (Provision) Federal.............................. 3,608 (27,465) 5,126 3,848 (78) State................................ 599 (5,954) 800 594 -- Foreign.............................. -- -- -- -- -- ----------- ------------ ------ ------ ------ Total Deferred Benefit (Provision)..... 4,207 (33,419) 5,926 4,442 (78) ----------- ------------ ------ ------ ------ Total Benefit From (Provision For) Income Taxes......................... $ 4,661 $ (33,419) $ 5,868 $ 4,442 $ (88) ----------- ------------ ------ ------ ------ ----------- ------------ ------ ------ ------
F-18 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES (CONTINUED) A reconciliation of the differences between the statutory Federal income tax rate and the effective income tax rates follows:
JANUARY 1, DECEMBER 31, DECEMBER 29, 1995 1995 1996 ------------- --------------- ----------------- Statutory Federal Income Tax Rate.................... 35% 35 % 35 % State Income Taxes Net of Federal Benefit............ 17 11 14 Write-off of Intercompany NOL Carryforwards and Tax Credits............................................ -- (85 ) (13 ) Increase (Decrease) in Federal NOL Valuation Allowance.......................................... -- (57 ) 10 Increase in State NOL Valuation Allowance............ (4 ) (30 ) (8 ) Tax Credits.......................................... 8 3 3 Nondeductible Expenses............................... (2 ) (1 ) (1 ) Other................................................ -- (8 ) 3 -- -- --- Effective Tax Rate................................... 54 % (132 )% 43% -- -- -- -- --- ---
Deferred tax assets and liabilities are determined as the difference between the financial statement and tax bases of the assets and liabilities multiplied by the enacted tax rates in effect for the year in which the differences are expected to reverse. Significant deferred tax assets (liabilities) at December 31, 1995 and December 29, 1996 were as follows (in thousands):
DECEMBER 31, DECEMBER 29, 1995 1996 ------------ ------------ Property and Equipment........................................... $ (51,903) $ (50,866) Federal and State NOL Carryforwards (net of valuation allowance of $23,026 and $21,220 at December 31, 1995 and December 29, 1996, respectively)............................................ -- 4,355 Insurance Reserves............................................... 6,311 5,788 Inventories...................................................... 2,450 1,862 Accrued Pension.................................................. 3,272 4,388 Intangible Assets................................................ (3,600) (6,037) Tax Credit Carryforwards......................................... -- 1,001 Other............................................................ 1,447 3,412 ------------ ------------ Net Deferred Tax Liability....................................... $ (42,023) $ (36,097) ------------ ------------ ------------ ------------
At December 31, 1995, December 29, 1996 and September 28, 1997, the classification of deferred taxes was as follows (in thousands):
DECEMBER 31, DECEMBER 29, SEPTEMBER 28, 1995 1996 1997 ------------ ------------ ------------- Current Asset.................................... $ 9,885 $ 12,375 $ 12,381 Long-term Liability.............................. (51,908) (48,472) (50,104) ------------ ------------ ------------- $ (42,023) $ (36,097) $ (37,723) ------------ ------------ ------------- ------------ ------------ -------------
F-19 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. EMPLOYEE BENEFIT PLANS Substantially all of the employees of FICC are covered by a non-contributory defined benefit pension plan. Effective January 1, 1992, the plan was changed to a defined benefit cash balance plan. Plan benefits are based on years of service and participant compensation during their years of employment. FICC accrues the cost of its pension plan over its employees' service lives. Under the cash balance plan, a nominal account for each participant is established. The plan administrator makes an annual contribution to each account based on current wages and years of service. Each account earns a specified rate of interest which is adjusted annually. FICC's policy is to make contributions to the plan which provide for benefits and pay plan expenses. Contributions are intended to provide not only for benefits attributable to service to date, but also for those benefits expected to be earned in the future. For the years ended January 1, 1995, December 31, 1995 and December 29, 1996, net pension expense was (in thousands):
JANUARY 1, DECEMBER 31, DECEMBER 29, 1995 1995 1996 ----------- ------------ ------------ Service Cost......................................... $ 4,011 $ 3,877 $ 4,202 Interest Cost........................................ 5,106 5,420 5,781 Actual Loss (Gain) on Plan Assets.................... 5,180 (17,438) (9,428) Deferral of Asset (Loss) Gain........................ (11,725) 10,850 2,377 Net Amortization of Deferral of Asset Gain........... (548) (770) (651) ----------- ------------ ------------ Net Pension Expense.................................. $ 2,024 $ 1,939 $ 2,281 ----------- ------------ ------------ ----------- ------------ ------------
The funded status of the plan as of December 31, 1995 and December 29, 1996 was (in thousands):
DECEMBER 31, DECEMBER 29, 1995 1996 ------------ ------------ Actuarial Present Value of Benefit Obligations: Vested......................................................... $ 49,581 $ 56,752 Non-vested..................................................... 1,081 1,316 ------------ ------------ Accumulated Benefit Obligations.................................. $ 50,662 $ 58,068 ------------ ------------ ------------ ------------ Projected Benefit Obligations.................................... $ 69,188 $ 76,768 Plan Assets at Market Value...................................... 86,477 90,626 ------------ ------------ Plan Assets in Excess of Projected Benefit Obligation............ 17,289 13,858 Unrecognized Prior Service Costs................................. (3,486) (3,077) Unrecognized Net Gain............................................ (21,785) (21,044) ------------ ------------ Accrued Pension Liability........................................ $ (7,982) $ (10,263) ------------ ------------ ------------ ------------
For the years ended January 1, 1995, December 31, 1995 and December 29, 1996, the weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 8.50%, 8.00% and 7.75%, respectively. The rate of annual increase in future compensation levels used ranged from 5.0% to 6.5% for the year ended January 1, 1995, from 4.5% to 6.0% for the year ended F-20 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. EMPLOYEE BENEFIT PLANS (CONTINUED) December 31, 1995 and 4.0% to 5.5% for the year ended December 29, 1996, depending on the employee group. The expected long-term rate of return on plan assets was 9.5% for each of the three years. Effective December 30, 1996, FICC changed its method of calculating the market-related value of plan assets used in determining the return-on-asset component of annual pension expense and the cumulative net unrecognized gain or loss subject to amortization. Under the previous accounting method, the calculation of the market-related value of assets reflected amortization of the actual realized and unrealized capital return on assets on a straight-line basis over a five-year period. Under the new method, the calculation of the market-related value of assets reflects the long-term rate of return expected by FICC and amortization of the difference between the actual return (including capital, dividends and interest) and the expected return over a five-year period. FICC believes the new method is widely used in practice and preferable because it results in calculated plan asset values that more closely approximate fair value, while still mitigating the effect of annual market-value fluctuations. Under both methods, only the cumulative net unrecognized gain or loss which exceeds 10% of the greater of the projected benefit obligation or the market-related value of plan assets is subject to amortization. This change resulted in a noncash benefit for the nine months ended September 28, 1997 of $2,236,000 (net of taxes of $1,554,000) which represents the cumulative effect of the change related to years prior to fiscal 1997 and $455,000 (net of taxes of $316,000) in lower pension expense related to the nine months ended September 28, 1997 as compared to the previous accounting method. Had this change been applied retroactively, pension expense would have been reduced by $729,000, $879,000 and $946,000 for the years ended January 1, 1995, December 31, 1995 and December 29, 1996, respectively. FICC's Employee Savings and Investment Plan (the "Plan") covers all eligible employees and is qualified under Section 401(k) of the Internal Revenue Code. For the years ended January 1, 1995, December 31, 1995 and December 29, 1996, FICC made discretionary matching contributions at the rate of 75% of a participant's first 2% of his/her contributions and 50% of a participant's next 2% of his/her contributions. All employee contributions are fully vested. Employer contributions are vested at the completion of five years of service or at retirement, death, disability or termination at age 65 or over, as defined by the Plan. Contribution and administrative expenses for the Plan were approximately $1,032,000, $1,086,000 and $1,002,000 for the years ended January 1, 1995, December 31, 1995 and December 29, 1996, respectively. 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS FICC provides health care and life insurance benefits to certain groups of employees upon retirement. Eligible employees may continue their coverages if they are receiving a pension benefit, are 55 years of age, and have completed 10 years of service. The plan requires contributions for health care coverage from participants who retired after September 1, 1989. Life insurance benefits are non-contributory. The plan is not funded. F-21 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) FICC accrues the cost of postretirement benefits over the years employees provide services to the date of their full eligibility for such benefits. The components of the net postretirement benefit cost for the years ended January 1, 1995, December 31, 1995 and December 29, 1996 were (in thousands):
JANUARY 1, DECEMBER 31, DECEMBER 29, 1995 1995 1996 ------------- --------------- --------------- Service Cost of Benefits Earned...................... $ 108 $ 105 $ 125 Interest Cost on Accumulated Postretirement Benefit Obligation, net of Amortization.................... 405 478 374 ----- ----- ----- Net Postretirement Benefit Expense................... $ 513 $ 583 $ 499 ----- ----- ----- ----- ----- -----
The postretirement benefit liability as of December 31, 1995 and December 29, 1996 included the following components (in thousands):
DECEMBER 31, DECEMBER 29, 1995 1996 ------------- ------------- Actuarial Present Value of Postretirement Benefit Obligation: Retirees..................................................... $ 4,267 $ 3,837 Other fully eligible plan participants....................... 428 358 Other active plan participants............................... 1,480 1,514 ------ ------ Accumulated Postretirement Benefit Obligation.................... 6,175 5,709 Plan Changes..................................................... 1,175 1,113 Unrecognized Net (Loss) Gain..................................... (293) 328 ------ ------ Postretirement Benefit Liability................................. $ 7,057 $ 7,150 ------ ------ ------ ------
The discount rate used to determine the accumulated postretirement benefit obligation was 8.50%, 8.00% and 7.75% for the years ended January 1, 1995, December 31, 1995 and December 29, 1996, respectively. The assumed health care cost trend rate used to measure the accumulated postretirement benefit obligation was 14% gradually declining to 6% in 2000 and thereafter for the year ended January 1, 1995, 11.5% gradually declining to 5.5% in 2000 and thereafter for the year ended December 31, 1995 and 9.25% gradually declining to 5.25% in 2000 and thereafter for the year ended December 29, 1996. A one-percentage-point increase in the assumed health care cost trend rate would have increased the postretirement benefit expense by approximately $56,000, $55,000 and $49,000, and would have increased the accumulated postretirement benefit obligation by approximately $484,000, $478,000 and $411,000 for the years ended January 1, 1995, December 31, 1995 and December 29, 1996, respectively. FICC increased the required contributions from participants who retired after July 31, 1994, for health coverage. This and other plan changes are being amortized over the expected remaining employee service period of active plan participants. 12. INSURANCE RESERVES At December 31, 1995, December 29, 1996 and September 28, 1997, insurance reserves of approximately $20,847,000, $16,940,000 and $29,306,000, respectively, had been recorded. Insurance reserves at F-22 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. INSURANCE RESERVES (CONTINUED) September 28, 1997 included RIC's reserve for FICC's insurance liabilities of approximately $13,625,000. Reserves at December 31, 1995, December 29, 1996 and September 28, 1997 also included accruals related to postemployment benefits and postretirement benefits other than pensions. While management believes these reserves are adequate, it is reasonably possible that the ultimate liabilities will exceed such estimates. Classification of the reserves was as follows (in thousands):
DECEMBER 31, DECEMBER 29, SEPTEMBER 28, 1995 1996 1997 ------------ ------------ ------------- Current.......................................... $ 6,605 $ 3,973 $ 6,773 Long-term........................................ 14,242 12,967 22,533 ------------ ------------ ------------- Total........................................ $ 20,847 $ 16,940 $ 29,306 ------------ ------------ ------------- ------------ ------------ -------------
Following is a summary of the activity in the insurance reserves for the years ended January 1, 1995, December 31, 1995 and December 29, 1996 and for the nine months ended September 28, 1997 (in thousands):
JANUARY 1, 1995 DECEMBER 31, 1995 DECEMBER 29, 1996 SEPTEMBER 28, 1997 -------------- ----------------- ----------------- ------------------ Beginning balance..................... $ 24,977 $ 23,216 $ 20,847 $ 16,940 Provision............................. 11,727 11,336 8,363 8,948 Payments.............................. (13,488) (13,705) (12,270) (9,813) Acquisition of RIC.................... -- -- -- 13,231 ------- ------- ------- ------- Ending balance........................ $ 23,216 $ 20,847 $ 16,940 $ 29,306 ------- ------- ------- ------- ------- ------- ------- -------
13. STOCK PLANS A Stock Rights Plan ("SRP") was adopted by FICC in 1991. Under the SRP, certain eligible individuals were granted rights to purchase shares of voting common stock of FICC for $.01 per share, subject to certain vesting, anti-dilution and exercise requirements. As of December 31, 1995, the aggregate number of shares which could have been issued under the SRP was 88,801 of which 41,316 rights were issued and vested. The estimated fair value of the rights vested was not material and no compensation expense was recorded. On March 25, 1996, FICC established the Management Stock Plan ("MSP"). The MSP provided for persons with rights granted under the SRP to waive their rights under such plan and receive shares of FICC's Class A Common Stock. Accordingly, in April 1996, all of the participants in the SRP made this election and the SRP rights then outstanding were cancelled and 122,888 shares of Class A Common Stock were issued, of which 61,650 were vested as of December 29, 1996. In April 1996, the fair value of the 122,888 shares of Class A Common Stock issued was approximately $30,700, or $0.25 per share. The estimated fair value of the 20,334 additional shares vested in 1996 of $5,000 was recorded as compensation expense in the year ended December 29, 1996. The remaining issued, non-vested shares of 61,238 will vest based on the Company achieving certain performance measurements. As of September 28, 1997, 27,113 additional shares are available for grant under the MSP (see Note 17). Net loss and net loss per share (see Note 17) for the year ended December 29, 1996 would have been $7,786,000 and $1.09, respectively had FICC used the fair value based method prescribed by SFAS No. 123 to account for the restricted stock issued in 1996. F-23 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. STOCK PLANS (CONTINUED) In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation" which was adopted by FICC effective January 1, 1996. SFAS No. 123 requires the measurement of the fair value of stock options or warrants granted to be included in the statement of operations or that pro forma information related to the fair value be disclosed in the notes to financial statements. FICC has determined that it will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25 and elect the disclosure-only alternative under SFAS No. 123. Since no options were granted since January 2, 1995, the pro forma disclosures required by SFAS No. 123 are not applicable. 14. RELATED PARTY TRANSACTIONS In March 1996, the FICC pension plan acquired three restaurant properties from FICC. The land, buildings and improvements were purchased by the plan at their appraised value of $2,043,000 and are located in Connecticut, Vermont and Virginia. Simultaneous with the purchase, the pension plan leased back the three properties to FICC at an aggregate annual base rent of $214,000 for the first five years and $236,000 for the following five years. The pension plan was represented by independent legal and financial advisors. 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 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. F-24 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. RELATED PARTY TRANSACTIONS (CONTINUED) 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. Proceeds from the sale were approximately $8,238,000, which amount includes $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. 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 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 F-25 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. FRANCHISE AGREEMENT (CONTINUED) with an option to acquire these restaurants in the future. The franchisee is required by the terms of the Agreement to purchase from FICC all of the frozen dessert products it sells in the franchised restaurants. 17. PROPOSED INITIAL PUBLIC OFFERING (UNAUDITED) The Company has filed Registration Statements with the Securities and Exchange Commission related to an initial public offering of 5,000,000 shares of the Company's Common Stock (the "Common Stock Offering") and $175 million of Senior Notes due 2007 (the "Senior Note Offering") and will, contingent upon consummation of the offerings, enter into a new credit facility consisting of a $105 million term loan facility, a $55 million revolving credit facility and a $15 million letter of credit facility (the "New Credit Facility"). The Company will amend its articles of organization in connection with the Common Stock Offering to give effect to a 923.6442-for-1 split of Class A and Class B Common Stock and increase the number of authorized shares. The accompanying consolidated financial statements have been restated to reflect the anticipated share split. Pursuant to a stockholder rights plan FICC plans to adopt (the "Plan"), prior to the consummation of the Common Stock Offering, the Board will declare a dividend distribution of one purchase right (a "Right") for each outstanding share of Common Stock. The Plan provides, in substance, that should any person or group (other than Mr. Smith, Equitable, senior management and their respective affiliates) acquire 15% or more of FICC's Common Stock, each Right, other than Rights held by the acquiring person or group, would entitle its holder to purchase a specified number of shares of Common Stock for 50% of their then current market value. Unless a 15% acquisition has occurred, the Rights may be redeemed by FICC at any time prior to the termination date of the Plan. In connection with the offerings, the 27,113 shares in the MSP not previously allocated will be allocated and immediately vested and the 61,238 shares previously issued but not vested will become vested (see Note 13). Additionally, 775,742 shares of Class A Common Stock will be returned to FICC from certain shareholders for no consideration. The shares are being returned in accordance with an agreement with FICC's existing lenders as a condition to the offerings. Of such shares, 100,742 shares will be issued to FICC's Chief Executive Officer and vest immediately, 375,000 shares will be reserved for issuance under a restricted stock option plan (the "Restricted Stock Plan") to be adopted by FICC in connection with the offerings and 300,000 shares will be issued to certain employees. The 300,000 shares will vest immediately. The estimated fair value of $9,782,000 of the (i) 27,113 vested shares to be issued under the MSP, (ii) 61,238 shares previously issued under the MSP which will vest in connection with the offerings, (iii) 100,742 vested shares to be issued to the Company's Chief Executive Officer in connection with the offerings and (iv) 300,000 vested shares to be issued to certain employees will be recorded as compensation expense by FICC upon consummation of the offerings. In connection with the offerings, FICC also plans to adopt a stock option plan. Pro forma net loss per share amounts assume the issuance of 5,000,000 additional shares of Common Stock in connection with the Common Stock Offering and the return of 375,000 net shares to FICC in 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 F-26 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. PROPOSED INITIAL PUBLIC OFFERING (UNAUDITED) (CONTINUED) to management in connection with the offerings have been included in the pro forma shares used in computing net loss per share. Historical net loss per share is not presented in the accompanying consolidated financial statements, as such amounts are not meaningful. 18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION FICC's obligation related to the $175,000,000 of Senior Notes (see Note 17) are guaranteed fully and unconditionally by one of FICC's subsidiaries. There are no restrictions on FICC's ability to obtain dividends or other distributions of funds from this subsidiary except those imposed by applicable law. The following supplemental financial information sets forth, on a condensed consolidating basis, statements of operations, balance sheets and statements of cash flows for Friendly Ice Cream Corporation ("the Parent Company"), Friendly's Restaurants Franchise, Inc. ("the Guarantor Subsidiary") and Friendly's International, Inc. (FII), Friendly Holding (UK) Limited, Friendly Ice Cream (UK) Limited and Restaurant Insurance Corporation (collectively "the Non-guarantor Subsidiaries"). Prior to the consummation of the offerings (see Note 17), the investment in joint venture will be transferred to FII, therefore, the equity in net loss of joint venture and investment in joint venture are included in Non-guarantor Subsidiaries in the accompanying consolidating financial statements. Stockholders' equity (deficit), total assets and net income (loss) of the Non-guarantor Subsidiaries are insignificant to consolidated amounts for prior periods. Accordingly, supplemental condensed consolidating financial information is not presented for prior periods. Separate complete financial statements and other disclosures of the respective Guarantor Subsidiary as of December 29, 1996 and September 28, 1997 and for the year and nine months then ended are not presented because management has determined that such information is not material to investors. Investments in subsidiaries are accounted for by the Parent Company on the equity method for purposes of the supplemental consolidating presentation. Earnings of the subsidiaries are, therefore, reflected in the Parent Company's investment accounts and earnings. The principal elimination entries eliminate the Parent Company's investments in subsidiaries and intercompany balances and transactions. F-27 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 29, 1996 (In thousands)
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ----------- ------------- ------------- ------------ Revenues.................................... $ 650,024 $ 145 $ 638 $ -- $ 650,807 Costs and expenses: Cost of sales............................. 191,578 51 327 -- 191,956 Labor and benefits........................ 209,145 115 -- -- 209,260 Operating expenses and write-down of property and equipment.................. 143,046 -- 344 -- 143,390 General and administrative expenses....... 41,061 106 1,554 -- 42,721 Depreciation and amortization............. 32,953 6 20 -- 32,979 Interest expense.......................... 44,141 -- -- -- 44,141 ---------- ----------- ------------- ------ ------------ Loss before benefit from (provision for) income taxes and equity in net loss of consolidated subsidiaries................. (11,900) (133) (1,607) -- (13,640) Benefit from (provision for) income taxes... 5,594 (2) 276 -- 5,868 ---------- ----------- ------------- ------ ------------ Loss before equity in net loss of consolidated subsidiaries................. (6,306) (135) (1,331) -- (7,772) Equity in net loss of consolidated subsidiaries.............................. (1,466) -- -- 1,466 -- ---------- ----------- ------------- ------ ------------ Net loss.................................... $ (7,772) $ (135) $ (1,331) $ 1,466 $ (7,772) ---------- ----------- ------------- ------ ------------ ---------- ----------- ------------- ------ ------------
F-28 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 29, 1996 (In thousands)
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ------------- --------------- ------------ ------------ Assets Current assets: Cash and cash equivalents.................. $ 17,754 $ 268 $ 604 $ -- $ 18,626 Trade accounts receivable.................. 4,765 -- 227 -- 4,992 Inventories................................ 14,796 24 325 -- 15,145 Deferred income taxes...................... 12,366 9 -- -- 12,375 Prepaid expenses and other current assets................................... 4,805 -- 517 (3,664) 1,658 ---------- ----- ------ ------------ ------------ Total current assets......................... 54,486 301 1,673 (3,664) 52,796 Investment in joint venture.................. -- -- 4,500 -- 4,500 Property and equipment, net.................. 285,460 522 179 -- 286,161 Intangibles and deferred costs, net.......... 16,019 -- -- -- 16,019 Investments in subsidiaries.................. 3,531 -- -- (3,531) -- Other assets................................. 650 -- -- -- 650 ---------- ----- ------ ------------ ------------ Total assets................................. $ 360,146 $ 823 $ 6,352 $ (7,195) $ 360,126 ---------- ----- ------ ------------ ------------ ---------- ----- ------ ------------ ------------ Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations.............................. $ 7,642 $ -- $ -- $ -- $ 7,642 Accounts payable........................... 20,773 -- -- -- 20,773 Accrued expenses........................... 44,780 141 3,824 (3,664) 45,081 ---------- ----- ------ ------------ ------------ Total current liabilities.................... 73,195 141 3,824 (3,664) 73,496 Deferred income taxes........................ 48,793 11 (332) -- 48,472 Long-term obligations, less current maturities................................. 385,977 -- -- -- 385,977 Other liabilities............................ 25,337 -- -- -- 25,337 Stockholders' equity (deficit)............... (173,156) 671 2,860 (3,531) (173,156) ---------- ----- ------ ------------ ------------ Total liabilities and stockholders' equity (deficit).................................. $ 360,146 $ 823 $ 6,352 $ (7,195) $ 360,126 ---------- ----- ------ ------------ ------------ ---------- ----- ------ ------------ ------------
F-29 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 29, 1996 (In thousands)
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ----------- --------------- ------------ ------------ Net cash provided by (used in) operating activities.................................. $ 25,519 $ (38) $ 682 $ -- $ 26,163 ---------- ----------- ------ ------------ ------------ Cash flows from investing activities: Purchases of property and equipment......... (24,043) -- (174) -- (24,217) Proceeds from sales of property and equipment................................. 8,409 -- -- -- 8,409 Investments in joint venture................ (4,500) -- -- -- (4,500) Investments in consolidated subsidiaries.... (306) -- -- 306 -- ---------- ----------- ------ ------------ ------------ Net cash used in investing activities......... (20,440) -- (174) 306 (20,308) ---------- ----------- ------ ------------ ------------ Cash flows from financing activities: Contribution of capital..................... -- 306 -- (306) -- Proceeds from exercise of stock purchase warrants.................................. 22 -- -- -- 22 Proceeds from borrowings.................... 48,196 -- -- -- 48,196 Repayments of long-term obligations......... (59,215) -- -- -- (59,215) ---------- ----------- ------ ------------ ------------ Net cash (used in) provided by financing activities.................................. (10,997) 306 -- (306) (10,997) ---------- ----------- ------ ------------ ------------ Effect of exchange rate changes on cash....... 5 -- 73 -- 78 ---------- ----------- ------ ------------ ------------ Net (decrease) increase in cash and cash equivalents................................. (5,913) 268 581 -- (5,064) Cash and cash equivalents, beginning of period...................................... 23,667 -- 23 -- 23,690 ---------- ----------- ------ ------------ ------------ Cash and cash equivalents, end of period...... $ 17,754 $ 268 $ 604 $ -- $ 18,626 ---------- ----------- ------ ------------ ------------ ---------- ----------- ------ ------------ ------------ Supplemental disclosures: Interest paid............................... $ 36,000 $ -- $ -- $ -- $ 36,000 Capital lease obligations incurred.......... 5,923 28 -- -- 5,951 Capital lease obligations terminated........ 128 -- -- -- 128 Issuance of common stock to lenders......... 50 -- -- -- 50
F-30 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1997 (In thousands)
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ----------- ------------- ------------ ------------ Revenues..................................... $ 506,407 $ 1,146 $ 480 $ -- $ 508,033 Costs and expenses: Cost of sales.............................. 146,674 -- 431 -- 147,105 Labor and benefits......................... 159,315 -- -- -- 159,315 Operating expenses and write-down of property and equipment................... 113,009 -- (393) -- 112,616 General and administrative expenses........ 31,908 158 709 -- 32,775 Depreciation and amortization.............. 24,226 -- -- -- 24,226 Interest expense (income).................. 33,029 -- (57) -- 32,972 Gain on sale of restaurant operations........ 2,303 -- -- -- 2,303 Equity in net loss of joint venture.......... -- -- 1,112 -- 1,112 ---------- ----------- ------------- ------------ ------------ Income (loss) before (provision for) benefit from income taxes, cumulative effect of change in accounting principle and equity in net loss of consolidated subsidiaries... 549 988 (1,322) -- 215 (Provision for) benefit from income taxes.... (225) (405) 542 -- (88) ---------- ----------- ------------- ------------ ------------ Income (loss) before cumulative effect of change in accounting principle and equity in net loss of consolidated subsidiaries.................. 324 583 (780) -- 127 Cumulative effect of change in accounting principle.................................. 2,236 -- -- -- 2,236 ---------- ----------- ------------- ------------ ------------ Income (loss) before equity in net loss of consolidated subsidiaries.................. 2,560 583 (780) -- 2,363 Equity in net loss of consolidated subsidiaries............................... (197) -- -- 197 -- ---------- ----------- ------------- ------------ ------------ Net income (loss)............................ $ 2,363 $ 583 $ (780) $ 197 $ 2,363 ---------- ----------- ------------- ------------ ------------ ---------- ----------- ------------- ------------ ------------
F-31 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET AS OF SEPTEMBER 28, 1997 (In thousands)
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ----------- ------------- ------------ ------------ Assets Current assets: Cash and cash equivalents................. $ 10,976 $ 248 $ 820 $ -- $ 12,044 Restricted cash........................... -- -- 4,000 -- 4,000 Trade accounts receivable................. 7,105 277 481 -- 7,863 Inventories............................... 16,573 -- 444 -- 17,017 Deferred income taxes..................... 12,375 -- 6 -- 12,381 Prepaid expenses and other current assets.................................. 10,896 2,274 219 (6,654) 6,735 ----------- ----------- ------------- ------------ ------------ Total current assets........................ 57,925 2,799 5,970 (6,654) 60,040 Restricted cash............................. -- -- 8,907 -- 8,907 Investment in joint venture................. -- -- 3,388 -- 3,388 Property and equipment, net................. 272,950 -- 239 -- 273,189 Intangibles and deferred costs, net......... 15,519 -- -- -- 15,519 Investments in subsidiaries................. 4,970 -- -- (4,970) -- Other assets................................ 412 -- 2,359 (900) 1,871 ----------- ----------- ------------- ------------ ------------ Total assets................................ $ 351,776 $ 2,799 $ 20,863 $ (12,524) $ 362,914 ----------- ----------- ------------- ------------ ------------ ----------- ----------- ------------- ------------ ------------ Liabilities and Stockholders' Equity (Deficit) Current liabilities: Current maturities of long-term obligations............................. $ 8,139 $ -- $ -- $ (400) $ 7,739 Accounts payable.......................... 25,542 -- -- -- 25,542 Accrued expenses.......................... 43,126 47 7,735 (6,254) 44,654 ----------- ----------- ------------- ------------ ------------ Total current liabilities................... 76,807 47 7,735 (6,654) 77,935 Deferred income taxes....................... 50,240 -- (136) -- 50,104 Long-term obligations, less current maturities................................ 372,196 -- -- (900) 371,296 Other liabilities........................... 23,217 1,422 9,624 -- 34,263 Stockholders' equity (deficit).............. (170,684) 1,330 3,640 (4,970) (170,684) ----------- ----------- ------------- ------------ ------------ Total liabilities and stockholders' equity (deficit)................................. $ 351,776 $ 2,799 $ 20,863 $ (12,524) $ 362,914 ----------- ----------- ------------- ------------ ------------ ----------- ----------- ------------- ------------ ------------
F-32 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED) SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1997 (In thousands)
PARENT GUARANTOR NON-GUARANTOR COMPANY SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ---------- ----------- ------------- ------------- ------------ Net cash provided by (used in) operating activities.................................. $ 22,188 $ (162) $ 7,198 $ -- $ 29,224 ---------- ----------- ------------- ----- ------------ Cash flows from investing activities: Purchases of property and equipment......... (14,595) -- (61) -- (14,656) Proceeds from sales of property and equipment................................. 4,842 -- -- -- 4,842 Purchases of investment securities.......... -- -- (8,181) -- (8,181) Proceeds from sales and maturities of investment securities..................... -- -- 316 -- 316 Cash (paid) received in acquisition of Restaurant Insurance Corporation.......... (2,300) -- 2,265 -- (35) Advances to joint venture................... (1,400) -- -- -- (1,400) Investments in consolidated subsidiaries.... (142) -- -- 142 -- ---------- ----------- ------------- ----- ------------ Net cash (used in) provided by investing activities.................................. (13,595) -- (5,661) 142 (19,114) ---------- ----------- ------------- ----- ------------ Cash flows from financing activities: Contribution of capital..................... -- 142 -- (142) -- Proceeds from borrowings (advances to parent)................................... 45,511 -- (1,300) -- 44,211 Repayments of long-term obligations......... (60,882) -- -- -- (60,882) ---------- ----------- ------------- ----- ------------ Net cash (used in) provided by financing activities.................................. (15,371) 142 (1,300) (142) (16,671) ---------- ----------- ------------- ----- ------------ Effect of exchange rate changes on cash....... -- -- (21) -- (21) ---------- ----------- ------------- ----- ------------ Net (decrease) increase in cash and cash equivalents................................. (6,778) (20) 216 -- (6,582) Cash and cash equivalents, beginning of period...................................... 17,754 268 604 -- 18,626 ---------- ----------- ------------- ----- ------------ Cash and cash equivalents, end of period...... $ 10,976 $ 248 $ 820 $ -- $ 12,044 ---------- ----------- ------------- ----- ------------ ---------- ----------- ------------- ----- ------------ Supplemental disclosures: Interest paid............................... $ 30,236 $ -- $ -- $ -- $ 30,236 Capital lease obligations incurred.......... 2,227 -- -- -- 2,227 Capital lease obligations terminated........ 141 -- -- -- 141
F-33 - --------------------------------------------- --------------------------------------------- - --------------------------------------------- --------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THIS OFFERING AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. ------------------------ TABLE OF CONTENTS ------------------------
PAGE --------- PROSPECTUS SUMMARY................................ 3 RISK FACTORS...................................... 10 USE OF PROCEEDS................................... 17 DIVIDEND POLICY................................... 18 DILUTION.......................................... 18 CAPITALIZATION.................................... 19 SELECTED CONSOLIDATED FINANCIAL INFORMATION....... 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................... 22 BUSINESS.......................................... 32 MANAGEMENT........................................ 45 OWNERSHIP OF COMMON STOCK......................... 52 CERTAIN TRANSACTIONS.............................. 53 DESCRIPTION OF NEW CREDIT FACILITY................ 54 DESCRIPTION OF SENIOR NOTES....................... 55 DESCRIPTION OF CAPITAL STOCK...................... 56 SHARES ELIGIBLE FOR FUTURE SALE................... 60 UNDERWRITING...................................... 62 LEGAL MATTERS..................................... 64 EXPERTS........................................... 64 AVAILABLE INFORMATION............................. 64 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS........ F-1
------------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THE COMMON STOCK OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 5,000,000 SHARES [LOGO] COMMON STOCK ----------------- PROSPECTUS ----------------- NATIONSBANC MONTGOMERY SECURITIES, INC. PIPER JAFFRAY INC. TUCKER ANTHONY INCORPORATED , 1997 - --------------------------------------------- --------------------------------------------- - --------------------------------------------- --------------------------------------------- PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following is a statement of the expenses payable by the Company in connection with issuance and distribution of the securities being registered hereby. All amounts shown are estimates, except the SEC registration fee and the NASD filing fee. SEC registration fee.............................................. $ 36,600 NASD filing fee................................................... 12,575 Nasdaq filing fee................................................. 36,250 Printing and engraving............................................ 39,500 Legal fees and expenses........................................... 197,400 Accounting fees and expenses...................................... 39,500 Transfer Agent and Registrar fees and expenses.................... 10,000 Blue sky fees and expenses........................................ 7,500 Miscellaneous..................................................... 47,675 --------- Total............................................................. $ 427,000 --------- ---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 67 of Chapter 156B of the Massachusetts General Laws provides that a corporation may indemnify its directors and officers to the extent specified in or authorized by (i) the articles of organization, (ii) a by-law adopted by the stockholders, or (iii) a vote adopted by the holders of a majority of the shares of stock entitled to vote on the election of directors. In all instances, the extent to which a corporation provides indemnification to its directors and officers under Section 67 is optional. In its Restated Articles of Organization, the Registrant has elected to provide indemnification to its directors and officers in appropriate circumstances. Generally, the Restated Articles of Organization provide that the Registrant shall indemnify directors and officers of the Registrant against liabilities and expenses arising out of legal proceedings brought against them by reason of their status as directors or officers of the Registrant or by reason of their agreeing to serve, at the request of the Registrant, as a director or officer of another organization. Under this provision, a director or officer of the Registrant shall be indemnified by the Registrant for all costs and expenses (including attorneys' fees), judgments, liabilities and amounts paid in settlement of such proceedings, unless he is adjudicated in such proceedings not to have acted in good faith and in the reasonable belief that his action was in the best interest of the Registrant or, to the extent such matter relates to service with respect to an employee benefit plan, in the best interest of the participants or beneficiaries of such benefit plan. Any indemnification shall be made by the Registrant unless a court of competent jurisdiction holds that the director or officer did not meet the standard of conduct set forth above or the Registrant determines, by clear and convincing evidence, that the director or officer did not meet such standard. Such determination shall be made by the Board of Directors of the Registrant, based on advice of independent legal counsel. The Registrant shall advance litigation expenses to a director or officer at his request upon receipt of an undertaking by any such director or officer to repay such expenses if it is ultimately determined that he is not entitled to indemnification for such expenses. The Registrant may, to the extent authorized from time to time by the Board of Directors, grant indemnification rights to employees, agents or other persons serving the Registrant. Article VI of the Registrant's Restated Articles of Organization eliminates the personal liability of the Registrant's directors to the Registrant or its stockholders for monetary damages for breach of a director's II-1 fiduciary duty, except that such Article VI does not eliminate or limit any liability of a director (i) for any breach of a director's duty of loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 61 or 62 of Chapter 156B of the Massachusetts General Laws, or (iv) with respect to any transaction from which the directors derived an improper personal benefit. Section 8 of the Underwriting Agreement provides that the Underwriters are obligated, under certain circumstances, to indemnify the Company, directors, officers and controlling persons of the Company against certain liabilities, including liabilities under the Securities Act. Reference is made to the form of Underwriting Agreement filed as Exhibit 1.1 hereto. The Company maintains directors and officers liability insurance for the benefit of its directors and certain of its officers. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since the beginning of 1994, the Company sold the following securities without registration under the Securities Act of 1933, as amended (the "Act"). No underwriter was involved in such sales and no underwriting commissions or discounts were paid with respect to any of such sales. 1. In connection with a restructuring of the Company's old credit agreement in March 1996, the Company issued 1,187,503 shares of its Class B Common Stock to the Bank of Boston, as agent for the other lenders under such credit agreement, in reliance upon the exemption from the registration requirements of the Securities Act contained in Section 4(2) of the Securities Act. 2. In April 1996, two officers of the Company exercised warrants held by them for an aggregate of 71,527 shares of the Company's Class A Common Shares for an aggregate consideration of approximately $21,000. Such shares were issued in reliance upon the exemption from the registration requirements of the Securities Act contained in Section 4(2) of the Securities Act. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits.
**1.1 Form of Underwriting Agreement. 3.1 Restated Articles of Organization of Friendly Ice Cream Corporation (the "Company"). **3.2 Amended and Restated By-laws of the Company. 4.1 Stockholder and Registration Rights Agreement of the Company, as amended. *4.2 Registration Rights Agreement between the Company and Donald N. Smith. 4.3 Rights Agreement between the Company and The Bank of New York, a Rights Agent. *5.1 Opinion and consent of Mayer, Brown & Platt, counsel for the Company regarding the validity of the offered securities. 10.1 Form of Credit Agreement to be entered into among the Company, Societe Generale, New York Branch and certain other banks and financial institutions. (Incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1, No. 333-34635.) **10.2 Form of Senior Note Indenture between Friendly Ice Cream Corporation, Friendly's Restaurants Franchise, Inc. and The Bank of New York, as Trustee. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1, No. 333-34635.) 10.3 The Company's Stock Option Plan. 10.4 The Company's Restricted Stock Plan. **10.5 Form of Agreement relating to the Company's Limited Stock Compensation Program. 10.6 Development Agreement between Friendly Ice Cream Corporation and FriendCo Restaurants, Inc. 10.7 Franchise Agreement between Friendly's Restaurants Franchise, Inc. and FriendCo Restaurants, Inc. 10.8 Management Agreement between Friendly Ice Cream Corporation and FriendCo Restaurants, Inc. 10.9 Purchase and Sale Agreement between Friendly Ice Cream Corporation and FriendCo Restaurants, Inc. 10.10 Software License Agreement between Friendly's Restaurants Franchise, Inc. and FriendCo Restaurants, Inc. (Exhibits 10.6 through 10.10, collectively, the "DavCo Agreement") **10.11 Sublease between SSP Company, Inc. and the Company, as amended, for the Chicopee, Massachusetts Distribution Center. **10.12 Master License and Distribution Agreement for the Territory of Korea between Friendly's International, Inc. and Hansung Enterprise Co., Ltd. 10.13 TRC Management Contract between the Company and The Restaurant Company. 10.14 License Agreement between the Company and Hershey Foods Corporation for 1988 Non-Friendly Marks. 12.1 Schedule of Computation of Ratio of Earnings to Fixed Charges. **21.1 Subsidiaries of the Company. *23.1 Consent of Mayer, Brown & Platt (included in Exhibit 5.1). 23.2 Consent of Arthur Andersen LLP. **24.1 Power of attorney (included on Registration Statement signature page). 24.2 Power of Attorney of Charles A. Ledsinger, Jr. **99.1 Consent of Michael J. Daly, as a person about to become a director. 99.2 Consent of Burton J. Manning, as a person about to become a director.
- ------------------------ * To be filed by amendment. ** Previously filed. II-3 (b) Financial Statement Schedules. All schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS. The undersigned Registrants hereby undertake that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrants pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) At the closing specified in the underwriting agreement, it will provide to the underwriter certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (4) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrants pursuant to the foregoing provisions, or otherwise, the Registrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in such Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrants of expenses incurred or paid by a director, officer or controlling person of the Registrants in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrants will, unless in the opinion of their counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (5) To provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement, or amendment thereto, to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Wilbraham, State of Massachusetts, on the 17th day of October, 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 October 17, 1997 Donald N. Smith Executive Officer and Director) Vice President, Finance, /s/ GEORGE G. ROLLER Chief Financial Officer - ------------------------------ and Treasurer October 17, 1997 George G. Roller (Principal Financial and Accounting Officer) * - ------------------------------ Director October 17, 1997 Charles A. Ledsinger, Jr. * - ------------------------------ Director October 17, 1997 Steven L. Ezzes - ------------------------------ Director Gregory L. Segall */s/ GEORGE G. ROLLER ------------------------- George G. Roller ATTORNEY-IN-FACT II-5 EX-3.1 2 EXHIBIT 3.1 THE COMMONWEALTH OF MASSACHUSETTS - ---------- William Francis Galvin Examiner Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108-1512 RESTATED ARTICLES OF ORGANIZATION (General Laws, Chapter 156B, Section 74) - ---------- Name Approved We, Donald N. Smith, *President -----------------------------------------------------------, and Aaron B. Parker, *Clerk -----------------------------------------------------------, of Friendly Ice Cream Corporation -----------------------------------------------------------, (EXACT NAME OF CORPORATION) located at 1855 Boston Road, Wilbraham, Massachusetts 01095 -----------------------------------------------------------, (STREET ADDRESS OF CORPORATION MASSACHUSETTS) do hereby certify that the following Restatement of the Articles of Organization was duly adopted at a meeting held on _____________, 19____ by a vote of the directors/or: _______ shares of ______________ of _________ shares outstanding, (TYPE, CLASS & SERIES, IF ANY) _______ shares of ______________ of _________ shares outstanding, and (TYPE, CLASS & SERIES, IF ANY) _______ shares of ______________ of _________ shares outstanding, (TYPE, CLASS & SERIES, IF ANY) **being at least a majority of each type, class or series outstanding and entitled to vote thereon: /**being at least two-thirds of each type, class or series outstanding and entitled to vote thereon and of each type, class or series of stock whose rights are adversely affected thereby: C / / P / / ARTICLE I M / / The name of the corporation is: R.A. / / Friendly Ice Cream Corporation ARTICLE II The purpose of the corporation is to engage in the following business activities: (See Attachment 2) *DELETE THE INAPPLICABLE WORDS. **DELETE THE INAPPLICABLE CLAUSE. NOTE: IF THE SPACE PROVIDED UNDER ANY ARTICLE OR ITEM ON THIS FORM IS INSUFFICIENT, ADDITIONS SHALL BE SET FORTH ON SEPARATE 8-1/2 x 11 SHEETS OF PAPER WITH A LEFT MARGIN OF AT LEAST 1 INCH. ADDITIONS TO MORE THAN ONE ARTICLE MAY BE MADE ON A SINGLE SHEET SO LONG AS EACH ARTICLE REQUIRING EACH ADDITION IS CLEARLY INDICATED. - ---------- P.C. ARTICLE III State the total number of shares and par value, if any, of each class of stock which the corporation is authorized to issue:
- ------------------------------------------------------------------------------------------- WITHOUT PAR VALUE WITH PAR VALUE - ------------------------------------------------------------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - ------------------------------------------------------------------------------------------- Common: Common: 50,000,000 $.01 - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- Preferred: Preferred: 1,000,000 $.01 - ------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------
ARTICLE IV If more than one class of stock is authorized, state a distinguishing designation for each class. Prior to the issuance of any shares of a class, if shares of another class are outstanding, the corporation must provide a description of the preferences, voting powers, qualifications, and special or relative rights or privileges of that class and of each other class of which shares are outstanding and of each series then established within any class. (See Attachment 4) ARTICLE V The restrictions, if any, imposed by the Articles of Organization upon the transfer of shares of stock of any class are: N/A ARTICLE VI **Other lawful provisions, if any, for the conduct and regulation of the business and affairs of the corporation, for its voluntary dissolution, or for limiting, defining, or regulating the powers of the corporation, or of its directors or stockholders, or of any class of stockholders: (See Attachment 6) **IF THERE ARE NO PROVISIONS STATE "NONE". NOTE: THE PRECEDING SIX (6) ARTICLES ARE CONSIDERED TO BE PERMANENT AND MAY ONLY BE CHANGED BY FILING APPROPRIATE ARTICLES OF AMENDMENT. ARTICLE VII The effective date of the restated Articles of Organization of the corporation shall be the date approved and filed by the Secretary of the Commonwealth. If a later effective date is desired, specify such date which shall not be more than thirty days after the date of filing. ARTICLE VIII The information contained in Article VIII is not a permanent part of the Articles of Organization. a. The street address (post office boxes are not acceptable) of the principal office of the corporation in Massachusetts is: 1855 Boston Road, Wilbraham, Massachusetts 01095 b. The name, residential address and post office address of each director and officer of the corporation is as follows: NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS President: Donald N. Smith 90 Hawthorne Road, Barrington Hills, IL 60010 SAME Treasurer: George G. Roller 2304 Bigelow Commons, Enfield, CT 06082 SAME Clerk: Aaron B. Parker 93 Elmwood Avenue, Longmeadow, MA 01106 SAME Directors: Donald N. Smith SEE ABOVE SAME Steven L. Ezzes 7 Sipperlays Hill Road, Westport, CT 06680 SAME Charles L. Atwood 2980 Gardens Way, Memphis, TN 38111 SAME Barry Krantz 11 Ironwood Court, Irvine, CA 92714 SAME Gregory L. Segall 1022 Barberry Road, Bryn Mawr, PA 19010 SAME c. The fiscal year (i.e., tax year) of the corporation shall end on the last day of the month of: d. The name and business address of the resident agent, if any, of the corporation is: CT Corporation System, 2 Oliver Street, Boston, MA 02109 **We further certify that the foregoing Restated Articles of Organization affect no amendments to the Articles of Organization of the corporation as heretofore amended, except amendments to the following articles. Briefly describe amendments below: (See Attachment A) SIGNED UNDER THE PENALTIES OF PERJURY, this day of , 19 ------- ------------ --, Donald N. Smith, *President, - -------------------------------------------------------------- Aaron B. Parker, *Clerk. - -------------------------------------------------------------- *Delete the inapplicable words. **If there are no amendments, state "None". THE COMMONWEALTH OF MASSACHUSETTS RESTATED ARTICLES OF ORGANIZATION (General Laws, Chapter 156B, Section 74) ------------------------------------------------------ ------------------------------------------------------ I hereby approve the within Restated Articles of Organization and, the filing fee in the amount of $_________ having been paid, said articles are deemed to have been filed with me this ________day of _____________, 19___. Effective Date:__________________________________________ WILLIAM FRANCIS GALVIN Secretary of the Commonwealth TO BE FILLED IN BY CORPORATION Photocopy of document to be sent to: ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ Telephone: -------------------------------------------- ATTACHMENT 2 ARTICLE II 1. To manufacture, store, buy, sell, handle, preserve, can, export, import, market, distribute, dispose of in any manner and generally trade and deal in and with, at wholesale or retail, as principal or agent, ice cream, dairy foods and food products of every class, kind and description. 2. To carry on any manufacturing, mercantile, selling, management, service or other business, operation or activity which may be lawfully carried on by a corporation organized under the Business Corporation Law of The Commonwealth of Massachusetts, whether or not related to those referred to in the foregoing paragraph. 3. To carry on any business, operation or activity through a wholly or partly owned subsidiary. 4. To carry on any business, operation or activity referred to in the foregoing paragraphs to the same extent as might an individual, whether as principal, agent, contractor or otherwise, and either alone or in conjunction or a joint venture or other arrangement with any corporation, association, trust, firm or individual. 5. To have as additional purposes all powers granted to business corporations under Chapter 156B, as amended from time to time, of the General Laws of The Commonwealth of Massachusetts. ATTACHMENT 4 ARTICLE IV Upon the effectiveness of these Restated Articles of Organization, each outstanding share of the Corporation's issued and outstanding Class A Common Stock, Class B Common Stock and Class C Common Stock shall be automatically converted into one share of Common Stock, whereupon each certificate evidencing shares of Class A Common Stock, Class B Common Stock and Class C Common Stock shall thereafter evidence the number of whole shares of Common Stock into which they have been converted, without need to exchange such certificate for a new certificate. A. DESCRIPTION OF STOCK Section 1. Common Stock. The holders of shares of Common Stock shall have the following rights: (a) Voting. The holders of shares of Common Stock shall be entitled to one vote per share on all matters to be voted by stockholders of the Corporation. (b) Dividends and Distributions. Dividends may be declared upon and paid to the holders of Common Stock as the Board of Directors shall determine. (c) Liquidation. On dissolution and liquidation of the Corporation, whether voluntary or involuntary, after paying or setting aside for the holders of all shares of Preferred Stock then outstanding the full preferential amounts to which they are entitled pursuant to the terms thereof, the net assets of the Corporation remaining shall be divided ratably among the holders of shares of Common Stock. (d) Conversion. The holders of shares of Common Stock shall not have any conversion rights whatsoever with respect to such shares of Common Stock. Section 2. Preferred Stock. The Board of Directors is authorized, subject to the limitations prescribed by law and by the provisions of this Article IV, to provide for the issuance of shares of Preferred Stock in series, to establish from time to time the number of shares to be included in each series, and to determine the designations, relative rights, preferences and limitations of the shares of each series. The authority of the Board of Directors with respect to each series includes determination of the following: (a) The number of shares in and the distinguishing designation of that series; (b) Whether shares of that series shall have full, special, conditional, limited or no voting rights, except to the extent otherwise provided by law; (c) Whether shares of that series shall be convertible into other securities of the Corporation and the terms and conditions of the conversion, including provision for adjustment of the conversion rate in circumstances determined by the Board of Directors; (d) Whether or not shares of that series shall be redeemable and the terms and conditions of redemption, including the date or dates upon or after which they shall be redeemable and the amount per share payable in case of redemption, which amount may vary under different conditions or at different redemption dates; (e) The dividend rate, if any, on shares of that series, the manner of calculating any dividends and the preferences of any dividends; (f) The right of shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation and the rights of priority of that series relative to the Common Stock and any other series of Preferred Stock on the distribution of assets on dissolution; and (g) Any other relative rights, preferences and limitations of that series that are permitted by law to vary. Section 3. Preemptive Rights. Holders of Common Stock and Preferred Stock of the Corporation shall have no preemptive rights to purchase stock of the Corporation or securities convertible into or carrying a right to subscribe for or acquire stock of the Corporation. ATTACHMENT 6 ARTICLE VI A. CLASSIFICATION OF BOARD OF DIRECTORS Section 1. Number of Directors. Subject to the restriction that the number of directors shall not be less than the number required by law, the number of directors of the Corporation shall be fixed from time to time by the vote of a majority of the directors then in office, but such number shall in no case be less than three. Any such determination made by the Board of Directors shall continue in effect unless and until changed by the Board of Directors, but no such changes shall affect the term of any director then in office. Section 2. Classification of Directors. This Article VI, Part A, Section 2 shall be effective only from and after the pricing of the Corporation's initial public offering of shares of Common Stock pursuant to the Securities Act of 1933, as amended (the "Effective Date"). The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. The term of office of the initial Class I directors shall continue until the first annual meeting following the Effective Date and until their successors are chosen and qualified, the term of office of the initial Class II directors shall continue until the second annual meeting following the Effective Date and until their successors are chosen and qualified and the term of office of the initial Class III directors shall continue until the third annual meeting following the Effective Date and until their successors are chosen and qualified. At each annual meeting of stockholders, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the authorized number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. A majority of the directors then in office shall constitute a quorum for the transaction of business. Any vacancy on the Board of Directors that results from an increase in the number of directors shall be filled by a majority of the directors then in office, even if less than a quorum, or by a sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his or her predecessor. Any director elected by the stockholders, or by the Board of Directors to fill a vacancy, may be removed only for cause by the affirmative vote of (i) the holders of not less than a majority of the voting power represented by all the shares of stock of the Corporation outstanding and entitled to vote for the election of directors, given at a duly called annual or special meeting of stockholders, or (ii) a majority of the directors then in office. B. LIMITATION OF LIABILITY OF DIRECTORS No director of this Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director notwithstanding any provision of law imposing such liability; provided, however, that this Article shall not eliminate or limit any liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 61 or 62 of the Massachusetts Business Corporation Law, or (iv) with respect to any transaction from which the director derived an improper personal benefit. No amendment or repeal of this Article shall adversely affect the rights and protection afforded to a director of this Corporation under this Article for acts or omissions occurring prior to such amendment or repeal. C. INDEMNIFICATION Section 6.1 Right to Indemnification. The Corporation shall indemnify and hold harmless each person who was or is a party or is threatened to be made a party to or is otherwise involved in any threatened, pending or completed action, suit, proceeding or investigation, whether civil, criminal or administrative (a "Proceeding"), by reason of being, having been or having agreed to become, a director or officer of the Corporation, or serving, having served or having agreed to serve, at the request of the Corporation, as a director or officer of, or in a similar capacity with, another organization or in any capacity with respect to any employee benefit plan (any such person being referred to hereafter as an "Indemnitee"), or by reason of any action alleged to have been taken or omitted in such capacity, against all expense, liability and loss (including without limitation reasonable attorneys' fees, judgments, fines, "ERISA" excise taxes or penalties) incurred or suffered by the Indemnitee or on behalf of the Indemnitee in connection with such Proceeding and any appeal therefrom, unless the Indemnitee shall have been adjudicated in such Proceeding not to have acted in good faith in the reasonable belief that his or her action was in the best interest of the Corporation or, to the extent such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan. Notwithstanding anything to the contrary in these Articles of Organization, except as set forth in Section 6.6 below, the Corporation shall not indemnify or advance expenses to an Indemnitee seeking indemnification in connection with a Proceeding (or part thereof) initiated by the Indemnitee, unless the initiation thereof was approved by the Board of Directors of the Corporation. Section 6.2 Settlements. Subject to compliance by the Indemnitee with the applicable provisions of Section 6.5 below, the right to indemnification conferred in these Articles of Organization shall include the right to be paid by the Corporation for amounts paid in settlement of any such Proceeding and any appeal therefrom, and all expenses (including attorneys' fees) incurred in connection with such settlement, pursuant to a consent decree or otherwise, unless it is held or determined pursuant to Section 6.5 below that the Indemnitee did not act in good faith in the reasonable belief that his or her action was in the best interest of the Corporation or, to the extent such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan. Section 6.3 Notification and Defense of Proceedings. The Indemnitee shall notify the Corporation in writing as soon as reasonably practicable of any Proceeding involving the Indemnitee for which indemnity or advancement of expenses is intended to be sought. Any omission to so notify the Corporation shall not relieve it from any liability that it may have to the Indemnitee under these Articles of Organization unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the Corporation. With respect to any Proceeding of which the Corporation is so notified, the Corporation shall be entitled but not obligated, to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to the Indemnitee, except as provided in the last sentence of this Section 6.3. After notice from the Corporation to the Indemnitee of its election so to assume such defense (subject to the limitations in the last sentence of this Section 6.3), the Corporation shall not be liable to the Indemnitee for any fees and expenses of counsel subsequently incurred by the Indemnitee in connection with such Proceeding, other than as provided below in this Section 6.3. The Indemnitee shall have the right to employ his or her own counsel in connection with such Proceeding, but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof at its expense with counsel reasonably acceptable to Indemnitee shall be at the expense of the Indemnitee unless (i) the employment of counsel by the Indemnitee at the Corporation's expense has been authorized by the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the Corporation and the Indemnitee in the conduct of the defense of such action or (iii) the Corporation shall not in fact have employed counsel reasonably acceptable to the Indemnitee to assume the defense of such Proceeding within a reasonable time after receiving notice thereof, in each of which cases the fees and expenses of counsel for the Indemnitee shall be at the expense of the Corporation, except as otherwise expressly provided in these Articles of Organization. The Corporation shall not be entitled, without the consent of the Indemnitee, to assume the defense of any Proceeding brought by or in the right of the Corporation or as to which counsel for the Indemnitee shall have reasonably made the conclusion provided for in clause (ii) above. Section 6.4 Advance of Expenses. Except as provided in Section 6.3 of these Articles of Organization, as part of the right to indemnification granted by these Articles of Organization, any expenses (including attorneys' fees) incurred by an Indemnitee in defending any Proceeding within the scope of Section 6.1 of these Articles of Organization or any appeal therefrom shall be paid by the Corporation in advance of the final disposition of such matter, provided, however, that the payment of such expenses incurred by an Indemnitee in advance of the final disposition of such matter shall be made only upon receipt of a written undertaking by or on behalf of the Indemnitee to repay all amounts so advanced in the event that it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by the Corporation as authorized by Section 6.1 or Section 6.2 of these Articles of Organization. Such undertaking need not be secured and shall be accepted without reference to the financial ability of the Indemnitee to make such repayment. Such advancement of expenses shall be made by the Corporation promptly following its receipt of written requests therefor by the Indemnitee, accompanied by reasonably detailed documentation, and of the foregoing undertaking. Section 6.5 Certain Presumptions and Determinations. If, in a Proceeding brought by or in the right of the Corporation, a director or officer of the Corporation is held not liable for monetary damages, whether because that director or officer is relieved of personal liability under the provisions of Article VI, Part B of these Articles of Organization of the Corporation or otherwise, that director or officer shall be deemed to have met the standard of conduct set forth in Section 6.1 and thus to be entitled to be indemnified by the Corporation thereunder. In any adjudicated Proceeding against an Indemnitee brought by reason of the Indemnitee's serving, having served or agreed to serve, at the request of the Corporation, for an organization other than the Corporation in one or more of the capacities indicated in Section 6.1, if the Indemnitee shall not have been adjudicated not to have acted in good faith in the reasonable belief that the Indemnitee's action was in the best interest of such other organization, the Indemnitee shall be deemed to have met the standard of conduct set forth in Section 6.1 and thus be entitled to be indemnified thereunder. An adjudication in such a Proceeding that the Indemnitee did not act in good faith in the reasonable belief that the Indemnitee's action was in the best interest of such other organization shall not create a presumption that the Indemnitee has not met the standard of conduct set forth in Section 6.1. In order to obtain indemnification of amounts paid in settlement pursuant to Section 6.2 of these Articles of Organization, the Indemnitee shall submit to the Corporation a written request, including in such request such documentation and information as is reasonably available to the Indemnitee and is reasonably necessary to determine whether and to what extent the Indemnitee is entitled to such indemnification. Any such indemnification under Section 6.2 shall be made promptly, and in any event within 60 days after receipt by the Corporation of the written request of the Indemnitee, unless a court of competent jurisdiction holds within such 60-day period that the Indemnitee did not meet the standard of conduct set forth in Section 6.2 or the Corporation determines, by clear and convincing evidence, within such 60-day period that the Indemnitee did not meet such standard. Such determination shall be made by the Board of Directors of the Corporation, based on advice of independent legal counsel (who may, with the consent of the Indemnitee, be regular legal counsel to the Corporation). The Corporation and the directors shall be under no obligation to undertake any such determination or to seek any ruling from any court. Section 6.6 Remedies. The right to indemnification or advances as granted by these Articles of Organization shall be enforceable by the Indemnitee in any court of competent jurisdiction if the Corporation denies such a request, in whole or in part, or, with respect to indemnification pursuant to Section 6.2, if no disposition thereof is made within the 60-day period referred to above in Section 6.5. Unless otherwise provided by law, the burden of proving that the Indemnitee is not entitled to indemnification or advancement of expenses under these Articles of Organization shall be on the Corporation. Neither absence of any determination prior to the commencement of such action that indemnification is proper in the circumstances because the Indemnitee has met any applicable standard of conduct, nor an actual determination by the Corporation pursuant to Section 6.5 that the Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. The Indemnitee's expenses (including reasonable attorneys' fees) incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such Proceeding shall also be paid by the Corporation. Section 6.7 Contract Right; Subsequent Amendment. The right to indemnification and advancement of expenses conferred in these Articles of Organization shall be a contract right. No amendment, termination or repeal of these Articles of Organization or of the relevant provisions of Chapter 156B of the Massachusetts General Laws or any other applicable laws shall affect or diminish in any way the rights of any Indemnitee to indemnification or advancement of expenses under the provisions hereof with respect to any Proceeding arising out of or relating to any action, omission, transaction or facts occurring prior to the final adoption of such amendment, termination or repeal, except with the consent of the Indemnitee. Section 6.8 Other Rights. The indemnification and advancement of expenses provided by these Articles of Organization shall not be deemed exclusive of any other rights to which an Indemnitee seeking indemnification or advancement of expenses may be entitled under any law (common or statutory), agreement or vote of stockholders or directors or otherwise, both as to action in his or her official capacity and as to action in any other capacity while holding office for the Corporation, and shall continue as to an Indemnitee who has ceased to be a director or officer, and shall inure to the benefit of the estate, heirs, executors and administrators of the Indemnitee. Nothing contained in these Articles of Organization shall be deemed to prohibit, and the Corporation is specifically authorized to enter into, agreements with any Indemnitee providing indemnification rights and procedures different from those set forth in these Articles of Organization. Section 6.9 Partial Indemnification. If an Indemnitee is entitled under any provision of these Articles of Organization to indemnification by the Corporation for some or a portion of the expenses (including attorneys' fees), judgments, fines or amounts paid in settlement actually and reasonably incurred by the Indemnitee or on his or her behalf in connection with any Proceeding and any appeal therefrom but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify the Indemnitee for the portion of such expenses (including reasonable attorneys' fees), judgments, fines or amounts paid in settlement to which the Indemnitee is entitled. Section 6.10 Insurance. The Corporation may purchase and maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another organization or employee benefit plan against any expense, liability or loss incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under Chapter 156B of the Massachusetts General Laws. Section 6.11 Merger or Consolidation. If the Corporation is merged into or consolidated with another corporation and the Corporation is not the surviving corporation, the surviving corporation shall assume the obligations of the Corporation under these Articles of Organization with respect to any Proceeding arising out of or relating to any action, omission, transaction or facts occurring on or prior to the date of such merger or consolidation. Section 6.12 Savings Clause. If these Articles of Organization or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify and advance expenses to each Indemnitee as to any expenses (including attorneys' fees), judgments, fines and amounts paid in settlement in connection with any Proceeding, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of these Articles of Organization that shall not have been invalidated and to the fullest extent permitted by applicable law. Section 6.13 Subsequent Legislation. If the Massachusetts General Laws are amended after adoption of these Articles of Organization to expand further the indemnification permitted to Indemnitees, then the Corporation shall indemnify such persons to the fullest extent permitted by the Massachusetts General Laws as so amended. Section 6.14 Indemnification of Others. The Corporation may, to the extent authorized from time to time by its Board of Directors, grant indemnification rights to employees or agents of the Corporation or other persons serving the Corporation who are not Indemnitees, and such rights may be equivalent to, or greater or less than, those set forth in these Articles of Organization. D. TRANSACTIONS WITH INTERESTED PERSONS 1. Unless entered into in bad faith, no contract or transaction by this Corporation shall be void, voidable or in any way affected by reason of the fact that it is with an Interested Person. 2. For the purposes of this Article, "Interested Person" means any person or organization in any way interested in this Corporation whether as an officer, director, stockholder, employee or otherwise, and any other entity in which any such person or organization this Corporation is in any way interested. 3. Unless such contract or transaction was entered into in bad faith, no Interested Person, because of such interest, shall be liable to this Corporation or to any other person or organization for any loss or expense incurred by reason of such contract or transaction or shall be accountable for any gain or profit realized from such contract or transaction. 4. The provisions of this Article shall be operative notwithstanding the fact that the presence of an Interested Person was necessary to constitute a quorum at a meeting of directors or stockholders of this Corporation at which such contract or transaction was authorized or that the vote of an Interested Person was necessary for the authorization of such contract or transaction. E. ENFORCEMENT If the Corporation shall fail to perform, observe or pay any of its obligations set forth in this Articles of Organization, then in each and every such case any holder of capital stock affected thereby may proceed to enforce performance of such obligations in such manner as it may elect and may proceed to protect and enforce its rights by suit in equity, action at law and/or other appropriate proceeding for performance of such obligations. F. STOCKHOLDERS' MEETINGS Meetings of stockholders of this Corporation may be held anywhere in the United States. G. AMENDMENT OF BY-LAWS The By-Laws may provide that the Board of Directors as well as the stockholders may make, amend or repeal the By-Laws of this Corporation, except with respect to any provision thereof which by law, by these Articles of Organization or by the By-Laws requires action by the stockholders. H. ACTING AS A PARTNER This Corporation may be a partner in any business enterprise which it would have power to conduct by itself. ATTACHMENT A Article III is hereby amended by changing the presently authorized 4,000 shares of Class A Common Stock, $.01 par value, 2,000 shares of Class B Common Stock, $.01 par value, and 2,000 shares of Class C Common Stock, $.01 par value, into the classes and shares of stock set forth in Article III. Article IV is hereby amended by deleting Article IV in its entirety and by replacing it with a new Article IV as set forth on Attachment 4. Article VI is hereby amended by deleting Article VI in its entirety and be replacing it with a new Article VI as set forth on Attachment 6. EX-4.1 3 EXHIBIT 4.1 Exhibit 4.1 FORM OF STOCKHOLDER AND REGISTRATION RIGHTS AGREEMENT This STOCKHOLDER AND REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of March ___, 1996, is among (a) Friendly Ice Cream Corporation, a Massachusetts corporation (the "COMPANY"), (b) the Lenders listed on the signature pages hereto and any other Lender who becomes a party to this Agreement by executing an Assignment and Acceptance (an "ASSIGNMENT AND ACCEPTANCE") in the form of EXHIBIT H to the Lender Subscription Agreement (as defined herein) or an Instrument of Accession in the form of EXHIBIT I to the Lender Subscription Agreement (collectively, the "LENDERS"), (c) Harrah's Operating Company, Inc., a Delaware corporation ("HARRAH'S"), (d) Investment Limited Partnership, a Delaware limited partnership ("ILP"), (e) Donald N. Smith ("SMITH"), (f) Peter M. Joost ("JOOST"), (g) Larry W. Browne ("BROWNE"; Harrah's, ILP, Smith, Joost and Browne being referred to herein collectively as the "CLASS A STOCKHOLDERS"), (h) Quidnet Partners, a Texas general partnership ("QUIDNET"), (i) Bedrock Asset Trust I, a Delaware business trust, and ML Life Insurance Company of New York, a New York life insurance company (collectively, the "EXISTING WARRANTHOLDERS"), and (j) each other Person who becomes a party to this Agreement by executing an Instrument of Accession (an "INSTRUMENT OF ACCESSION") in the form of SCHEDULE I hereto. WHEREAS, the parties hereto wish to set forth their relative rights with regard to the transfer of the Company's securities and certain other matters: NOW, THEREFORE, the parties to this Agreement hereby agree as follows: Section 1. DEFINITIONS. For all purposes of this Agreement, the following terms shall have the meanings set forth below: AFFILIATE. Affiliate means, with respect to any Stockholder, any Person directly or indirectly controlling, controlled by or under direct or indirect common control with such Stockholder and shall include (a) any Person who is a director or beneficial holder of at least 10% of the then outstanding capital stock (or partnership interests or other shares of beneficial interest) of such Stockholder and Family Members of any such Person, (b) any Person of which such Stockholder or an Affiliate (as defined in clause (a) above) of such Stockholder directly or indirectly, either beneficially owns at least 10% of the then outstanding capital stock (or partnership interests or other shares of beneficial interest) or constitutes at least a 10% equity participant, (c) any Person of which an Affiliate (as defined in clause (a) above) of such Stockholder is a partner, director, officer or -2- executive employee, and (d) in the case of a specified Person who is an individual, Family Members of such Person. AGENT means The First National Bank of Boston, as Agent under the Agency Agreement, and any successor Agent thereunder. AGENCY AGREEMENT has the meaning set forth in the Subscription Agreement. ASSIGNMENT AND ACCEPTANCE. See preamble. CHARTER. Charter means the Company's Restated Articles of Organization and all additional restatements or amendments thereto. CLASS A COMMON STOCK. See definition of "COMMON STOCK." CLASS A STOCKHOLDERS. Class A Stockholders means Harrah's, ILP, Smith, Joost and Browne and any other person or entity who holds any capital stock of the Company subject to the Class A Stockholder's Agreement. CLASS A STOCKHOLDERS' AGREEMENT. Class A Stockholders' Agreement shall mean the FICC Stockholders Agreement dated as of March ___, 1996 by and among the Company, Harrah's, ILP, Smith, Joost and Browne, as in effect from time to time. CLASS B COMMON STOCK. See definition of "COMMON STOCK." CLASS C COMMON STOCK. See definition of "COMMON STOCK." CLASS H STOCK. Class H Stock has the meaning specified in the Class A Stockholders Agreement. CLASS I STOCK. Class I Stock has the meaning specified in the Class A Stockholders Agreement. CLASS S STOCK. Class S Stock has the meaning specified in the Class A Stockholders Agreement. COMMON STOCK. Common Stock means (a) the Company's Class A Voting Common Stock, $.01 par value per share (the "CLASS A COMMON STOCK"), (b) the Company Class B Voting Common Stock, $.01 par value per share (the "CLASS B COMMON STOCK"), (c) the Company's Class C Non-Voting Common Stock, $.01 par value per share (the "CLASS C COMMON STOCK"), and (d) any shares of any other class of capital stock of the Company hereafter issued which are (i) not preferred as to -3- dividends or assets over any class of stock of the Company, (ii) not subject to redemption pursuant to the terms thereof, or (iii) issued to the holders of shares of Common Stock upon any reclassification thereof. COMPANY. See preamble. CREDIT AGREEMENT. Credit Agreement means that certain Second Amended and Restated Revolving Credit and Term Loan Agreement dated as of January 1, 1996, by and among the Company, as borrower, Dogwood II, Inc., Family Restaurants Franchise, Inc., Friendly's International, Inc., and Dogwood Restaurants, Inc., as guarantors, The First National Bank of Boston, as administrative agent and as collateral agent for itself and the other Lenders referred to therein and as issuing bank with respect to letter of credit, and the Lenders referred to therein, as amended and in effect from time to time. EVENT OF DEFAULT. Event of Default has the meaning specified in the Credit Agreement. EXISTING STOCKHOLDERS. Existing Stockholders means Quidnet, the Class A Stockholders and the Existing Warrantholders, collectively. EXISTING WARRANTHOLDERS. See preamble. EXISTING WARRANTS. Existing Warrants means the following: (a) Warrant in favor of Smith for 70.68 shares of Class A Common Stock; (b) Warrant in favor of Browne for 6.76 shares of Class A Common Stock; (c) Warrant in favor of ML Life Insurance Company of New York for 0.68480 shares of Class A Common Stock; and (d) Warrant in favor of Bedrock Asset Trust I for 14.29520 shares of Class A Common Stock; in each case in the form attached as part of SCHEDULE 3.2(B)(I) of the Lender Subscription Agreement, and any warrant or warrants issued upon transfer, exchange or replacement thereof. FAMILY MEMBERS. Family Members means, with respect to any individual, any Related Person or Family Trust of such individual. FAMILY TRUST. Family Trust means, with respect to any individual, any trust created for the benefit of one or more of such individual's Related Persons and controlled by such individual. -4- INSTRUMENT OF ACCESSION. See preamble. LENDER. See preamble. LENDER SECURITIES. Lender Securities means (a) the shares of Common Stock issued to the Lenders pursuant to the Lender Subscription Agreement, (b) all shares of Common Stock issued or issuable upon conversion of such shares of Common Stock, (c) the Lender Warrants and the shares of Common Stock issued or issuable upon exercise of the Lender Warrants in accordance with their terms, (d) all shares of Common Stock issued or issuable upon conversion of such shares of Common Stock, (e) [intentionally omitted], (f) all shares of the Company's capital stock issued with respect to such shares by way of stock dividend or stock split or in connection with any merger, consolidation, recapitalization or other reorganization affecting the Company's capital stock. Lender Securities will continue to be Lender Securities in the hands of any holder and each transferee thereof will succeed to the rights and obligations of a holder of Lender Securities hereunder, PROVIDED that shares of Lender Securities will cease to be Lender Securities when transferred (i) to the Company, (ii) pursuant to a Public Sale or (iii) to a holder of Other Securities. LENDER STOCKHOLDERS. Lender Stockholders means the Lenders for so long as the Lenders hold Lender Securities and any other Person to whom Lender Securities are transferred and who has executed either (A) prior to the Loan Repayment Date, and Assignment and Acceptance or (B) thereafter, an Instrument of Accession, for so long as such Person holds any Lender Securities. LENDER SUBSCRIPTION AGREEMENT. Lender Subscription Agreement means the Subscription Agreement, dated as of the date hereof, among the Company, the Lenders named therein, and The First National Bank of Boston, as agent for the Lenders, as in effect from time to time. LENDER WARRANTS. Lender Warrants means the Common Stock Purchase Warrant issued to The First National Bank of Boston, as agent for the Lenders, pursuant to the Lender Subscription Agreement, and any warrant or warrants issued upon transfer, exchange or replacement thereof. LOAN REPAYMENT DATE. Loan Repayment Date has the meaning specified in the Charter. MAJORITY LENDER STOCKHOLDERS. Majority Lender Stockholders means the holders at any time of 51% of the aggregate issued and outstanding shares of Class B Common Stock and Class C Common Stock that at the time constitute Lender Securities for purposes of this Agreement (or, in the event that all of the shares of Class B Common Stock and Class C Common Stock have been automatically converted into Class A Common Stock pursuant to the Charter, the holders of a majority of the Class A Common Stock that at the time constitute Lender Securities for purposes of this Agreement), taken together as a class. -5- MANAGEMENT SECURITIES. Management Securities means (a) all shares of Common Stock issued to participants in the Management Stock Plan or the Old Option Plan and (b) all shares of the Company's capital stock issued with respect to such shares by way of stock dividend or stock split or in connection with any merger, consolidation, recapitalization or other reorganization affecting the Company's capital stock. Management Securities will continue to be Management Securities in the hands of any holder and each transferee thereof will succeed to the rights and obligations of a holder of Management Securities hereunder, provided that shares of Management Securities will cease to be Management Securities when transferred (i) to the Company (unless such shares are reissued pursuant to the Management Stock Plan), (ii) pursuant to a Public Sale or (iii) to a holder of Other Securities or Lender Securities. MANAGEMENT STOCK PLAN. Management Stock Plan has the meaning set forth in the Lender Subscription Agreement. MANAGEMENT STOCKHOLDERS. Management Stockholders means the participants in the Management Stock Plan or Old Option Plan for so long as such Persons hold Management Securities and any other Person to whom Management Securities are transferred in compliance with the provisions of the Management Stock Plan and who has executed an Instrument of Accession, for so long as such Person holds any Management Securities. OLD OPTION PLAN. Old Option Plan has the meaning set forth in the Lender Subscription Agreement. OTHER SECURITIES. Other Securities means (a) the shares of Common Stock held by any of the Existing Stockholders on the date hereof, (b) [intentionally omitted], (c) the Existing Warrants and the shares of Common Stock issued or issuable upon exercise of the Existing Warrants in accordance with their terms, (d) all shares of Common Stock issued or issuable upon conversion of such shares of Common Stock, (e) [intentionally omitted] and (f) all shares of the Company's capital stock issued with respect to such shares by way of stock dividend or stock split or in connection with any merger, consolidation, recapitalization or other reorganization affecting the Company's capital stock. Other Securities will continue to be Other Securities in the hands of any holder and each transferee thereof will succeed to the rights and obligations of a holder of Other Securities hereunder, PROVIDED that shares of Other Securities will cease to be Other Securities when transferred (i) to the Company, (ii) pursuant to a Public Sale or (iii) to a holder of Lender Securities. OTHER STOCKHOLDERS. Other Stockholders means the Existing Stockholders for so long as such Person holds Other Securities and any other Person to whom Other Securities are transferred and who has executed an Instrument of Accession, for so long as such Person holds any Other Securities. OFFER NOTICE. See Section 2.2. -6- PERSON. Person means an individual, partnership, corporation, limited liability company, association, trust, joint venture, unincorporated organization, or any government, government department or agency or political subdivision thereof. PUBLIC OFFERING. Public Offering means any sale of Common Stock pursuant to a public offering registered under the Securities Act. PUBLIC SALE. Public Sale means any sale of Common Stock pursuant to a Public Offering or to the public pursuant to the provisions of Rule 144 (or any successor rule) adopted under the Securities Act. QUALIFIED PUBLIC OFFERING. Qualified Public Offering has the meaning specified in the Charter. QUIDNET. See preamble. REGISTRATION PERIOD. Registration Period means a period of time equal to eighteen months from and after the end of the period of time the Stockholders have agreed not to sell stock of the Company pursuant to lockup agreements entered into in connection with the Company's initial Public Offering; PROVIDED, HOWEVER, that such eighteen-month period shall be tolled during any period in which the Company has elected to delay filing a Registration Statement under Section 5.2(c) hereof. RELATED PERSONS. Related Persons means, with respect to any individual, such individual's parents, spouse, children and grandchildren. SECURITIES. Securities means the Lender Securities and the Other Securities. SECURITIES ACT. Securities Act means the Securities Act of 1933, as amended. SPECIAL EVENT OF DEFAULT. Special Event of Default has the meaning specified in the Charter. STOCKHOLDERS. Stockholders means, collectively, the Lender Stockholders, the Other Stockholders and Management Stockholders. SUBSIDIARY. Subsidiary means any corporation, association, trust, or other business entity, of which the designated parent shall at any time own or control directly or indirectly through a Subsidiary or Subsidiaries at least a majority (by number of votes) of the outstanding shares of capital stock (or other shares of beneficial interest) entitled ordinarily to vote for the election of such business entity's directors (or in the case of a business entity that is not a corporation, for those Persons exercising functions similar to directors of a corporation). -7- TRANSFER. See Section 2.1. VOTING SECURITIES. Voting Securities means, collectively, the Class A Common Stock and the Class B Common Stock. Section 2. [intentionally omitted] Section 3. [intentionally omitted] Section 4. [intentionally omitted] Section 5. REGISTRATION RIGHTS. 5.1 PIGGYBACK REGISTRATION RIGHTS. (a) If, at any time during the Registration Period, the Company proposes to file a Registration Statement in connection with a Public Offering (other than a Public Offering initiated pursuant to the demand registration provisions of Section 5.2) other than its initial Public Offering, the Company will provide written notice thereof to the Stockholders at least sixty (60) days prior to the filing of the first such Registration Statement. For purposes of this Agreement, "REGISTRATION STATEMENT" shall mean a registration statement on the appropriate form in order to register shares of Common Stock under the Securities Act (otherwise than in connection with the registration of shares of Common Stock issuable pursuant to an employee stock option, stock purchase or similar plan or pursuant to a merger, exchange offer or in a transaction of the type specified in Rule 145(a) under the Securities Act); "UNDERWRITER" or "UNDERWRITERS" shall mean, in the case of a Public Offering under Section 5.1, an underwriter selected by the Company or, in the case of a Public Offering initiated under Section 5.2, an underwriter selected by the Company and approved by Stockholders owning a majority of the Registration Shares to be included in such registration (which approval shall not be unreasonably withheld); and "UNDERWRITERS' MAXIMUM NUMBER" means (for any registration which is an underwritten registration) that number of securities to which such registration should, in the written opinion of the managing Underwriters of such registration in the light of marketing factors, be limited. At the written request of any Stockholder delivered to the Company within fifteen (15) days after the receipt of such notice from the Company, which request shall state the number of shares of Common Stock held by such Stockholder that such Stockholder wishes to sell under the Registration Statement (shares of Common Stock held by any Stockholder -8- that are requested to be offered and sold pursuant to this Section 5.1 together with shares of Common Stock that are requested to be offered and sold pursuant to Section 5.2 are herein referred to as "REGISTRATION SHARES"), the Company agrees, subject to Section 5.1(b), to use its best efforts to cause all of the Registration Shares to be registered under the Securities Act on such Registration Statement to the extent and under the conditions such registration is permissible under the Securities Act and the rules and regulations of the Securities and Exchange Commission (the "COMMISSION") thereunder. (b) The number of Registration Shares to be registered pursuant to Section 5.1(a) for the benefit of any particular Stockholder is subject to mandatory reduction as follows: if, in an underwritten Public Offering, the managing Underwriter(s) thereof advise the Company in writing of an Underwriters' Maximum Number, the Company will include in such registration: (i) first, that number of shares that the Company proposes to sell for its own account, and which does not exceed the Underwriters' Maximum Number; (ii) second, if the Underwriters' Maximum Number exceeds the number of securities which the Company proposes to offer and sell for its own account (with such excess referred to as the "FIRST AVAILABLE AMOUNT"), that number of Registration Shares requested to be included in such registration by the Management Stockholders, Lender Stockholders and Other Stockholders up to the lesser of (A) the First Available Amount and (B) the total number of Registration Shares requested to be included in such registration by the other Stockholders, Lender Stockholders and Management Stockholders. The number of shares to be registered pursuant to clause (ii) above with respect to any Stockholder shall be based on the number of Registration Shares requested to be included in such registration by such Stockholder as compared to the total number of Registration Shares requested to be included in such registration by all of the Stockholders referred to in such clause. 5.2 DEMAND REGISTRATION RIGHTS. (a) At any time during the Registration Period either (x) the Stockholders holding a majority of the aggregate number of all outstanding Lender Securities, Management Securities and Other Securities or (y) the Majority Lender Stockholders may by written notice (a "DEMAND") request the Company to file a Registration Statement in order to register all (or any portion as determined by such Stockholders) of the shares of Common Stock owned by such Stockholders. In the event that the Company receives a Demand, the Company will give prompt written notice thereof to all other Stockholders. Subject to paragraph (b) below, the Company will be required to include in such registration all Registration Shares requested to be included in such registration by any other Stockholder responding in writing fifteen (15) days of the Company's notice. -9- (b) The number of Registration Shares to be registered pursuant to Section 5.2(a) for the benefit of any particular Stockholder is subject to mandatory reduction, in the event that the managing Underwriter(s) advise the Company of an Underwriter's Maximum Number, as follows: the Company will include in such registration: (i) first, the total number of Registration Shares requested to be included in such registration by all Stockholders up to the Underwriter's Maximum Number, with the amount to be registered for the account of any Stockholder not to exceed such Stockholder's PRO RATA portion of the Underwriter's Maximum Number; and (ii) in the event the number of shares to be registered pursuant to clause (i) above is less than the Underwriter's Maximum Number, the number of shares the Company wishes to register for its own account. (c) Upon receipt of a Demand, the Company shall promptly (and in any event within ninety (90) days) use its best efforts to file such Registration Statement under the Securities Act with respect to the applicable Registration Shares subject to the following (i) If the Company has commenced taking action with respect to any financing, acquisition, reorganization or other transaction or development material to the Company, and in the reasonable and good faith opinion of the Company Board, filing a Registration Statement would not be in the best interests of the Company, the Company may delay filing the Registration Statement until the earlier of (A) the termination of activities with respect to any such transaction or development, (B) the consummation or abandonment of any agreement with respect to such transaction or development or (C) ninety (90) days following the Company's receipt of the Stockholder's notice of a Demand pursuant to this Section 5.2. (ii) If filing a Registration Statement could require the Company to undergo a special interim audit, and in the reasonable and good faith opinion of the Board of Directors, the cost of such special interim audit would exceed $50,000, the Company may delay filing a Registration Statement until ninety (90) days after the close of the fiscal year in which the request by the applicable Stockholder for registration of shares of Common Stock is made, unless the Stockholders making such Demand agree to reimburse the Company for the cost of such special interim audit. In the event that the Company elects to delay filing a Registration Statement in accordance with this Section 5.2, it will promptly notify the Stockholders thereof. The Stockholders responsible -10- for the applicable Demand may, within twenty (20) days following receipt of such notice, decide to withdraw its request that the Company file a Registration Statement, in which case the withdrawn request will not count as an exercise of Stockholder's right to request the Company to file a Registration Statement pursuant to this Section 5.2. (d) If the Company so requests, it shall not be required to effect a Public Offering under Section 5.2 for a period not to exceed six (6) months immediately following the date any other Public Offering was commenced and consummated. (e) The Stockholders will not be entitled to submit more than one (1) Demand to the Company. No party may require the Company to file any Registration Statement on Form S-1 (or other comparable form adopted by the Commission) unless Form S-3 (or any comparable form adopted by the Commission) is not available for such filing. Any registration initiated by a group of Stockholders pursuant to a Demand pursuant to Section 5.2(a) above shall not, for purposes of this paragraph (e), count as a Demand unless and until such registration shall have become effective and, if such registration is an underwritten offering, at least 80% of the Registration Shares included in such registration (other than any Registration Shares included in any over-allotment option granted to the underwriters) shall have been actually sold. No party may require the Company to file a Registration Statement pursuant to a Demand unless the Registration Statement is one for the registration of Registration Shares having an expected price to the public (determined in accordance with Rule 457 promulgated under the Securities Act) of at least $5,000,000. (f) Any registration initiated by Stockholders pursuant to a Demand may be revoked by such Stockholders by giving written notice thereof to the Company at any time before such registration shall have become effective; PROVIDED, HOWEVER, that in the event of such a revocation either such Stockholders shall pay all expenses of such registration required to be paid by the Company pursuant to Section 5, in which case such registration shall not, for purposes of this Section 5.2(a), count as a Demand, or if such Stockholders fail to pay such expenses within a reasonable period of time after receipt of appropriate documentation for such expenses, such registration shall count as a Demand for purposes of this Section 5.2(a). 5.3 PROCEDURES Whenever the Company shall include Registration Shares owned by a Stockholder ("SELLING STOCKHOLDER") in a Registration Statement, the Company shall: (i) prepare and file with the Commission a Registration Statement with respect to such Registration Shares and use its best efforts to cause such Registration Statement to become promptly effective and furnish to each Selling Stockholder copies of the Registration Statement and any amendments or supplements thereto and any Prospectus included therein prior to filing; -11- (ii) prepare and file with the Commission such amendments and supplements to such Registration Statement and the Prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for the lesser of (A) a period of time necessary to permit each Selling Stockholder to dispose of all of such Registration Shares and (B) six (6) months (as appropriately extended to reflect any periods when a Selling Stockholder is not permitted to sell Registration Shares pursuant to such Registration Statement), and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during such effective period in accordance with the intended methods of disposition by the Selling Stockholders set forth in such Registration Statement and cause the Prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Securities Act; (iii) Upon request, furnish to each Selling Stockholder such number of copies of such Registration Statement, each amendment and supplement thereto, the Prospectus included in such Registration Statement (including each a preliminary Prospectus and each Prospectus filed under Rule 424 of the Securities Act) and such other documents as each such Selling Stockholder may reasonably request in order to facilitate the disposition of the Registration Shares owned by each such Selling Stockholder (it being understood that the Company consents to the use of the Prospectus and any amendment or supplement thereto by such Selling Stockholder in connection with the offering and Sale of the Registration Shares covered by the Prospectus or any amendment or supplement thereto); (iv) use its best efforts to register or quality such Registration Shares under such other securities or blue sky laws of such jurisdictions as determined by the managing Underwriter after consultation with the Company (or, if there is no managing Underwriter, as determined by the Company), use its best efforts to keep such registration or qualification effective, including through new filings, amendments or renewals, during the period such Registration Statement is required to be kept effective, and do any and all other acts and things which may be reasonably necessary or advisable to enable such Selling Stockholder to consummate the disposition in such jurisdictions of the Registration Shares; PROVIDED that the Company will not be required (A) to qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph (iv), (B) to subject itself to taxation in any such jurisdiction, (C) to consent to general service of process in any such jurisdiction, (D) register or qualify as a broker-dealer in any such jurisdiction or (E) to qualify or register in any particular state if such state refuses to permit such registration or qualification because of the expense allocation provisions set forth in Section 5.5; -12- (v) notify the Selling Stockholders, at any time when a Prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the Prospectus included in such Registration Statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any Selling Stockholder, the Company will promptly prepare (and, when completed, give notice to each Selling Stockholder) a supplement or amendment to such Prospectus so that, as thereafter delivered to the purchasers of such Registration Shares, such Prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; PROVIDED that upon such notification by the Company, each Selling Stockholder will not offer to sell such Registration Shares until the Company has notified such Selling Stockholder that it has prepared a supplement or amendment to such Prospectus and delivered copies of such supplement or amendment to such Selling Stockholder; (vi) use its best efforts to cause all such Registration Shares to be listed, prior to the date of the first sale of such Registration Shares pursuant to such registration, on each securities exchange on which similar securities issued by the Company are then listed, and, if not so listed, to be listed with The NASDAQ Stock Market; (vii) enter into all such customary agreements (including underwriting agreements in customary form) and take all such other actions as the holders of a majority of the Registration Shares being sold or the Underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registration Shares (including, without limitation, effecting a stock split or a combination of shares); (viii) make available for inspection on a confidential basis by any Selling Stockholder, any Underwriter participating in any disposition pursuant to such Registration Statement, and any attorney, accountant or other agent retained by any such Selling Stockholder or Underwriter (in each case after reasonable prior notice), all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply on a confidential basis all information reasonably requested by any such Selling Stockholder, Underwriter, attorney, accountant or agent in connection with such Registration Statement; (ix) use its best efforts to cause the Registration Shares to be registered with or approved by such other governmental agencies or authorities within the United States and having jurisdiction over the Company as may reasonably be necessary to enable the Selling Stockholders or the Underwriter or Underwriters, if any, to consummate the disposition of such Registration Shares; -13- (x) obtain a cold comfort letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters; and (xi) cause the Company's counsel to provide customary legal opinions in connection with such Registration Statement. 5.4 INDEMNIFICATION (a) The Company will indemnify and hold harmless each Stockholder, the officers, directors, partners, and partners of partners of such Stockholder, and each Underwriter of shares of Common Stock sold pursuant to Section 5.1 or 5.2 (and any person who controls such Stockholder or any such Underwriter within the meaning of Section 15 of the Securities Act) against all claims, losses, damages, liabilities and expenses resulting from any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement or in any related prospectus, notification or the like and from any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar (i) as the same may have been based on information furnished in writing to the Company by such Stockholder or such Underwriter expressly for use therein and used in accordance with such writing or (ii) as such claims, losses, damages, liabilities and expenses result from a breach by a Stockholder of its obligations under Section 5.3(v). (b) Each Stockholder, by acceptance of the registration provisions provided herein, agrees to furnish to the Company such information concerning such Stockholder and the proposed sale or distribution as shall, in the opinion of counsel for the Company, be necessary in connection with any such registration or qualification of any shares of stock proposed to be made pursuant to Section 5.1 or 5.2 and to indemnify and hold harmless the Company, its officers and directors, each of its Underwriters and the other Stockholders (and any person who controls the Company or such Underwriters or such other Stockholders within the meaning of Section 15 of the Securities Act and the officers, directors, partners and partners of partners of such Stockholders) against all claims, losses, damages, liabilities and expenses resulting from any untrue statement or alleged untrue statement of a material fact furnished in writing to the Company by such Stockholder expressly for use in connection with such registration or qualification and used in accordance with such writing and from any omission therefrom or alleged omission therefrom of a material fact needed to be furnished or necessary to make the information furnished not misleading; PROVIDED, HOWEVER, that no Stockholder shall have liability under this paragraph (b) in excess of the net proceeds received by such Stockholder from the sale of Registration Shares. (c) If any party (the "INDEMNITEE") receives notice of any claim or the commencement of any action or proceeding with respect to which any other party (or parties) is obligated to provide indemnification (the "INDEMNIFYING PARTY") pursuant to this Section 5.4, the Indemnitee shall -14- promptly give the Indemnifying Party notice thereof. If the Indemnitee does not promptly give this notice, the Indemnifying Party shall not be obligated to provide indemnification hereunder to the extent that the liability for which such indemnification is claimed could have been avoided or mitigated if the Indemnitee had promptly given notice to the Indemnifying Party. The Indemnifying Party may compromise, defend or settle, at such Indemnifying Party's own expense and by such Indemnifying Party's own counsel, any such matter involving the asserted liability of the Indemnitee. If the Indemnifying Party chooses to defend any claim, the Indemnitee shall make available to the Indemnifying Party any books, records or other documents within its control that are necessary or appropriate for such defense. 5.5 EXPENSES Subject to Section 5.2(f), the Company shall pay all of the expenses in connection with a Public Offering in which a Selling Stockholder participates in accordance with Section 5.1 or 5.2, including, without limitation, costs of complying with federal and state securities laws and regulations, attorneys' and accounting fees of the Company, printing expenses and federal and state filing fees, except that transfer taxes, underwriting commissions, fees and expenses incurred by the Selling Stockholders and fees and disbursements of counsel (if any) to the Selling Stockholders will be borne by the Selling Stockholders. 5.6 RESTRICTIONS ON PUBLIC SALE BY HOLDERS OF REGISTRATION SHARES. (a) Each Stockholder, if the Company or the managing underwriters so request in connection with any underwritten offering subject to the provisions of this Section 5 other than the Company's initial Public Offering, will not, without the prior written consent of the Company or such underwriters, effect any public sale or other distribution of any equity securities of the Company, including any sale pursuant to Rule 144, during the seven (7) days prior to, and during the ninety-day period commencing on, the effective date of such underwritten registration, except in connection with such underwritten registration; PROVIDED that each executive officer and director of the Company and each other person who is also an Affiliate of the Company who, in either case, is a holder of securities of the Company, shall enter into similar agreements; and PROVIDED, FURTHER, that such Stockholder is permitted to include in such registration at least 80% of the Registration Shares requested to be included in such registration by such Selling Stockholder. (b) In connection with the Company's initial Public Offering, each Stockholder will not, without the prior written consent of the Company's underwriters in such Public Offering (which consent may be withheld in the sole discretion of such underwriters), directly or indirectly, sell, offer, contract or grant any option to sell (including without limitation any short sale), pledge, transfer, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock, or securities -15- exchangeable or exercisable for or convertible into shares of Common Stock currently or hereafter owned either of record or beneficially (as defined in Rule 13d-3 under the Exchange Act), other than shares purchased in or after such initial Public Offering that are not "restricted securities" within the meaning of Rule 144 of the Securities Act, or publicly announce such Stockholder's intention to do any of the foregoing during the three hundred sixty-day period commencing on the date of the prospectus relating to such initial Public Offering; PROVIDED that each executive officer and director of the Company and each other person who is also an Affiliate of the Company who, in either case, is a holder of securities of the Company, shall enter into an agreement substantially similar to this Section 5.6(b); and PROVIDED, FURTHER, that, notwithstanding this Section 5.6(b), the Lender Stockholders may, for so long as the restrictions on transfer on Lender Securities set forth in Section 11.1(a) of the Lender Subscription Agreement are in effect, transfer Lender Securities along with a proportional amount of Obligations (as defined in the Credit Agreement) in the manner prescribed in the Credit Agreement and the Lender Subscription Agreement . (c) Notwithstanding anything to the contrary in Sections 5.6(a) and (b), any Stockholder (other than a Management Stockholder) may transfer equity securities of the Company to any Person that was a Stockholder immediately prior to the sale of Common Stock by the Company in consummation of the Company's initial Public Offering. Section 6. NO INCONSISTENT AGREEMENTS. The Company will not enter into any registration rights or other agreement that conflicts with its obligations under this Agreement. Section 7. SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. Section 8. ENTIRE AGREEMENT. Except as otherwise expressly set forth herein, this document embodies the complete agreement and understanding among the parties hereto with respect to the subject matter hereof and thereof and supersedes and preempts any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. Section 9. SUCCESSORS AND ASSIGNS. This Agreement will bind and inure to the benefit of and be enforceable by the Company and the Stockholders and their respective successors and assigns. -16- Section 10. COUNTERPARTS. This Agreement may be executed in separate counterparts each of which will be an original and all of which taken together will constitute one and the same agreement. Section 11. REMEDIES. The Stockholders will be entitled to enforce their rights under this Agreement specifically (without posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights existing in their favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any Stockholder may in its sole discretion apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive relief in order to enforce or prevent any violation of the provisions of this Agreement. In the event of any dispute involving the terms of this Agreement, the prevailing party shall be entitled to collect reasonable fees and expenses incurred by the prevailing party in connection with such dispute from the other parties to such dispute. Section 12. NOTICES. Any notice provided for in this Agreement will be in writing and will be deemed properly delivered if either personally delivered or sent by telecopier, overnight courier or mailed certified or registered mail, return receipt requested, postage prepaid to the recipient (a) if to any Stockholder, at the address listed for such Stockholder in the stock records of the Company and (b) if to the Company, to 1855 Boston Road, Wilbraham, Massachusetts 01095, Attention: Larry W. Browne. Any such notice shall be effective (i) if delivered personally or by telecopier, when received, (ii) if sent by overnight courier, when receipted for, and (iii) if mailed, 3 days after being mailed as described above. The Company agrees to make available to each Stockholder upon request an address list of all Stockholders to ensure correct delivery of all notices hereunder. Section 13. AMENDMENT AND WAIVER. No modification, amendment or waiver of any provision of this Agreement will be effective against the Company or the Stockholders unless such modification, amendment or waiver is approved in writing by the Majority Lender Stockholders and holders of a majority of the Other Securities then outstanding. The failure of any party to enforce any of the provisions of this Agreement will in no way be construed as a waiver of such provisions and will not affect the right of such party thereafter to enforce each and every provision of this Agreement in accordance with its terms. Section 14. TERMINATION. The provisions of Section 2 of this Agreement will terminate upon the earliest to occur of (a) the completion of any voluntary or involuntary liquidation or dissolution of the Company or (b) the completion of a Qualified Public Offering. As noted in Section 3.9, the provisions of Section 3 shall terminate upon the Loan Repayment Date. Section 15. GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT WILL -17- BE GOVERNED BY THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. Section 16. DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. Section 17. CONSTRUCTION. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction will be applied against any party. EX-4.3 4 EXHIBIT 4.3 Exhibit 4.3 CH&S DRAFT 9/04/97 FRIENDLY ICE CREAM CORPORATION and THE BANK OF NEW YORK Rights Agent RIGHTS AGREEMENT Dated as of _______, 1997 TABLE OF CONTENTS Page Section 1. Certain Definitions........................................... 1 Section 2. Appointment of Rights Agent................................... 6 Section 3. Issuance of Rights Certificates............................... 6 Section 4. Form of Rights Certificates................................... 8 Section 5. Countersignature and Registration............................. 9 Section 6. Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.................................................. 10 Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights........................................................ 11 Section 8. Cancellation and Destruction of Rights Certificates........... 13 Section 9. Reservation and Availability of Preferred Shares.............. 13 Section 10. Preferred Shares Record Date.................................. 15 Section 11. Adjustment of Purchase Price; Number of Shares or Number of Rights........................................................ 15 Section 12. Certificate of Adjusted Purchase Price or Number of Shares.... 25 Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power......................................................... 25 Section 14. Fractional Rights and Fractional Shares....................... 28 Section 15. Rights of Action.............................................. 29 Section 16. Agreement of Rights Holders................................... 30 Section 17. Rights Certificate Holder Not Deemed a Stockholder............ 30 Section 18. Concerning the Rights Agent................................... 30 Section 19. Merger or Consolidation or Change of Name of Rights Agent..... 31 i Section 20. Duties of Rights Agent........................................ 32 Section 21. Change of Rights Agent........................................ 34 Section 22. Issuance of New Rights Certificate............................ 35 Section 23. Redemption.................................................... 36 Section 24. Exchange...................................................... 37 Section 25. Notice of Certain Events...................................... 39 Section 26. Notices....................................................... 39 Section 27. Supplements and Amendments.................................... 40 Section 28. Successors.................................................... 41 Section 29. Determinations and Actions by the Board of Directors, etc..... 41 Section 30. Benefits of this Agreement.................................... 41 Section 31. Severability.................................................. 41 Section 32. Governing Law................................................. 42 Section 33. Counterparts.................................................. 42 Section 34. Descriptive Headings.......................................... 42 EXHIBITS Exhibit A Form of Certificate of Designations Exhibit B Form of Rights Certificate Exhibit C Summary of Rights ii RIGHTS AGREEMENT Rights Agreement, dated as of ________, 1997 (this "Agreement"), between FRIENDLY ICE CREAM CORPORATION, a Massachusetts corporation (the "Company"), and THE BANK OF NEW YORK (the "Rights Agent"). As of __________, 1997 (the "Rights Dividend Declaration Date"), the Board of Directors of the Company authorized and declared a dividend of one Preferred Share purchase right (a "Right") for each Common Share (as hereinafter defined) of the Company outstanding as of the Close of Business (as hereinafter defined) on ___________, 1997 (the "Record Date"), each right representing the right to purchase one one-thousandth of a share of Series A Junior Preferred Stock (as such number may be adjusted pursuant to the provisions of this Agreement), having the rights, preferences and privileges set forth in the form of Certificate of Vote of Directors Establishing a Series of a Class of Stock, with respect to the Series A Junior Preferred Stock of the Company, attached hereto as Exhibit A, upon the terms and subject to the conditions herein set forth, and further authorized and directed the issuance of one Right (as such number may be adjusted pursuant to the provisions of this Agreement) with respect to each Common Share that shall become outstanding between the Record Date and the earlier of the Distribution Date and the Expiration Date (as such terms are hereinafter defined), and in certain circumstances after the Distribution Date. NOW, THEREFORE, in consideration of the promises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. Certain Definitions. For purposes of this Agreement, the following terms have the meanings indicated: (a) "Acquiring Person" shall mean any Person who or which, together with all Affiliates and Associates of such Person, shall be the Beneficial Owner of 15% or more of the Common Shares then outstanding, but shall not include (i) the Company, (ii) any Subsidiary of the Company, (iii) any employee benefit plan of the Company or of any Subsidiary of the Company, (iv) any entity holding Common Shares for or pursuant to the terms of any such plan or (v) Donald N. Smith, Harrah's Operating Company, Inc., The Equitable Life Assurance Society of the United States and members of senior management of the Company, as determined by the Company's Board of Directors from time to time (collectively, the "Excluded Persons"). Notwithstanding the foregoing, no Affiliate or Associate of the Excluded Persons shall be treated as the Beneficial Owner of the Common Shares held by the Excluded Persons, and no Person shall be deemed to be an Acquiring Person either (i) as the result of an acquisition of Common Shares by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 15% or more of the Common Shares of the Company then outstanding; provided, however, that if a Person shall become the Beneficial Owner of 15% of more of the Common Shares of the Company then outstanding by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial Owner of any additional Common Shares of the Company, then such Person shall be deemed to be an Acquiring Person, or (ii) if within eight Business Days after such Person would otherwise become an Acquiring Person (but for the operation of this clause (ii)), such Person notifies the Board of Directors that such Person did so inadvertently and within two Business Days after such notification, such Person is the Beneficial Owner of less than 15% of the outstanding Common Shares. (b) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the date of this Agreement. (c) A Person shall be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own" any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly, for purposes of Section 13(d) of the Exchange Act and Rule 13d-3 thereunder (or any comparable or successor law or regulation); (ii) which such Person or any of such Person's Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights (other than the Rights), warrants or options, or otherwise; provided, however, that a Person shall not be deemed pursuant to this Section 1(c)(ii)(A) the Beneficial Owner of, or to beneficially own, (1) securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange or (2) securities which a Person or any of such Person's Affiliates or Associates may be deemed to have the right to acquire pursuant to any merger or other acquisition agreement between the Company and such Person (or one or more of its Affiliates or Associates) if such agreement has been approved by the Board of Directors of the Company prior to there being an Acquiring Person; or (B) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security under this Section 1(c)(ii)(B) if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations of the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person or any of such Person's 2 Affiliates or Associates has any agreement, arrangement or understanding (whether or not in writing) (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to Section 1(c)(ii)(B)) or disposing of any securities of the Company; provided, however, that in no case shall an officer or director of the Company be deemed (x) the Beneficial Owner of any securities beneficially owned by another officer or director of the Company solely by reason of actions undertaken by such persons in their capacity as officers or directors of the Company or (y) the Beneficial Owner of securities held of record by the trustee of any employee benefit plan of the Company or any Subsidiary of the Company for the benefit of any employee of the Company or any Subsidiary of the Company, other than the officer or director, by reason of any influence that such officer or director may have over the voting of the securities held in the plan. (d) "Business Day" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in Massachusetts are authorized or obligated by law or executive order to close. (e) "Close of Business" on any given date shall mean 5:00 P.M., Massachusetts time, on such date; provided, however, that if such date is not a Business Day it shall mean 5:00 P.M., Massachusetts time, on the next succeeding Business Day. (f) "Common Shares" when used with reference to the Company shall mean the shares of Common Stock of the Company, $.01 par value. "Common Shares" when used with reference to any Person other than the Company shall mean the capital stock (or equity interest) with the greatest voting power of such other Person or, if such other Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person. (g) "Continuing Director" shall mean (i) any member of the Board of Directors of the Company, while a member of the Board, who is not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate or Associate, and who was a member of the Board prior to the date of this Agreement, or (ii) any Person who subsequently becomes a member of the Board, while a member of the Board, who is not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate or Associate, if such Person's nomination for election or election to the Board is recommended or approved by a majority of the Continuing Directors. (h) "Distribution Date" shall mean the earlier of (i) the Close of Business on the tenth Business Day (or such later date as 3 may be determined by action of a majority of Continuing Directors then in office) after the Shares Acquisition Date (or, if the tenth Business Day after the Shares Acquisition Date occurs before the Record Date, the Close of Business on the Record Date) or (ii) the Close of Business on the tenth Business Day (or such later date as may be determined by action of a majority of Continuing Directors then in office) after the date that a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any Person or entity organized, appointed or established by the Company for or pursuant to the terms of any such plan) is first published or sent or given within the meaning of Rule 14d-2(a) of the General Rules and Regulations under the Exchange Act, if, assuming the successful consummation thereof, such person would be the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding. (i) "Equivalent Shares" shall mean Preferred Shares and any other class or series of capital stock of the Company which is entitled to participate in dividends and other distributions, including distributions upon the liquidation, dissolution or winding up of the Company, on a proportional basis with the Common Shares. In calculating the number of any class or series of Equivalent Shares for purposes of Section 11 of this Agreement, the number of shares, or fractions of a share, of such class or series of capital stock that is entitled to the same dividend or distribution as a whole Common Share shall be deemed to be one share. (j) "Expiration Date" shall mean the earliest of (i) the Close of Business on the Final Expiration Date, (ii) the Redemption Date, (iii) the time at which the Board of Directors orders the exchange of the Rights as provided in Section 24 hereof or (iv) the consummation of a transaction contemplated by Section 13(d) hereof. (k) "Final Expiration Date" shall mean ______________, 2007. (l) "Permitted Offer" shall mean a tender offer for all outstanding Common Shares made in the manner prescribed by Section 14(d) of the Exchange Act and the rules and regulations promulgated thereunder; provided, however, that such tender offer occurs at a time when Continuing Directors are in office and a majority of the Continuing Directors then in office has determined that the offer is both adequate and otherwise in the best interests of the Company and its stockholders (taking into account all factors that such Continuing Directors deem relevant, including without limitation prices that could reasonably be achieved if the Company or its assets were sold on an orderly basis designed to realize maximum value). (m) "Person" shall mean any individual, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity. (n) "Preferred Shares" shall mean shares of Series A Junior Preferred Stock of the Company. (o) "Purchase Price" shall have the meaning set forth in Section 4(a) hereof. (p) "Record Date" shall have the meaning set forth in the recitals at the beginning of this Agreement. 4 (q) "Redemption Date" shall mean the time at which the Board of Directors of the Company orders redemption of the Rights as provided in Section 23 hereof. (r) "Redemption Price" shall have the meaning set forth in Section 23(a) hereof. (s) "Rights Dividend Declaration Date" shall have the meaning set forth in the recitals at the beginning of this Agreement. (t) "Section 13 Event" shall mean any event described in clause (i), (ii) or (iii) of Section 13(a) hereof. (u) "Shares Acquisition Date" shall mean the first date of public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become such; provided that, if such person is determined not to have become an Acquiring Person pursuant to Section 1(a)(ii) hereof, then no Shares Acquisition Date shall be deemed to have occurred. (v) "Subsidiary" of any Person shall mean any corporation or other entity of which an amount of voting securities sufficient to elect a majority of the directors or Persons having similar authority of such corporation or other entity is beneficially owned, directly or indirectly, by such Person, or any corporation or other entity otherwise controlled by such Person. (w) "Total Exercise Price" shall have the meaning set forth in Section 4(a) hereof. (x) "Trading Day" shall have the meaning set forth in Section 11(d) hereof. (y) A "Triggering Event" shall be deemed to have occurred upon any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any Subsidiary of the Company, or any entity holding Common Shares for or pursuant to the terms of any such plan), together with all Affiliates and Associates of such Person, becoming an Acquiring Person. Section 2. Appointment of Rights Agent. The Company hereby appoints the Rights Agent to act as agent for the Company and the holders of the Rights (who, in accordance with Section 3 hereof, shall, prior to the Distribution Date, also be the holders of the Common Shares) in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such co-Rights Agents as it may deem necessary or desirable upon ten (10) days' prior written notice to the Rights Agent. 5 The Rights Agent shall have no duty to supervise, and shall in no event be liable for, the acts or omissions of any such co-Rights Agent. Section 3. Issuance of Rights Certificates. (a) Until the Distribution Date, (i) the Rights will be evidenced (subject to the provisions of Section 3(b) and 3(c) hereof) by the certificates for Common Shares registered in the names of the holders thereof (which certificates shall also be deemed to be Rights Certificates) and not by separate Rights Certificates and (ii) the right to receive Rights Certificates will be transferable only in connection with the transfer of Common Shares. Until the earlier of the Distribution Date or the Expiration Date, the surrender for transfer of such certificates for Common Shares shall also constitute the surrender for transfer of the Rights associated with the Common Shares represented thereby. As soon as practicable after the Distribution Date, the Company will prepare and execute, the Rights Agent will countersign, and the Company will send or cause to be sent (and the Rights Agent will, if requested, send) by first-class, postage-prepaid mail, to each record holder of Common Shares as of the close of business on the Distribution Date, at the address of such holder shown on the records of the Company, a Rights Certificate in substantially the form of Exhibit B hereto (a "Rights Certificate"), evidencing one Right for each Common Share so held, subject to adjustment as provided herein. In the event that an adjustment in the number of Rights per Common Share has been made pursuant to Section 11(a)(i), Section 11(i) or Section 11(p) hereof, then at the time of distribution of the Rights Certificates, the Company shall make the necessary and appropriate rounding adjustments (in accordance with Section 14(a) hereof) so that Rights Certificates representing only whole numbers of Rights are distributed and cash is paid in lieu of any fractional Rights. As of the Distribution Date, the Rights will be evidenced solely by such Rights Certificates and may be transferred by the transfer of the Rights Certificates as permitted hereby, separated and apart from any transfer of one or more Common Shares, and the holders of such Rights Certificates as listed in the records of the Company or any transfer agent or registrar for the Rights shall be the record holders thereof. (b) On the Record Date or as soon as practicable thereafter, the Company will send a copy of a Summary of Rights in substantially the form of Exhibit C hereto (the "Summary of Rights"), by first-class, postage-prepaid mail, to each record holder of Common Shares as of the close of business on the Record Date, at the address of such holder shown on the records of the Company. (c) Unless the Board of Directors, by resolution adopted at or before the time of the issuance (including pursuant to the exercise of rights under the Company's benefit plans) of any Common Shares, specifies to the contrary, Rights shall be issued in respect of all Common Shares that are issued after the Record Date but prior to the earlier of the Distribution Date or the Expiration Date or, in certain circumstances provided in Section 22 hereof, after the Distribution Date. Certificates representing such Common Shares shall also be deemed to be certificates for Rights, and shall bear the following legend: This certificate also evidences and entitles the holder hereof to certain rights as set forth in a Rights Agreement between FRIENDLY ICE CREAM 6 CORPORATION and THE BANK OF NEW YORK, as the Rights Agent, dated as of ______________, 1997 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of FRIENDLY ICE CREAM CORPORATION. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. FRIENDLY ICE CREAM CORPORATION will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a written request therefor. Under certain circumstances set forth in the Rights Agreement, Rights issued to, or held by, any Person who is, was or becomes an Acquiring Person or any Affiliate or Associate thereof (as such terms are defined in the Rights Agreement), whether currently held by or on behalf of such Person or by any subsequent holder, may become null and void. With respect to such certificates containing the foregoing legend, until the earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights associated with the Common Shares represented by such certificates shall be evidenced by such certificates alone, and the surrender for transfer of any such certificate shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. In the event that the Company purchases or acquires any Common Shares after the Record Date but prior to the Distribution Date, any Rights associated with such Common Shares shall be deemed cancelled and retired so that the Company shall not be entitled to exercise any Rights associated with the Common Shares which are no longer outstanding. Section 4. Form of Rights Certificates. (a) The Rights Certificates (and the forms of election to purchase Common Shares and of assignment to be printed on the reverse thereof) shall be substantially in the form of Exhibit B hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed, or to conform to usage. Subject to the provisions of Section 11 and Section 22 hereof, the Rights Certificates, whenever distributed, shall be dated as of the Record Date (or in the case of Rights issued with respect to Common Shares issued by the Company after the Record Date, as of the date of issuance of such Common Shares) and on their face shall entitle the holders thereof to purchase such number of one-thousandths of a Preferred Share as shall be set forth therein at the price set forth therein (such exercise price per one one-thousandth of a Preferred Share being hereinafter referred to as the "Purchase Price" and the aggregate exercise price of all Preferred Shares issuable upon exercise of one Right being hereinafter referred to as the "Total Exercise Price"), but the number and type of securities purchasable upon the exercise of each Right and the Purchase Price shall be subject to adjustment as provided herein. 7 (b) Any Rights Certificate issued pursuant to Section 3(a) or Section 22 hereof that represents Rights beneficially owned by: (i) an Acquiring Person or any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom such Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect avoidance of Section 7(e) hereof, and any Rights Certificate issued pursuant to Section 6 or Section 11 hereof upon transfer, exchange, replacement or adjustment of any other Rights Certificate referred to in this sentence, shall contain (to the extent feasible) the following legend: The Rights represented by this Rights Certificate are or were beneficially owned by a Person who was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person (as such terms are defined in the Rights Agreement). Accordingly, this Rights Certificate and the Rights represented hereby may become null and void in the circumstances specified in Section 7(e) of the Rights Agreement. Section 5. Countersignature and Registration. (a) The Rights Certificates shall be executed on behalf of the Company by its President or any Vice President, either manually or by facsimile signature, and by the Treasurer or an Assistant Treasurer of the Company, either manually or by facsimile signature, and shall have affixed thereto the Company's seal (if any) or a facsimile thereof. The Rights Certificates shall be manually countersigned by the Rights Agent and shall not be valid for any purpose unless countersigned. In case any officer of the Company who shall have signed any of the Rights Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Rights Certificates nevertheless may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as through the person who signed such Rights Certificates had not ceased to be such officer of the Company; and any Rights Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Rights Certificate, shall be a proper officer of the Company to sign such Rights Certificate, although at the date of the execution of this Rights Agreement any such person was not such an officer. (b) Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its office designated for such purposes, books for registration and transfer of the Rights Certificates issued hereunder. Such books shall show the names and addresses of the 8 respective holders of the Rights Certificates, the number of Rights evidenced on its face by each of the Rights Certificates and the date of each of the Rights Certificates. Section 6. Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates. (a) Subject to the provisions of Sections 7(e), 14 and 24 hereof, at any time after the Close of Business on the Distribution Date, and at or prior to the Close of Business on the Expiration Date, any Rights Certificate or Rights Certificates may be transferred, split up, combined or exchanged for another Rights Certificate or Rights Certificates, entitling the registered holder to purchase a like number of one-thousandths of a Preferred Share (or, following a Triggering Event, other securities, cash or other assets, as the case may be) as the Rights Certificate or Rights Certificates surrendered then entitled such holder to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Rights Certificate or Rights Certificates shall make such request in writing delivered to the Rights Agent, and shall surrender the Rights Certificate or Rights Certificates to be transferred, split up, combined or exchanged at the office of the Rights Agent designated for such purpose. Neither the Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Rights Certificate until the registered holder shall have completed and signed the certificate contained in the form of assignment on the reverse side of such Rights Certificate and shall have provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Thereupon the Rights Agent shall, subject to Sections 7(e), 14 and 24 hereof, countersign and deliver to the Person entitled thereto a Rights Certificate or Rights Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Rights Certificates. (b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Rights Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, at the Company's request, reimbursement to the Company and the Rights Agent and cancellation of the Rights Certificate if mutilated, the Company will make and deliver a new Rights Certificate of like tenor to the Rights Agent for delivery to the registered holder in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated. Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights. (a) Subject to Section 7(e) hereof, the registered holder of any Rights Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein) in whole or in part at any time after the Distribution Date upon surrender of the Rights Certificate, with the form of election to purchase on the reverse side thereof duly executed, to the Rights Agent at the office of the Rights Agent designated for such purpose, together with payment of 9 the Purchase Price for each one-thousandth of a Preferred Share as to which the Rights are exercised, at or prior to the Expiration Date. (b) The Purchase Price for each one-thousandth of a Preferred Share issuable pursuant to the exercise of a Right shall initially be $______, shall be subject to adjustment from time to time as provided in Sections 11 and 13 hereof and shall be payable in lawful money of the United States of America in accordance with paragraph (c) below. (c) Upon receipt of a Rights Certificate representing exercisable Rights, with the form of election to purchase duly executed, accompanied by payment of the Purchase Price for the number of one-thousandths of a Preferred Share (or other securities or property, as the case may be) to be purchased and an amount equal to any applicable transfer tax required to be paid by the holder of such Rights Certificate in accordance with Section 9 hereof in cash, or by certified check or cashier's check payable to the order of the Company, the Rights Agent shall, subject to Section 20(k) hereof, thereupon promptly (i) (A) requisition from any transfer agent of the Preferred Shares (or make available, if the Rights Agent is the transfer agent for the Preferred Shares) a certificate or certificates for the number of one-thousandths of a Preferred Share to be purchased and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests or (B) if the Company shall have elected to deposit the total number of one-thousandths of a Preferred Share issuable upon exercise of the Rights hereunder with a depositary agent, requisition from the depositary agent of depositary receipts representing such number of one-thousandths of a Preferred Share as are to be purchased (in which case certificates for the Preferred Shares represented by such receipts shall be deposited by the transfer agent with the depositary agent) and the Company hereby directs the depositary agent to comply with such request, (ii) when appropriate, requisition from the Company the amount of cash to be paid in lieu of issuance of fractional shares in accordance with Section 14 hereof, (iii) after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder and (iv) when appropriate, after receipt thereof, deliver such cash to or upon the order of the registered holder of such Rights Certificate. The payment of the Purchase Price (as such amount may be reduced (including to zero) pursuant to Section 11(a)(iv) hereof) may be made in cash or by certified bank check or bank draft payable to the order of the Company. In the event that the Company is obligated to issue other securities of the Company, pay cash and/or distribute other property pursuant to Section 11(a) hereof, the Company will make all arrangements necessary so that such other securities, cash and/or other property are available for distribution by the Rights Agent, if and when appropriate. (d) In case the registered holder of any Rights Certificate shall exercise less than all the Rights evidenced thereby, a new Rights Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent to the registered holder of such Rights Certificate or to his or her duly authorized assigns, subject to the provisions of Section 14 hereof. 10 (e) Notwithstanding anything in this Agreement to the contrary, from and after the first occurrence of a Triggering Event or a Section 13 Event, any Rights beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such (a "Post Transferee"), (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom the Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect the avoidance of this Section 7(e) (a "Prior Transferee") or (iv) any subsequent transferee receiving transferred Rights from a Post Transferee or a Prior Transferee, either directly or through one or more intermediate transferees, shall become null and void without any further action and no holder of such Rights shall have any rights whatsoever with respect to such Rights, whether under any provision of this Agreement or otherwise. The Company shall use all reasonable efforts to ensure that the provisions of this Section 7(e) and Section 4(b) hereof are complied with, but shall have no liability to any holder of Rights Certificates or to any other Person as a result of its failure to make any determinations with respect to an Acquiring Person or any of such Acquiring Person's Affiliates, Associates or transferees hereunder. (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this Section 7 unless such registered holder shall have (i) completed and signed the certificate contained in the form of election to purchase set forth on the reverse side of the Rights Certificate surrendered for such exercise and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Section 8. Cancellation and Destruction of Rights Certificates. All Rights Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Rights Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled Rights Certificates to the Company, or shall, at the written request of the Company, destroy such cancelled Rights Certificates, and in such case shall deliver a certificate of destruction thereof to the Company. 11 Section 9. Reservation and Availability of Preferred Shares. (a) The Company covenants and agrees that it will use its best efforts to cause to be reserved and kept available out of and to the extent of its authorized and unissued shares of preferred stock not reserved for another purpose (and, following the occurrence of a Triggering Event, out of its authorized and unissued shares of Common Shares and/or other securities), the number of Preferred Shares (and, following the occurrence of the Triggering Event, Common Shares and/or other securities) that will be sufficient to permit the exercise in full of all outstanding Rights. (b) If the Company shall hereafter list any of its Preferred Shares on a national securities exchange, then so long as the Preferred Shares (and, following the occurrence of a Triggering Event, Common Shares and/or other securities) issuable and deliverable upon exercise of the Rights may be listed on a national securities exchange, the Company shall use its best efforts to cause, from and after such time as the Rights become exercisable (but only to the extent that it is reasonably likely that the Rights will be exercised), all shares reserved for such issuance to be listed on such exchange upon official notice of issuance upon such exercise. (c) The Company shall use its best efforts to (i) file, as soon as practicable following the earliest date after the first occurrence of a Triggering Event in which the consideration to be delivered by the Company upon exercise of the Rights has been determined in accordance with Section 11(a)(iv) hereof, or as soon as is required by law following the Distribution Date, as the case may be, a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities purchasable upon exercise of the Rights on an appropriate form, (ii) cause such registration statement to become effective as soon as practicable after such filing, and (iii) cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Securities Act) until the earlier of (A) the date as of which the Rights are no longer exercisable for such securities and (B) the date of expiration of the Rights. The Company may temporarily suspend, for a period not to exceed ninety (90) days after the date set forth in clause (i) of the first sentence of this Section 9(c), the exercisability of the Rights in order to prepare and file such registration statement and permit it to become effective. Upon any such suspension, the Company shall issue a public announcement stating, and notify the Rights Agent, that the exercisability of the Rights has been temporarily suspended, as well as a public announcement and notification to the Rights Agent at such time as the suspension is no longer in effect. The Company will also take such action as may be appropriate under, or to ensure compliance with, the securities or "blue sky" laws of the various states in connection with the exercisability of the Rights. Notwithstanding any provision of this Agreement to the contrary, the Rights shall not be exercisable in any jurisdiction, unless the requisite qualification in such jurisdiction shall have been obtained, or an exemption therefrom shall be available, and until a registration statement has been declared effective. 12 (d) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all Preferred Shares delivered upon exercise of Rights shall, at the time of delivery of the certificates for such Preferred Shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and nonassessable shares. (e) The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the original issuance or delivery of the Rights Certificates or of any Preferred Shares upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Rights Certificates to a person other than, or the issuance or delivery of certificates or depositary receipts for the Preferred Shares in a name other than that of, the registered holder of the Rights Certificate evidencing Rights surrendered for exercise or to issue or to deliver any certificates or depositary receipts for Preferred Shares upon the exercise of any Rights until any such tax shall have been paid (any such tax being payable by the holder of such Rights Certificate at the time of surrender) or until it has been established to the Company's satisfaction that no such tax is due. Section 10. Preferred Shares Record Date. Each Person in whose name any certificate for a number of one-thousandths of a Preferred Share is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of Preferred Shares represented thereby on, and such certificate shall be dated, the date upon which the Rights Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price multiplied by the number of one-thousandths of a Preferred Share with respect to which the Rights have been exercised (and any applicable transfer taxes) was made; provided, however, that if the date of such surrender and payment is a date upon which the Preferred Shares transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Shares transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Rights Certificate shall not be entitled to any rights of a holder of Preferred Shares for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. Section 11. Adjustment of Purchase Price; Number of Shares or Number of Rights. The Purchase Price, the number and kind of shares or other property covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. (a) (i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Common Shares payable in Common Shares, (B) subdivide the outstanding Common Shares, (C) combine the outstanding Common Shares (by reverse stock split or otherwise) into a smaller number of Common Shares, or (D) issue any 13 shares of its capital stock in a reclassification of the Common Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), then, in each such event, except as otherwise provided in this Section 11(a) and Section 7(e) hereof: (1) each of the Rights outstanding at the time of the record date for such dividend or the effective date of such subdivision, combination or reclassification shall be proportionately adjusted to that number of Rights (calculated to the nearest one ten-thousandth (1/10,000) of a Right) equal to a fraction (the "Exchange Ratio"), the numerator of which shall be the total number of Common Shares or shares of capital stock issued in such reclassification of the Common Shares outstanding immediately following such time and the denominator of which shall be the total number of Common Shares outstanding immediately prior to such time, and the number of Rights that shall thereafter be issued with respect to each Common Share or share of such other capital stock that shall become outstanding thereafter prior to the Distribution Date shall be equal to the total number of outstanding Rights immediately after such event (as adjusted pursuant to this clause (1)) divided by the total number of outstanding Common Shares or shares of such other capital stock immediately after such event (subject to further adjustment pursuant to the provisions of this Agreement); (2) the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification shall be adjusted so that the Purchase Price thereafter shall equal the result obtained by dividing the Purchase Price in effect immediately prior to such time by the Exchange Ratio; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of such Right; and (3) the number of Common Shares or shares of such other capital stock issuable upon the exercise of each Right shall remain unchanged immediately after such event, but, in the event of a reclassification, the kind of shares issuable upon the exercise of each Right immediately after such reclassification shall be adjusted to be the kind of shares of such other capital stock issued in such reclassification, rather than Common Shares. If an event occurs which would require an adjustment under both this Section 11(a)(i) and Section 11(a)(ii) hereof, the adjustment provided for in this Section 11(a)(i) shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 11(a)(ii) hereof. (ii) Subject to Section 24 of this Agreement, in the event a Triggering Event shall have occurred, then promptly following such Triggering Event, proper provision shall be made so that each holder of a Right, except as provided in Section 7(e) hereof, shall thereafter have the right to receive for each Right, upon exercise thereof in accordance with the terms of this Agreement and payment of the then-current Total Exercise Price, in lieu of a number of one-thousandths of a Preferred Share, such number of Common Shares of the Company as shall equal the result obtained by multiplying the then-current Purchase Price by the then number of one-thousandths of a Preferred Share for which a Right was exercisable (or would have been exercisable if the Distribution Date had occurred) immediately prior to the first occurrence of a Triggering Event, and dividing that product by 50% of the current per share market price (determined pursuant to Section 11(d) hereof) for Common Shares on the date of 14 occurrence of the Triggering Event (such number of shares being hereinafter referred to as the "Adjustment Shares"). (iii) The right to buy Common Shares of the Company pursuant to Section 11(a)(ii) hereof shall not arise as a result of any Person becoming an Acquiring Person through an acquisition of Common Shares pursuant to a Permitted Offer. (iv) In lieu of issuing Common Shares in accordance with Section 11(a)(ii) hereof, the Company may, if the Board of Directors determines that such action is necessary or appropriate and not contrary to the interest of holders of Rights (and, in the event that the number of Common Shares which are authorized by the Company's Articles of Organization but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights are not sufficient to permit the exercise in full of the Rights, or if any necessary regulatory approval for such issuance has not been obtained by the Company, the Company shall): (A) determine the excess of (1) the value of the Common Shares issuable upon the exercise of a Right (the "Current Value") over (2) the Purchase Price (such excess, the "Spread") and (B) with respect to each Right make adequate provision to substitute for such Common Shares, upon exercise of the Rights (1) cash, (2) a reduction in the Purchase Price, (3) other equity securities of the Company (including, without limitation, shares or units of shares of any series of preferred stock which the Board of Directors of the Company has deemed to have the same value as Common Shares (such shares or units of shares of preferred stock are herein called "common stock equivalents"), except to the extent that the Company has not obtained any necessary stockholder or regulatory approval for such issuance, (4) debt securities of the Company except to the extent that the Company has not obtained any necessary stockholder or regulatory approval for such issuance, (5) other assets or (6) any combination of the foregoing, having an aggregate value equal to the Current Value, where such aggregate value has been determined by the Board of Directors of the Company based upon the advice of a nationally recognized investment banking firm selected by the Board of Directors of the Company; provided, however, if the Company shall not have made adequate provision to deliver value pursuant to clause (B) above within thirty (30) days following the later of (x) the first occurrence of a Triggering Event and (y) the date on which the Company's right of redemption pursuant to Section 23(a) expires (the later of (x) and (y) being referred to herein as the "Section 11(a)(ii) Trigger Date"), then the Company shall be obligated to deliver, upon the surrender for exercise of a Right and without requiring payment of the Purchase Price, Common Shares (to the extent available), except to the extent that the Company has not obtained any necessary stockholder or regulatory approval for such issuance, and then, if necessary, cash, which shares and/or cash have an aggregate value equal to the Spread. If the Board of Directors of the Company shall determine in good faith that it is likely that sufficient additional Common Shares could be authorized for issuance upon exercise in full of the Rights or that any necessary regulatory approval for such issuance will be obtained, the thirty (30) day period set forth above may be extended to the extent necessary, but not more than ninety (90) days after the Section 11(a)(ii) Trigger Date, in order that the Company may seek stockholder approval for the authorization of such additional shares or take action to obtain such regulatory approval (such period, as it may be extended, the "Substitution 15 Period"). To the extent that the Company determines that some action need be taken pursuant to the first and/or second sentences of this Section 11(a)(iv), the Company (x) shall provide, subject to Section 7(e) hereof, that such action shall apply uniformly to all outstanding Rights and (y) may suspend the exercisability of the Rights until the expiration of the Substitution Period in order to seek any authorization of additional shares, to take any action to obtain any required regulatory approval and/or to decide the appropriate form of distribution to be made pursuant to such first sentence and to determine the value thereof. In the event of any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. For purposes of this Section 11(a)(iv), the value of the Common Shares shall be the current per share market price (as determined pursuant to Section 11(d) hereof) of the Common Shares on the Section 11(a)(ii) Trigger Date and the value of any "common stock equivalent" shall be deemed to have the same value as the Common Shares on such date. (b) In case the Company shall, at any time after the date of this Agreement, fix a record date for the issuance of rights, options or warrants to all holders of Common Shares or of any class or series of Equivalent Shares entitling such holders (for a period expiring within forty-five (45) calendar days after such record date) to subscribe for or purchase Common Shares or Equivalent Shares or securities convertible into Common Shares or Equivalent Shares at a price per share (or having a conversion price per share, if a security convertible into Common Shares or Equivalent Shares) less than the then current per share market price of the Common Shares or Equivalent Shares (as defined in Section 11(d)) on such record date, then, in each such case, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of Common Shares and Equivalent Shares (if any) outstanding on such record date, plus the number of Common Shares or Equivalent Shares, as the case may be, which the aggregate offering price of the total number of Common Shares or Equivalent Shares, as the case may be, so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price, and the denominator of which shall be the number of Common Shares and Equivalent Shares (if any) outstanding on such record date, plus the number of additional Common Shares or Equivalent Shares, as the case may be, to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. Common Shares and Equivalent Shares owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed, and in the event that such rights, options or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. 16 (c) In case the Company shall, at any time after the date of this Agreement, fix a record date for the making of a distribution to all holders of the Common Shares or of any class or series of Equivalent Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) or evidences of indebtedness or assets (other than a regular quarterly cash dividend, if any, or a dividend payable in Common Shares) or subscription rights, options or warrants (excluding those referred to in Section 11(b)), then, in each such case, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the current market price (as determined pursuant to Section 11(d) hereof) of a Common Share or an Equivalent Share on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent) of the portion of the cash, assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to a Common Share or Equivalent Share, as the case may be, and the denominator of which shall be such current market price (as determined pursuant to Section 11(d) hereof) of a Common Share or Equivalent Share on such record date. Such adjustments shall be made successively whenever such a record date is fixed, and in the event that such distribution is not so made, the Purchase Price shall be adjusted to be the Purchase Price which would have been in effect if such record date had not been fixed. (d) For the purpose of any computation hereunder, other than computations made pursuant to Section 11(a)(iv) hereof, the "current per share market price" of any security (a "Security" for the purpose of this Section 11(d)) on any date shall be deemed to be the average of the daily closing prices per share of such Security for the thirty (30) consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date, and for purposes of computations made pursuant to Section 11(a)(iv) hereof, the "current per share market price" of any Security on any date shall be deemed to be the average of the daily closing prices per share of such Security for the ten (10) consecutive Trading Days immediately prior to such date; provided, however, that in the event that the current per share market price of the Security is determined during a period following the announcement by the issuer of such Security of (i) a dividend or distribution on such Security payable in shares of such Security or securities convertible into such shares or (ii) any subdivision, combination or reclassification of such Security, and prior to the expiration of the requisite thirty (30) Trading Days or ten (10) Trading Day period, after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the current per share market price shall be appropriately adjusted to reflect the current market price per share equivalent of such Security. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Security is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Security is listed or 17 admitted to trading or, if the Security is not listed or admitted to trading on any national securities exchange, the last sale price or, if such last sale price is not reported, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("Nasdaq") or such other system then in use, or, if on any such date the Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by the Board of Directors of the Company. If on any such date no market maker is making a market in the Common Shares, the fair value of such shares on such date as determined in good faith by the Board of Directors of the Company shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Security is listed or admitted to trading is open for the transaction of business or, if the Security is not listed or admitted to trading on any national securities exchange, a Business Day. If the Common Shares are not publicly held or so listed or traded, "current per share market price" shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes. (e) Anything herein to the contrary notwithstanding, no adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; provided, however, that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest ten-thousandth of a Common Share or other share or one hundred-thousandth of a Preferred Share, as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three (3) years from the date of the transaction which requires such adjustment or (ii) the Expiration Date. (f) If as a result of an adjustment made pursuant to Section 11(a) or 13(a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock other than Preferred Shares, thereafter the number of such other shares so receivable upon exercise of any Right and if required, the Purchase Price thereof, shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Shares contained in sections 11(a), (b), (c), (e), (h), (i), (j), (k), (l) and (m), and the provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Shares shall apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of one-thousandths of a Preferred Share purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. 18 (h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Section 11(b), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of Preferred Shares (calculated to the nearest one hundred-thousandth of a share) obtained by (i) multiplying (x) the number of Preferred Shares covered by a Right immediately prior to this adjustment, by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price, and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Company may elect on or after the date of any adjustment of the Purchase Price as a result of the calculations made in Section 11(b) to adjust the number of Rights, in substitution for any adjustment in the number of Preferred Shares purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of one-thousandths of a Preferred Share for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Rights Certificates have been issued, shall be at least ten (10) days later than the date of the public announcement. If Rights Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Rights Certificates on such record date Rights Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Rights Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Rights Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Rights Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein (and may bear, at the option of the Company, the adjusted Purchase Price) and shall be registered in the names of the holders of record of Rights Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Purchase Price or the number of Preferred Shares issuable upon the exercise of the Rights, the Rights Certificates theretofore and thereafter issued may continue to express the Purchase Price per one one-thousandth of a Preferred Share and the number of one-thousandths of a Preferred Share which were expressed in the initial Rights Certificates issued hereunder. 19 (k) Before taking any action that would cause an adjustment reducing the Purchase Price below the par or stated value, if any, of the number of one-thousandths of a Preferred Share issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue as fully paid and nonassessable shares such number of one-thousandths of a Preferred Share at such adjusted Purchase Price. (l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuing to the holder of any Right exercised after such record date of the number of one-thousandths of a Preferred Share and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the number of one-thousandths of a Preferred Share and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided, however, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares (fractional or otherwise) upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 11 to the contrary notwithstanding, prior to the Distribution Date, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it in its sole discretion shall determine to be advisable in order that any (i) consolidation or subdivision of the Preferred or Common Shares, (ii) issuance wholly for cash of any Preferred or Common Shares at less than the current market price, (iii) issuance wholly for cash of Preferred or Common Shares or securities which by their terms are convertible into or exchangeable for Preferred or Common Shares, (iv) stock dividends or (v) issuance of rights, options or warrants referred to in this Section 11, hereafter made by the Company to holders of its Preferred or Common Shares shall not be taxable to such stockholders. (n) The Company covenants and agrees that it shall not, at any time after the Distribution Date, effect or permit to occur any Triggering Event or Section 13 Event, if (i) at the time or immediately after such Triggering Event or Section 13 Event there are any rights, warrants or other instruments or securities outstanding or agreements in effect which would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights or (ii) prior to, simultaneously with or immediately after such Section 13 Event, the stockholders of the Person who constitutes, or would constitute, the "Principal Party" for purposes of Section 13(b) hereof shall have received a distribution of Rights previously owned by such Person or any of its Affiliates and Associates. (o) The Company covenants and agrees that, after the Distribution Date, it will not, except as permitted by Sections 23, 24 or 27 hereof, take (or permit to be taken) any action if at the time such action is taken it is reasonably foreseeable that such action will diminish substantially or otherwise eliminate the benefits intended to be afforded by the Rights. 20 (p) Anything in this Agreement to the contrary notwithstanding, in the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Shares payable in Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine the outstanding Preferred Shares (by reverse stock split or otherwise) into a smaller number of Preferred Shares, or (D) issue any shares of its capital stock in a reclassification of the Preferred Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), then, in each such event, except as otherwise provided in this Section 11 and Section 7(e) hereof: (1) each of the Rights outstanding at the time of the record date for such dividend or the effective date of such subdivision, combination or reclassification shall be proportionately adjusted to that number of Rights (calculated to the nearest one ten-thousandth (1/10,000) of a Right) equal to a fraction (the "Exchange Fraction"), the numerator of which shall be the total number of Preferred Shares or shares of capital stock issued in such reclassification of the Preferred Shares outstanding immediately following such time and the denominator of which shall be the total number of Preferred Shares outstanding immediately prior to such time, and the number of Rights that shall thereafter be issued with respect to each Common Share or share of other capital stock that shall be issued in a reclassification of the Common Shares prior to the Distribution Date shall be equal to the total number of outstanding Rights immediately after such event (as adjusted pursuant to this clause(1)) divided by the total number of outstanding Common Shares or shares of such other capital stock immediately after such event (subject to further adjustment pursuant to the provisions of this Agreement); (2) the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification shall be adjusted so that the Purchase Price thereafter shall equal the result obtained by dividing the Purchase Price in effect immediately prior to such time by the Exchange Fraction; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of such Right; and (3) the number of one-thousandths of a Preferred Share or share of such other capital stock issuable upon the exercise of each Right shall remain unchanged immediately after such event, but, in the event of a reclassification, the kind of shares issuable upon the exercise of each Right immediately after such reclassification shall be adjusted to be the kind of shares of such other capital stock issued in such reclassification, rather than Preferred Shares. Section 12. Certificate of Adjusted Purchase Price or Number of Shares. Whenever an adjustment is made as provided in Sections 11 and 13 hereof, the Company shall promptly (a) prepare a certificate setting forth such adjustment and a brief statement of the facts accounting for such adjustment, (b) file with the Rights Agent and with each transfer agent for the Preferred Shares a copy of such certificate and (c) mail a brief summary thereof to each holder of a Rights Certificate in accordance with Section 26 hereof. Notwithstanding the foregoing sentence, the failure of the Company to make such certification or give such notice shall not affect the validity of such adjustment or the force or effect of the requirement for such adjustment. The Rights Agent shall be fully protected in relying on any such certificate and on 21 any adjustment contained therein and shall not be deemed to have knowledge of such adjustment unless and until it shall have received such certificate. Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power. (a) In the event that, following the Shares Acquisition Date, directly or indirectly: (i) the Company shall consolidate with, or merge with and into, any other Person (other than a Subsidiary of the Company in a transaction the principal purpose of which is to change the state of incorporation of the Company or which complies with Section 11(o) hereof); (ii) any Person (other than a Subsidiary of the Company in a transaction that complies with Section 11(o) hereof) shall consolidate with the Company, or merge with and into the Company and the Company shall be the continuing or surviving corporation of such consolidation or merger; or (iii) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one or more transactions, assets or earning power aggregating 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company or one or more of its wholly owned Subsidiaries in one or more transactions, each of which complies with Section 11(o) hereof); then, and in each such case, proper provision shall be made so that (A) each holder of a Right (except as otherwise provided herein) shall thereafter have the right to receive, upon the exercise thereof in accordance with the terms of this Agreement, such number of validly authorized and issued, fully paid and nonassessable Common Shares of the Principal Party (as hereinafter defined), free of any liens, encumbrances, rights of first refusal or other adverse claims, as shall be equal to the result obtained by (1) multiplying the then current Purchase Price by the number of one-thousandths of a Preferred Share for which a Right was exercisable immediately prior to the first occurrence of a Section 13 Event (or, if a Triggering Event has occurred prior to the first occurrence of a Section 13 Event, multiplying the number of such one-thousandths of a Preferred Share for which a Right was exercisable immediately prior to the first occurrence of a Triggering Event by the Purchase Price in effect immediately prior to such first occurrence) and (2) dividing that product (which, following the first occurrence of a Section 13 Event, shall be referred to as the "Total Exercise Price" for each Right and for all purposes of this Agreement) by 50% of the current per share market price (determined pursuant to Section 11(d) hereof) of the Common Shares of such Principal Party on the date of consummation of such Section 13 Event; 22 (B) such Principal Party shall thereafter be liable for, and shall assume, by virtue of such Section 13 Event, all the obligations and duties of the Company pursuant to this Agreement; (C) the term "Company" shall thereafter be deemed to refer to such Principal Party, it being specifically intended that the provisions of Section 11 hereof shall apply only to such Principal Party following the first occurrence of a Section 13 Event; (D) such Principal Party shall take such steps (including, but not limited to, the reservation of a sufficient number of its Common Shares) in connection with the consummation of any such transaction as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to its Common Shares thereafter deliverable upon the exercise of the Rights. (b) "Principal Party" shall mean, in the case of any transaction described in clause (i), (ii) or (iii) of Section 13(a), the Person or Acquiring Person referred to therein (or such Person's or Acquiring Person's successor, including, if applicable, the Company, if it is the surviving corporation), provided, however, that in any such case, (i) if such Person is a direct or indirect Subsidiary of another Person, "Principal Party" shall refer to such other Person and (ii) in case such Person is a Subsidiary, directly or indirectly, of more than one Person, "Principal Party" shall refer to whichever of such Persons is the issuer of the Common Shares having the greatest aggregate value, and provided, further, that for purposes of transactions described in clause (iii) hereof, "Principal Party" shall refer to that Person receiving the greatest portion of the assets or earning power transferred pursuant to such transaction or transactions. (c) If, for any reason, the Rights cannot be exercised for Common Shares of such Principal Party as provided in Section 13(a), then each holder of Rights shall have the right to exchange its Rights for cash from such Principal Party in an amount equal to the number of Common Shares that it would otherwise be entitled to purchase times 50% of the current per share market price, as determined pursuant to Section 11(d) hereof, of such Common Shares of such Principal Party. If, for any reason, the foregoing formulation cannot be applied to determine the cash amount into which the Rights are exchangeable, then the Board of Directors, based upon the advice of one or more nationally recognized investment banking firms, and based upon the total value of the Company, shall determine such amount reasonably and with good faith to the holders of Rights. Any such determination shall be final and binding on the Rights Agent. (d) Notwithstanding anything in this Agreement to the contrary, Section 13 shall not be applicable to a transaction described in clauses (i) and (ii) of Section 13(a) if: (i) such transaction is consummated with a Person or Persons who acquired Common Shares pursuant to a Permitted Offer (or a wholly-owned Subsidiary of any such Person or Persons); (ii) the price per share of Common Shares offered in such transaction is not less than the price per share of Common Shares paid to all holders of Common Shares whose shares were 23 purchased pursuant to such Permitted Offer; and (iii) the form of consideration being offered to the remaining holders of Common Shares pursuant to such transaction is the same form as the form of consideration paid pursuant to such Permitted Offer. Upon consummation of any such transaction contemplated by this Section 13(d), all rights hereunder shall expire. (e) The Company shall not consummate any Section 13 Event unless the Principal Party shall have a sufficient number of authorized Common Shares that have not been issued or reserved for issuance to permit the exercise in full of the Rights in accordance with this Section 13 and unless prior thereto the Company and such issuer shall have executed and delivered to the Rights Agent a supplemental agreement confirming that such Principal Party shall, upon consummation of such Section 13 Event, assume this Agreement in accordance with Sections 13(a) and (b) hereof, that all rights of first refusal or preemptive rights in respect of the issuance of Common Shares of such Principal Party upon exercise of outstanding Rights have been waived, that there are no rights, warrants, instruments or securities outstanding or any agreements or arrangements which, as a result of the consummation of such transaction, would eliminate or substantially diminish the benefits intended to be afforded by the Rights and that such transaction shall not result in a default by such Principal Party under this Agreement, and further providing that, as soon as practicable after the date of such Section 13 Event, such Principal Party will: (i) prepare and file a registration statement under the Securities Act with respect to the Rights and the securities purchasable upon exercise of the Rights on an appropriate form, use its best efforts to cause such registration statement to become effective as soon as practicable after such filing and use its best efforts to cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Securities Act) until the Expiration Date, and similarly comply with applicable state securities laws; (ii) use its best efforts to list (or continue the listing of) the Rights and the securities purchasable upon exercise of the Rights on a national securities exchange or to meet the eligibility requirements for quotation on Nasdaq; and (iii) deliver to holders of the Rights historical financial statements for such Principal Party which comply in all respects with the requirements for registration on Form 10 (or any successor form) under the Exchange Act. In the event that at any time after the occurrence of a Triggering Event some or all of the Rights shall not have been exercised at the time of a transaction described in this Section 13, the Rights which have not theretofore been exercised shall thereafter be exercisable in the manner described in Section 13(a) (without taking into account any prior adjustment required by Section 11(a)(ii)). (f) The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. 24 Section 14. Fractional Rights and Fractional Shares. (a) The Company shall not be required to issue fractions of Rights or to distribute Rights Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Rights Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable, as determined pursuant to the second sentence of Section 11(d) hereof. (b) The Company shall not be required to issue fractions of Preferred Shares (other than fractions that are integral multiples of one one-thousandth of a Preferred Share) upon exercise of the Rights or to distribute certificates which evidence fractional Preferred Shares (other than fractions that are integral multiples of one one-thousandth of a Preferred Share). In lieu of fractional Preferred Shares that are not integral multiples of one one-thousandth of a Preferred Share, the Company shall pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of a Common Share. For purposes of this Section 14(b), the current market value of a Common Share shall be the closing price of a Common Share (as determined pursuant to the second sentence of Section 11(d) hereof) for the Trading Day immediately prior to the date of such exercise. (c) The holder of a Right by the acceptance of the Right expressly waives his or her right to receive any fractional Rights or any fractional shares upon exercise of a Right. Section 15. Rights of Action. All rights of action in respect of this Agreement, excepting the rights of action given to the Rights Agent under Section 18 hereof, are vested in the respective registered holders of the Rights Certificates (and, prior to the Distribution Date, the registered holders of the Common Shares); and any registered holder of any Rights Certificate (or, prior to the Distribution Date, of the Common Shares), without the consent of the Rights Agent or of the holder of any other Rights Certificate (or, prior to the Distribution Date, of the Common Shares), may, in his or her own behalf and for his or her own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, his or her right to exercise the Rights evidenced by such Rights Certificate in the manner provided in such Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under and injunctive relief against actual or threatened violators of, the obligations of any Person subject to this Agreement. 25 Section 16. Agreement of Rights Holders. Every holder of a Right, by accepting the same, consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the Common Shares; (b) after the Distribution Date, the Rights Certificates are transferable only on the registry books of the Rights Agent if surrendered at the principal office or offices of the Rights Agent designated for such purposes duly endorsed or accompanied by a proper instrument of transfer and with the appropriate forms and certificates fully executed; and (c) subject to Sections 6(a) and 7(f) hereof, the Company and the Rights Agent may deem and treat the person in whose name the Rights Certificate (or, prior to the Distribution Date, the associated Common Shares certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Rights Certificates or the associated Common Shares certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice to the contrary. Section 17. Rights Certificate Holder Not Deemed a Stockholder. No holder, as such, of any Rights Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Preferred Shares or any other securities of the Company which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Rights Certificate be construed to confer upon the holder of any Rights Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 25 hereof), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Rights Certificate shall have been exercised in accordance with the provisions hereof. Section 18. Concerning the Rights Agent. (a) The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against any loss, liability or expense, incurred without gross negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability in the premises. 26 (b) The Rights Agent shall be protected and shall incur no liability for, or in respect of any action taken, suffered or omitted by it in connection with, its administration of this Agreement in reliance upon any Rights Certificate or certificate for the Common Shares or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons, or otherwise upon the advice of counsel as set forth in Section 20 hereof. Section 19. Merger or Consolidation or Change of Name of Rights Agent. (a) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the corporate trust business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided, however, that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Rights Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the counter-signature of the predecessor Rights Agent and deliver such Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, any successor Rights Agent may countersign such Rights Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. (b) In case at any time the name of the Rights Agent shall be changed and at such time any of the Rights Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, the Rights Agent may countersign such Rights Certificates either in its prior name or in its changed name; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Rights Certificates, by their acceptance thereof, shall be bound: (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion or advice of such counsel shall be full and complete 27 authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion or advice. (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter (including, without limitation, the identity of any Acquiring Person and the determination of "current per share market price") be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the President, any Vice President, the Chief Financial Officer, the Clerk or any Assistant Clerk of the Company and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder to the Company and any other Person only for its own gross negligence, bad faith or willful misconduct. (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Rights Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Rights Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Rights Certificate; nor shall it be responsible for any change in the exercisability of the Rights or any adjustment in the terms of the Rights (including the manner, method or amount thereof) provided for in Sections 3, 11, 13, 23 or 24, or the ascertaining of the existence of facts that would require any such change or adjustment (except with respect to the exercise of Rights evidenced by Rights Certificates after receipt by the Rights Agent of a certificate furnished pursuant to Section 12 describing such change or adjustment); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Preferred Shares to be issued pursuant to this Agreement or any Rights Certificate or as to whether any Preferred Shares will, when issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. 28 (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any one of the Chairman of the Board, the Chief Executive Officer, the President, any Vice President, the Chief Financial Officer, the Clerk or any Assistant Clerk of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered by it in good faith in accordance with instructions of any such officer or for any delay in acting while waiting for those instructions. Any application by the Rights Agent for written instructions from the Company may, at the option of the Rights Agent, set forth in writing any action proposed to be taken or omitted by the Rights Agent under this Rights Agreement and the date on and/or after which such action shall be taken or such omission shall be effective. The Rights Agent shall not be liable for any action taken by, or omission of, the Rights Agent in accordance with a proposal included in any such application on or after the date specified in such application (which date shall not be less than five (5) Business Days after the date any officer of the Company actually receives such application, unless any such officer shall have consented in writing to an earlier date) unless, prior to taking any such action (or the effective date in the case of an omission), the Rights Agent shall have received written instructions in response to such application specifying the action to be taken or omitted. (h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. (j) No provisions of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. (k) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise or transfer, the certificate attached to the form of assignment or form of election to purchase, as the case may be, has either not been completed or indicates an affirmative response to clause 1 and/or 2 thereof, the Rights Agent shall not take any further action with respect to such requested exercise or transfer without first consulting with the Company. 29 Section 21. Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon thirty (30) days' notice in writing mailed to the Company and to each transfer agent of the Preferred Shares and the Common Shares by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon thirty (30) days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Preferred Shares and the Common Shares by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of thirty (30) days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Rights Certificate (who shall, with such notice, submit his or her Rights Certificate for inspection by the Company), then the registered holder of any Rights Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court shall be a corporation organized and doing business under the laws of the United States or of any state of the United States, in good standing, which is authorized under such laws to exercise corporate trust or stockholder services powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50,000,000. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment, the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Preferred Shares and the Common Shares, and mail a notice thereof in writing to the registered holders of the Rights Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 22. Issuance of New Rights Certificate. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Rights Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Rights Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of Common Shares following the Distribution Date and prior to the redemption or expiration of the Rights, the Company (a) shall, with respect to Common Shares so issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement or upon the exercise, conversion or exchange of securities hereinafter issued by the Company and 30 (b) may, in any other case, if deemed necessary or appropriate by the Board of Directors of the Company, issue Rights Certificates representing the appropriate number of Rights in connection with such issuance of sale; provided, however, that (i) no such Rights Certificate shall be issued and this sentence shall be null and void ab initio if, and to the extent that, such issuance or this sentence would create a significant risk of or result in material adverse tax consequences to the Company or the Person to whom such Rights Certificate would be issued or would create a significant risk of or result in such options' or employee plans' or arrangements' failing to qualify for otherwise available special tax treatment and (ii) no such Rights Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof. Section 23. Redemption. (a) The Company may, at its option and with the approval of the Board of Directors, at any time prior to the Close of Business on the earlier of (i) the tenth day following the Shares Acquisition Date or such later date as may be determined by action of a majority of Continuing Directors then in office and publicly announced by the Company or (ii) the Final Expiration Date, redeem all but not less than all the then outstanding Rights at a redemption price of $0.01 per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being herein referred to as the "Redemption Price") and the Company may, at its option, pay the Redemption Price either in Common Shares (based on the current per share market price thereof (as determined pursuant to Section 11(d) hereof) at the time of redemption) or cash; provided, however, if the Board of Directors of the Company authorizes redemption of the Rights on or after the time a Person becomes an Acquiring Person, then there must be Continuing Directors then in office and such authorization shall require the concurrence of a majority of such Continuing Directors. (b) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights, evidence of which shall have been filed with the Rights Agent, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price. Within ten (10) days after the action of the Board of Directors ordering the redemption of the Rights, the Company shall give notice of such redemption to the Rights Agent and the holders of the then outstanding Rights by mailing such notice to all such holders at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Shares. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23 or in Section 24 hereof, and other than in connection with the purchase of Common Shares prior to the Distribution Date. 31 Section 24. Exchange. (a) Subject to applicable laws, rules and regulations, and subject to subsection (c) below, the Company may, at its option, by majority vote of the Board of Directors and a majority vote of the Continuing Directors, at any time after the occurrence of a Triggering Event, exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 7(e) hereof) for Common Shares at an exchange ratio of one Common Share per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such exchange ratio being hereinafter referred to as the "Ratio of Exchange"). Notwithstanding the foregoing, the Board of Directors shall not be empowered to effect such exchange at any time after any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any such Subsidiary, or any entity holding Common Shares for or pursuant to the terms of any such plan), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the Common Shares then outstanding. (b) Immediately upon the action of the Board of Directors ordering the exchange of any Rights pursuant to subsection (a) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of Common Shares equal to the number of such Rights held by such holder multiplied by the Ratio of Exchange. The Company shall give public notice of any such exchange; provided, however, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Common Shares for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than Rights which have become void pursuant to the provisions of Section 7(e) hereof) held by each holder of Rights. (c) In the event that there shall not be sufficient Common Shares issued but not outstanding or authorized but unissued to permit any exchange of Rights as contemplated in accordance with Section 24(a), the Company shall either take such action as may be necessary to authorize additional Common Shares for issuance upon exchange of the Rights or alternatively, at the option of a majority of the Board of Directors, with respect to each Right (i) pay cash in an amount equal to the Current Value (as hereinafter defined), in lieu of issuing Common Shares in exchange therefor, or (ii) issue debt or equity securities or a combination thereof, having a value equal to the Current Value, in lieu of issuing Common Shares in exchange for each such Right, where the value of such securities shall be determined by a nationally recognized investment banking firm selected by the Board of Directors by majority vote of the Board of Directors, or (iii) deliver any combination of cash, property, Common 32 Shares and/or other securities having a value equal to the Current Value in exchange for each Right. For purposes of this Section 24(c) only, the Current Value shall mean the product of the current per share market price of Common Shares (determined pursuant to Section 11(d) on the date of the occurrence of the event described above in subparagraph 9(a)) multiplied by the number of Common Shares for which the Right otherwise would be exchangeable if there were sufficient shares available. To the extent that the Company determines that some action need be taken pursuant to clauses (i), (ii) or (iii) of this Section 24(c), the Board of Directors may temporarily suspend the exercisability of the Rights for a period of up to sixty (60) days following the date on which the event described in Section 24(a) shall have occurred, in order to seek any authorization of additional Common Shares and/or to decide the appropriate form of distribution to be made pursuant to the above provision and to determine the value thereof. In the event of any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended. (d) The Company shall not be required to issue fractions of Common Shares or to distribute certificates which evidence fractional Common Shares. In lieu of such fractional Common Shares, there shall be paid to the registered holders of the Rights Certificates with regard to which such fractional Common Shares would otherwise be issuable, an amount in cash equal to the same fraction of the current per share market value of a whole Common Share (as determined pursuant to the second sentence of Section 11(d) hereof). (e) The Company may, at its option, by majority vote of the Board of Directors, at any time before any Person has become an Acquiring Person, exchange all or part of the then outstanding Rights for rights of substantially equivalent value, as determined reasonably and with good faith by the Board of Directors, based upon the advice of one or more nationally recognized investment banking firms. (f) Immediately upon the action of the Board of Directors ordering the exchange of any Rights pursuant to subsection (e) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of rights in exchange therefor as has been determined by the Board of Directors in accordance with subsection (e) above. The Company shall give public notice of any such exchange; provided, however, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the transfer agent for the Common Shares of the Company. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Rights will be effected. 33 Section 25. Notice of Certain Events. (a) In case the Company shall propose to effect or permit to occur any Section 13 Event, the Company shall give notice thereof to each holder of Rights in accordance with Section 26 hereof at least twenty (20) days prior to occurrence of such Section 13 Event. (b) In case any Triggering Event or Section 13 Event shall occur, then, in any such case, the Company shall as soon as practicable thereafter give to each holder of a Rights Certificate, in accordance with Section 26 hereof, a notice of the occurrence of such event, which shall specify the event and the consequences of the event to holders of Rights under Sections 11(a)(ii) and 13 hereof. Section 26. Notices. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Rights Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Friendly Ice Cream Corporation 1855 Boston Road Wilbraham, Massachusetts 01095 Attention: President Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Rights Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows: The Bank of New York [address] Attention: Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Rights Certificate shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 27. Supplements and Amendments. Prior to the Distribution Date, the Company may supplement or amend this Agreement in any respect without the approval of any holders of Rights and the Rights Agent shall, if the Company so directs, execute such supplement or amendment. From and after the Distribution Date, the Company and the Rights Agent may from time to time supplement or amend this Agreement without the approval of any holders of Rights in order to (i) cure any ambiguity, (ii) correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, 34 (iii) shorten or lengthen any time period hereunder (which lengthening or shortening, following the first occurrence of an event set forth in the proviso to Section 23(a) hereof, shall be effective only if there are Continuing Directors and shall require the concurrence of a majority of such Continuing Directors) or (iv) change or supplement the provisions hereunder in any manner that the Company may deem necessary or desirable and that shall not adversely affect the interests of the holders of Rights (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person); provided, this Agreement may not be supplemented or amended to lengthen, pursuant to clause (iii) of this sentence, (A) a time period relating to when the Rights may be redeemed at such time as the Rights are not then redeemable or (B) any other time period unless such lengthening is for the purpose of protecting, enhancing, or clarifying the rights of, and/or the benefits to, the holders of Rights. Upon the delivery of a certificate from an appropriate officer of the Company that states that the proposed supplement or amendment is in compliance with the terms of this Section 27, the Rights Agent shall execute such supplement or amendment. Prior to the Distribution Date, the interests of the holders of Rights shall be deemed coincident with the interests of the holders of Common Shares. Section 28. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 29. Determinations and Actions by the Board of Directors, etc. For all purposes of this Agreement, any calculation of the number of Common Shares outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding Common Shares of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act. The Board of Directors of the Company (and, where specifically provided for herein, the Continuing Directors) shall have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board, or the Company (or, where specifically provided for herein, the Continuing Directors), or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including a determination to redeem or not redeem the Rights or to amend the Agreement). All such actions, calculations, interpretations and determinations (including, for purposes of clause (y) below, all omissions with respect to the foregoing) which are done or made by the Board (or, where specifically provided for herein, by the Continuing Directors) in good faith, shall (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Rights Certificates and all other parties and (y) not subject the Board or the Continuing Directors to any liability to the holders of the Rights. Section 30. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any Person other than the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, the Common Shares) any legal or 35 equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, the Common Shares). Section 31. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; provided, however, that notwithstanding anything in this Agreement to the contrary, if any such term, provision, covenant or restriction is held by such court or authority to be invalid, void or unenforceable and the Board of Directors of the Company determines in its good faith judgment that severing the invalid language from this Agreement would adversely affect the purpose or effect of this Agreement, the right of redemption set forth in Section 23 hereof shall be reinstated and shall not expire until the close of business on the tenth day following the date of such determination by the Board of Directors. Section 32. Governing Law. This Agreement and each Right and each Rights Certificate issued hereunder shall be deemed to be a contract made under the laws of The Commonwealth of Massachusetts and for all purposes shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts applicable to contracts to be made and performed entirely within Massachusetts. Section 33. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 34. Descriptive Headings. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. [The remainder of this page is left blank intentionally.] 36 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. Attest: FRIENDLY ICE CREAM CORPORATION By: By: ------------------------ ----------------------------- [name] [name] Clerk President Attest: THE BANK OF NEW YORK By: By: ------------------------- ------------------------------- Name: Name: Title: Title: EXHIBIT A The Commonwealth of Massachusetts Office of the Massachusetts Secretary of State One Ashburton Place, Boston, Mass. 02108 CERTIFICATE OF VOTE OF DIRECTORS ESTABLISHING A SERIES OF A CLASS OF STOCK General Laws, Chapter 156B, Section 26 --------- We, ____________________, President, and _______________, Clerk of Friendly Ice Cream Corporation, located at 1855 Boston Road, Wilbraham, Massachusetts 01095, do hereby certify that at a meeting of the directors of the corporation held on ___________, 1997, the following vote establishing and designating a series of a class of stock and determining the relative rights and preferences thereof was duly adopted: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Preferred Stock," $.01 par value per share, and the number of shares constituting such series shall be [15,000]. Section 2. Dividends and Distributions. (A) Subject to the prior and superior right of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Junior Preferred Stock with respect to dividends, the holders of shares of Series A Junior Preferred Stock shall be entitled to receive when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the last day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date") commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Preferred Stock, in an amount per share (rounded to the nearest cent) equal to, subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Preferred Stock. In the event the Corporation shall at any time after _____________, 1997 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Preferred Stock were entitled immediately prior to such event under the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that ere outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Junior Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock). (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A Junior Preferred Stock shall have the following voting rights. (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Junior Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock to a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Junior Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after 2 such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Junior Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the corporation. (C) Except as required by law, holders of Series A Junior Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. Section 4. Certain Restrictions. (A) The Corporation shall not declare any dividend on, make any distribution on, or redeem or purchase or otherwise acquire for consideration any shares of Common Stock after the first issuance of a share or fraction of a share of Series A Junior Preferred Stock unless concurrently therewith it shall declare a dividend on the Series A Junior Preferred Stock as required by Section 2 hereof. (B) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Preferred Stock outstanding shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with Series A Junior Preferred Stock, except dividends paid ratably on the Series A Junior Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Junior Preferred Stock; 3 (iv) purchase or otherwise acquire for consideration any shares of Series A Junior Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (C) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Junior Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 6. Liquidation, Dissolution or Winding Up. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Preferred Stock shall have received an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, plus an amount equal to the greater of (1) [$_______] per share, provided that in the event the Corporation does not have sufficient assets, after payment of its liabilities and distribution to holders of Preferred Stock ranking prior to the Series A Junior Preferred Stock, available to permit payment in full of the [$_______] per share amount, the amount required to be paid under this Section 6(A)(1) shall, subject to Section 6(B) hereof, equal the value of the amount of available assets divided by the number of outstanding shares of Series A Junior Preferred Stock or (2) subject to the provisions for adjustment hereinafter set forth, 1,000 times the aggregate per share amount to be distributed to the holders of Common Stock (the greater of (1) or (2), the "Series A Liquidation Preference"). In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Preferred Stock were entitled immediately prior to such event under clause (2) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock that were outstanding immediately after such event and the 4 denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity with the Series A Junior Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. Section 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series A Junior Preferred Stock shall not be redeemable. Section 9. Ranking. The Series A Junior Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. Section 10. Amendment. The Articles of Organization of the Corporation shall not be further amended in any manner which would materially alter or change the powers, preference or special rights of the Series A Junior Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Junior Preferred Stock, voting separately as a class. Section 11. Fractional Shares. Series A Junior Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Preferred Stock. 5 IN WITNESS WHEREOF AND UNDER THE PAINS AND PENALTIES OF PERJURY, we have hereto signed our names this _____ day of __________, 1997. ________________________________ __________________, President ________________________________ __________________, Clerk 6 EXHIBIT B FORM OF RIGHTS CERTIFICATE Certificate No. ___. ____ Rights NOT EXERCISABLE AFTER ______________, 2007 OR EARLIER IF TERMINATED BY THE COMPANY OR IF THE COMPANY EXCHANGES THE RIGHTS PURSUANT TO THE RIGHTS AGREEMENT. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $0.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF SUCH RIGHTS AGREEMENT.](1) Rights Certificate This certifies that ____________________________________, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement, dated as of _____________, 1997 (the "Rights Agreement"), between FRIENDLY ICE CREAM CORPORATION, a Massachusetts corporation (the "Company"), and THE BANK OF NEW YORK (the "Rights Agent"), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M., Massachusetts time, on ___________ at the office of the Rights Agent designated for such purpose, or at the office of its successor as Rights Agent, one one-thousandth of a fully paid non-assessable share of Series A Junior Preferred Stock, par value $0.01 per share, (the "Preferred Shares"), of the Company, at a purchase price of $______ per one-thousandth of a Preferred Share (the "Purchase Price"), upon presentation and surrender of this Rights Certificate with the Form of - ----------------- (1)The portion of the legend in brackets shall be inserted only if applicable and shall replace the preceding sentence. Election to Purchase and related Certificate duly executed. The number of Rights evidenced by this Rights Certificate (and the number of one-thousandths of a Preferred Share which may be purchased upon exercise hereof) set forth above are the number and Purchase Price as of ____________, 1997 based on the Preferred Shares as constituted at such date. As provided in the Rights Agreement, the Purchase Price and the number and kind of Preferred Shares or other securities which may be purchased upon the exercise of the Rights evidenced by this Rights Certificate are subject to modification and upon the happening of certain events. This Rights Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Rights Certificates, which limitations of rights include the temporary suspension of the exercisability of such Rights under the specific circumstances set forth in the Rights Agreement. Copies of the Rights Agreement are on file at the principal executive offices of the Company and the above-mentioned office of the Rights Agent. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Rights Certificate (i) may be redeemed by the Company, at its option, at a redemption price of $0.01 per Right or (ii) may be exchanged by the Company in whole or in part for Common Shares, substantially equivalent rights or other consideration as determined by the Company. This Rights Certificate, with or without other Rights Certificates, upon surrender at the office of the Rights Agent designated for such purpose, may be exchanged for another Rights Certificate or Rights Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate amount of securities as the Rights evidenced by the Rights Certificate or Rights Certificates surrendered shall have entitled such holders to purchase. If this Rights Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Rights Certificate or Rights Certificates for the number of whole Rights not exercised. No fractional portion of less than one one-thousandth of a Preferred Share will be issued upon the exercise of any Right or Rights evidenced hereby but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. No holder of this Rights Certificate, as such, shall be entitled to vote or receive dividends or be deemed for any purpose the holder of the Preferred Shares or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions 2 affecting stockholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Rights Certificate shall have been exercised as provided in the Rights Agreement. This Rights Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Dated as of ________ ___, 19__. Attest: FRIENDLY ICE CREAM CORPORATION By: - ------------------------ ---------------------------- Clerk President Countersigned: THE BANK OF NEW YORK, as Rights Agent By: ------------------------------- Authorized Signature 3 Form of Reverse Side of Rights Certificate FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Rights Certificate) FOR VALUE RECEIVED _________________ hereby sells, assigns and transfers unto ______________________________________________________________ (Please print name and address of transferee) this Rights Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _______________________________ Attorney, to transfer the within Rights Certificate on the books of the within-named Company, with full power of substitution. Dated: ___________, 19___ ___________________________________ Signature Signature Guaranteed: The signature(s) should be guaranteed by an eligible guarantor institution (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with membership in an approved signature guarantee medallion program) pursuant to S.E.C. Rule 17Ad-15. 4 Form of Reverse Side of Rights Certificate -- continued CERTIFICATE The undersigned hereby certifies by checking the appropriate boxes that: (1) this Rights Certificate [ ] is [ ] not being sold, assigned and transferred by or on behalf of a Person who is or was an Acquiring Person, or an Affiliate or Associate of any such Person (as such terms are defined in the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate of any such Person. Dated: ______________ , 19__ _________________________________ Signature Signature Guaranteed: The signature(s) should be guaranteed by an eligible guarantor institution (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with membership in an approved signature guarantee medallion program) pursuant to S.E.C. Rule 17Ad-15. 5 Form of Reverse Side of Rights Certificate -- continued FORM OF ELECTION TO PURCHASE (To be executed if holder desires to exercise the Rights Certificate) To:________________________ The undersigned hereby irrevocably elects to exercise ______________________ Rights represented by this Rights Certificate to purchase the number of one-thousandths of a Preferred Share issuable upon the exercise of such Rights and requests that certificates for such number of one-thousandths of a Preferred Share issued in the name of: Please insert social security or other identifying number _________________________________________________________________ (Please print name and address) _________________________________________________________________ If such number of Rights shall not be all the Rights evidenced by this Rights Certificate, a new Rights Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to: Please insert social security or other identifying number _________________________________________________________________ _________________________________________________________________ Dated: ______________ , 19__ _________________________________ Signature Signature Guaranteed: The signature(s) should be guaranteed by an eligible guarantor institution (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with membership in an approved signature guarantee medallion program) pursuant to S.E.C. Rule 17Ad-15. 6 Form of Reverse Side of Rights Certificate -- continued CERTIFICATE The undersigned hereby certifies by checking the appropriate boxes that: (1) the Rights evidenced by this Rights Certificate [ ] are [ ] are not being exercised by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of any such Person (as such terms are defined in the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate of any such Person. Dated: ________________, 19__ ____________________________ Signature Signature Guaranteed: The signature(s) should be guaranteed by an eligible guarantor institution (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with membership in an approved signature guarantee medallion program) pursuant to S.E.C. Rule 17Ad-15. 7 Form of Reverse Side of Rights Certificate -- continued NOTICE The signature in the foregoing Forms of Assignment and Election and Certificates must conform to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. 8 EXHIBIT C FRIENDLY ICE CREAM CORPORATION STOCKHOLDER RIGHTS PLAN Summary of Rights Distribution and Transfer The Board of Directors has declared a dividend of of Rights; Rights one Right for each share of FRIENDLY ICE CREAM Certificate: CORPORATION Common Stock outstanding. Prior to the Distribution Date referred to below, the Rights will be evidenced by and trade with the certificates for the Common Stock. After the Distribution Date, FRIENDLY ICE CREAM CORPORATION (the "Company") will mail Rights certificates to the Company's stockholders and the Rights will become transferable apart from the Common Stock. Distribution Date: Rights will separate from the Common Stock and become exercisable following the tenth business day (the "Distribution Date") (or such later date as may be determined by a majority of the Directors not affiliated with the acquiring person or group (the "Continuing Directors")) after a person or group (a) acquires beneficial ownership of 15% or more of the Company's Common Stock or (b) announces a tender or exchange offer, the consummation of which would result in ownership by a person or group of 15% or more of the Company's Common Stock. Preferred Stock After the Distribution Date, each Right will Purchasable Upon entitle the holder to purchase, for $_____, a Exercise of Rights: fraction of a share of the Company's Preferred Stock with economic terms similar to that of one share of the Company's Common Stock. Flip-In: If an acquiror (an "Acquiring Person") obtains 15% or more of the Company's Common Stock (other than pursuant to a tender offer deemed fair by the Board of Directors (a "Permitted Offer")), then each Right (other than Rights owned by an Acquiring Person or its affiliates) will entitle the holder thereof to purchase, for the exercise price, a number of shares of the Company's Common Stock having a then current market value of twice the exercise price. Flip-Over: If, after the Shares Acquisition Date (defined below), (a) the Company merges into another entity, (b) an acquiring entity merges into the Company or (c) the Company sells more than 50% of the Company's assets or earning power, then each Right (other than Rights owned by an Acquiring Person or its affiliates) will entitle the holder thereof to purchase, for the exercise price, a number of shares of Common Stock of the person engaging in the transaction having a then current market value of twice the exercise price (unless the transaction satisfies certain conditions and is consummated with a person who acquired shares pursuant to a Permitted Offer, in which case the Rights will expire). Exchange Provision: At any time after an event triggering the flip-in or flip-over rights and prior to the acquisition by the Acquiring Person of 50% or more of the outstanding Common Stock, the Board of Directors of the Company may exchange the Rights (other than Rights owned by the Acquiring Person or its affiliates), in whole or in part, at an exchange ratio of one Common Share per Right (subject to adjustment). Redemption of Rights will be redeemable at the Company's option the Rights: for $0.01 per Right at any time on or prior to the tenth day (or such later date as may be determined by a majority of the Continuing Directors) after public announcement that a person has acquired beneficial ownership of 15% or more of the Company's Common Stock (the "Shares Acquisition Date"). Expiration of The Rights expire on the earliest of (a) _____ the Rights: ____, 2007, (b) exchange or redemption of the Right as described above, or (c) consummation of a merger or consolidation or sale of assets resulting in expiration of the Rights as described above. Amendment of Terms of The terms of the Rights and the Rights Agreement Rights: may be amended in any respect without the consent of the Rightsholders on or prior to the Distribution Date; thereafter, the terms of the Rights and the Rights Agreement may be amended without the consent of the Rights holders in order to cure any ambiguities or to make changes which do not adversely affect the interests of Rights holders (other than the Acquiring Person). Voting Rights: Rights will not have any voting rights. Anti-Dilution Provisions: Rights will have the benefit of certain customary anti-dilution provisions. Taxes: The Rights distribution should not be taxable for federal income tax purposes. However, following an event which renders the Rights exercisable or upon redemption of the Rights, stockholders may recognize taxable income. The foregoing is a summary of certain principal terms of the Stockholder Rights Plan only and is qualified in its entirety by reference to the detailed terms of the Rights Agreement, dated as of __________, 1997, between the Company and the Rights Agent. EX-10.3 5 EXHIBIT 10.3 EXHIBIT 10.3 Draft 10/9/97 FRIENDLY ICE CREAM CORPORATION 1997 STOCK OPTION PLAN TABLE OF CONTENTS SECTION 1.................................................................... 1 GENERAL.................................................................. 1 1.1. Purpose.......................................................... 1 1.2. Participation.................................................... 1 SECTION 2.................................................................... 2 OPTIONS.................................................................. 2 2.1. Definition....................................................... 2 2.2. Eligibility...................................................... 2 2.3. Price............................................................ 2 2.4. Exercise......................................................... 3 2.5. Post-Exercise Limitations........................................ 3 2.6. Expiration Date.................................................. 3 2.7. Reload Provision................................................. 4 SECTION 3.................................................................... 5 STOCK APPRECIATION RIGHTS................................................ 5 3.1. Definition....................................................... 5 3.2. Eligibility...................................................... 5 3.3. Exercise......................................................... 5 3.4. Settlement of Award.............................................. 6 3.5. Post-Exercise Limitations........................................ 6 3.6. Expiration Date.................................................. 6 SECTION 4.................................................................... 7 OPERATION OF THE PLAN.................................................... 7 4.1. Effective Date................................................... 7 4.2. Shares Subject to Plan........................................... 7 4.3. Individual Limits on Awards...................................... 7 4.4. Adjustments to Shares............................................ 8 4.5. Limit on Distribution............................................ 8 4.6. Withholding...................................................... 8 4.7. Transferability.................................................. 9 4.8. Notices.......................................................... 9 4.9. Form and Time of Elections....................................... 9 4.10. Agreement With Company........................................... 9 4.11. Limitation of Implied Rights..................................... 9 4.12. Evidence.........................................................10 4.13. Action by Company or Related Company.............................10 4.14. Gender and Number................................................10 SECTION 5....................................................................10 ADMINISTRATION...........................................................10 SECTION 6....................................................................12 CHANGE IN CONTROL........................................................12 SECTION 7....................................................................13 AMENDMENT AND TERMINATION................................................13 FRIENDLY ICE CREAM CORPORATION 1997 STOCK OPTION PLAN SECTION 1 GENERAL 1.1. Purpose. The Friendly Ice Cream Corporation 1997 Stock Option Plan (the "Plan") has been established by Friendly Ice Cream Corporation (the "Company") to: (a) attract and retain employees and other persons providing services to the Company and the Related Companies (as defined below); (b) motivate Participants, by means of appropriate incentives, to achieve long-range goals; (c) provide incentive compensation opportunities that are competitive with those of other major corporations; and (d) further identify Participants' interests with those of the Company's other stockholders through compensation that is based on the Company's common stock; and thereby promote the long-term financial interest of the Company and the Related Companies, including the growth in value of the Company's equity and enhancement of long-term stockholder return. The term "Related Company" means any company during any period in which it is a "subsidiary corporation" (as that term is defined in section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code")) with respect to the Company. 1.2. Participation. Subject to the terms and conditions of the Plan, the Board (as described in Section 5)shall determine and designate, from time to time, from among the Eligible Individuals, those persons who will be granted one or more awards under Sections 2 or 3 of the Plan (an "Award"), and thereby become "Participants" in the Plan. For purposes of the Plan, the term "Eligible Individual" shall mean any employee of the Company or a Related Company who is classified as salary grade 107 or 108, and any other person providing material services to the Company or a Related Company that is designated by the Board as eligible for participation in the Plan. 1 SECTION 2 OPTIONS 2.1. Definitions. The grant of an "Option" under this Section 2 entitles the Participant to purchase shares of common stock of the Company ("Stock") at a price fixed at the time the Option is granted, subject to the terms of this Section. Options granted under this Section may be either Incentive Stock Options or Non-Qualified Stock Options, as determined in the discretion of the Board. An "Incentive Stock Option" is an Option that is intended to satisfy the requirements applicable to an "incentive stock option" described in section 422 of the Code. A "Non-Qualified Stock Option" is an Option that is not intended to be an Incentive Stock Option. 2.2. Eligibility. The Board shall designate the Participants to whom Options are to be granted under this Section and shall determine the number of shares of Stock subject to each such Option. To the extent that the aggregate fair market value of Stock with respect to which Incentive Stock Options are exercisable for the first time by any individual during any calendar year (under all plans of the Company and all Related Companies) exceeds $100,000, such options shall be treated as Non-Qualified Stock Options, to the extent required by section 422 of the Code. 2.3. Price. The determination and payment of the purchase price of a share of Stock under each Option granted under this Section shall be subject to the following: (a) The purchase price shall be established by the Board at the time the Option is granted; provided, however, that in no event shall such price be less than the greater of (i) the Fair Market Value (defined below) or (ii) the par value of a share of Stock on such date. (b) Subject to the following provisions of this subsection, the full purchase price of each share of Stock purchased upon the exercise of any Option shall be paid at the time of such exercise and, as soon as practicable thereafter, a certificate representing the shares so purchased shall be delivered to the person entitled thereto. (c) The purchase price shall be payable in cash or in shares of Stock (valued at Fair Market Value as of the day of exercise) that have been held by the Participant at least six months, or in any combination thereof, as determined by the Board. 2 (d) A Participant may elect to pay the purchase price upon the exercise of an Option through a cashless exercise arrangement to the extent provided by the Board. (e) The "Fair Market Value" of a share of Stock of the Company as of any date shall be the closing sales price per share of the Stock on the New York Stock Exchange for that date as reported in the Wall Street Journal on the next following business date, or, if there shall have been no such sale so reported on that date, on the last preceding date on which such a sale was so reported. 2.4. Exercise. Except as otherwise expressly provided in the Plan, an Option granted under this Section shall be exercisable in accordance with the following terms of this subsection: (a) The terms and conditions relating to exercise of an Option shall be established by the Board, and may include, without limitation, conditions relating to completion of a specified period of service, achievement of performance standards prior to exercise of the Option or achievement of Stock ownership objectives by the Participant. The Board, in its sole discretion, may accelerate the vesting of any Option under circumstances designated by it at the time the Option is granted or thereafter. (b) No Option may be exercised by a Participant after the Expiration Date (as defined in subsection 2.6) applicable to that Option. (c) The exercise of an Option will result in the surrender of the corresponding rights under a tandem Stock Appreciation Right (as described in Section 3), if any. 2.5. Post-Exercise Limitations. The Board, in its discretion, may impose such restrictions on shares of Stock acquired pursuant to the exercise of an Option (including stock acquired pursuant to the exercise of a tandem Stock Appreciation Right) as it determines to be desirable, including, without limitation, restrictions relating to disposition of the shares and forfeiture restrictions based on service, performance, Stock ownership by the Participant and such other factors as the Board determines to be appropriate. 2.6. Expiration Date. Unless determined otherwise by the Board at the time an Option is granted, the "Expiration Date" with respect to an Option means the earliest to occur of: 3 (a) the ten-year anniversary of the date on which the Option is granted; (b) if the Participant's Date of Termination occurs by reason of death or Disability, the one-year anniversary of such Date of Termination; (c) if the Participant's Date of Termination occurs by reason of Retirement, the three-year anniversary of such Date of Termination; or (d) if the Participant's Date of Termination occurs for reasons other than Retirement, death or Disability, the three-month anniversary of such Date of Termination, or such earlier date as may be established by the Board. For purposes of the Plan, a Participant's "Date of Termination" shall be the date on which he both ceases to be an employee of the Company and the Related Companies and ceases to perform material services (including, but not limited to, consulting services or service as a member of the Board) for the Company and the Related Companies, regardless of the reason for the cessation; provided that a "Date of Termination" shall not be considered to have occurred during the period in which the reason for the cessation of services is a leave of absence approved by the Company or the Related Company which was the recipient of the Participant's services. Except as otherwise provided by the Board, a Participant shall be considered to have a "Disability" during the period in which he is unable, by reason of a medically determinable physical or mental impairment, to engage in any substantial gainful activity, which condition, in the opinion of a physician selected by the Board, is expected to have a duration of not less than 180 days. "Retirement" of a Participant shall mean the occurrence of a Participant's Date of Termination after providing at least five years of service to the Company or the Related Companies and attaining age 65. 2.7. Reload Provision. In the event the Participant exercises an Option and pays all or a portion of the purchase price in Stock in the manner permitted by subsection 2.3, or satisfies withholding obligations in Stock if permitted under subsection 4.6, such Participant (either pursuant to the terms of the Option Award, or pursuant to the exercise of Board discretion at the time the Option is exercised) may be issued a new Option to purchase additional shares of Stock equal to the number of shares of Stock surrendered to the Company in such payment. Such new Option shall have an exercise price equal to the Fair Market Value per share on the date such new Option is granted, shall first be exercisable six months from the date of grant of the new Option and shall have an Expiration Date on the same date as the 4 Expiration Date of the original Option so exercised by payment of the purchase price or withholding in shares of Stock. SECTION 3 STOCK APPRECIATION RIGHTS 3.1. Definition. Subject to the terms of this Section, a "Stock Appreciation Right" granted under the Plan entitles the Participant to receive, in cash or Stock (as determined in accordance with subsection 3.4), value equal to all or a portion of the excess of: (a) the Fair Market Value of a specified number of shares of Stock at the time of exercise over (b) a specified price designated at the time the Stock Appreciation Right is granted which price shall not be less than the Fair Market Value of a share of Stock on such date or, if granted in tandem with an Option, the exercise price with respect to shares under the tandem Option. 3.2. Eligibility. Subject to the provisions of the Plan, the Board shall designate the Participants to whom Stock Appreciation Rights are to be granted under the Plan, shall determine the exercise price or a method by which the price shall be established with respect to each such Stock Appreciation Right and shall determine the number of shares of Stock on which each Stock Appreciation Right is based. A Stock Appreciation Right may be granted in connection with all or any portion of a previously or contemporaneously-granted Option or not in connection with an Option. If a Stock Appreciation Right is granted in connection with an Option then, in the discretion of the Board, the Stock Appreciation Right may, but need not, be granted in tandem with the Option. 3.3. Exercise. The exercise of Stock Appreciation Rights shall be subject to the following: (a) If a Stock Appreciation Right is not in tandem with an Option, then the Stock Appreciation Right shall be exercisable in accordance with the terms established by the Board in connection with such rights; and may include, without limitation, conditions relating to completion of a specified period of service, achievement of performance standards prior to exercise of the Stock Appreciation Rights or achievement of objectives relating to Stock ownership by the Participant. The Board, in its sole discretion, may accelerate the vesting of any Stock Appreciation Right under circumstances designated by it at the time the Stock Appreciation Right is granted or thereafter. No Stock Appreciation Right subject to this paragraph may 5 be exercised by a Participant after the Expiration Date (as defined in subsection 3.6) applicable to that Stock Appreciation Right. (b) If a Stock Appreciation Right is in tandem with an Option, then the Stock Appreciation Right shall be exercisable at the time the tandem Option is exercisable. The exercise of a Stock Appreciation Right will result in the surrender of the corresponding rights under the tandem Option. 3.4. Settlement of Award. Upon the exercise of a Stock Appreciation Right, the value to be distributed to the Participant, in accordance with subsection 3.1, shall be distributed in shares of Stock (valued at their Fair Market Value at the time of exercise), in cash or in a combination thereof, in the discretion of the Board. 3.5. Post-Exercise Limitations. The Board, in its discretion, may impose such restrictions on shares of Stock acquired pursuant to the exercise of a Stock Appreciation Right as it determines to be desirable, including, without limitation, restrictions relating to disposition of the shares and forfeiture restrictions based on service, performance, ownership of Stock by the Participant and such other factors as the Board determines to be appropriate. 3.6. Expiration Date. If a Stock Appreciation Right is in tandem with an Option, then the "Expiration Date" for the Stock Appreciation Right shall be the Expiration Date for the related Option. If a Stock Appreciation Right is not in tandem with an Option, then unless determined otherwise by the Board, the "Expiration Date" for the Stock Appreciation Right shall be the earliest to occur of: (a) the ten-year anniversary of the date on which the Stock Appreciation Right is granted; (b) if the Participant's Date of Termination occurs by reason of death or Disability, the one-year anniversary of such Date of Termination; or (c) if the Participant's Date of Termination occurs by reason of Retirement, the three-year anniversary of such Date of Termination; or (d) if the Participant's Date of Termination occurs by reason other than Retirement, death or Disability, the three-month anniversary of such Date of Termination. 6 SECTION 4 OPERATION OF PLAN 4.1. Effective Date. The Plan shall be effective as of the date it is adopted by the Board; provided, however, that Awards granted under the Plan prior to its approval by stockholders will be contingent on approval of the Plan by the Company's stockholders. The Plan shall be unlimited in duration and, in the event of Plan termination, shall remain in effect as long as any shares of Stock awarded under it are outstanding and not fully vested; provided, however, that no new Awards shall be made under the Plan on or after the tenth anniversary of the date on which the Plan is adopted by the Board. 4.2. Shares Subject to Plan. The shares of Stock with respect to which Awards may be made under the Plan shall be shares currently authorized but unissued or currently held or subsequently acquired by the Company as treasury shares, including shares purchased in the open market or in private transactions. Subject to the provisions of subsection 4.4, the number of shares of Stock which may be issued with respect to Awards under the Plan shall not exceed 400,000 shares in the aggregate. Except as otherwise provided herein, any shares subject to an Award which for any reason expires or is terminated without issuance of shares (whether or not cash or other consideration is paid to a Participant in respect of such shares) shall again be available under the Plan. 4.3. Individual Limits on Awards. Notwithstanding any other provision of the Plan to the contrary, no Participant shall receive any Award of an Option or Stock Appreciation Right under the Plan to the extent that the sum of: (a) the number of shares of Stock subject to such Award; (b) the number of shares of Stock subject to all other prior Awards of Options and Stock Appreciation Rights under the Plan during the one-year period ending on the date of the Award; and (c) the number of shares of Stock subject to all other prior stock options and stock appreciation rights granted to the Participant under other plans or arrangements of the Company and Related Companies during the one-year period ending on the date of the Award; would exceed the Participant's Individual Limit under the Plan. The determination made under the foregoing provisions of this subsection shall be based on the shares subject to the awards at 7 the time of grant, regardless of when the awards become exercisable. Subject to the provisions of subsection 4.4, a Participant's "Individual Limit" shall be 100,000 shares. 4.4. Adjustments to Shares. In the event of any merger, consolidation, reorganization, recapitalization, spinoff, stock dividend, stock split, reverse stock split, exchange or other distribution with respect to shares of Stock or other change in the corporate structure or capitalization affecting the Stock, the type and number of shares of stock which are or may be subject to awards under the Plan and the terms of any outstanding awards (including the price at which shares of stock may be issued pursuant to an outstanding award) shall be equitably adjusted by the Board, in its sole discretion, to preserve the value of benefits awarded or to be awarded to Participants under the Plan; provided, however, in the event of a merger or sale of substantially all of the assets of the Company, the Board, in its sole discretion, may substitute awards of equal value for awards under the Plan or cancel outstanding awards, provided that the Participant receives an amount that the Board believes is reasonable payment therefor. 4.5. Limit on Distribution. Distribution of shares of Stock or other amounts under the Plan shall be subject to the following: (a) Notwithstanding any other provision of the Plan, the Company shall have no liability to deliver any shares of Stock under the Plan or make any other distribution of benefits under the Plan unless such delivery or distribution would comply with all applicable laws and the applicable requirements of any securities exchange or similar entity. (b) In the case of a Participant who is subject to Section 16(a) and 16(b) of the Securities Exchange Act of 1934, the Board may, at any time, add such conditions and limitations to any Award to such Participant, or any feature of any such Award, as the Board, in its sole discretion, deems necessary or desirable to comply with Section 16(a) or 16(b) and the rules and regulations thereunder or to obtain any exemption therefrom. (c) To the extent that the Plan provides for issuance of certificates to reflect the transfer of shares of Stock, the transfer of such shares may be effected on a non-certificated basis, to the extent not prohibited by applicable law or the rules of any stock exchange. 4.6. Withholding. All Awards under the Plan are subject to withholding of all applicable taxes, which withholding 8 obligations may be satisfied, with the consent of the Board, through the surrender of shares of Stock which the Participant already owns or to which a Participant is otherwise entitled under the Plan. 4.7. Transferability. Awards under the Plan are not transferable except as designated by the Participant by will or by the laws of descent and distribution. To the extent that the Participant who receives an Award under the Plan has the right to exercise such Award, the Award may be exercised during the lifetime of the Participant only by the Participant. Notwithstanding the foregoing provisions of this subsection, the Board may permit Awards under the Plan to be transferred to or for the benefit of the Participant's family (including, without limitation, to a trust for the benefit of a Participant's family), subject to such limits as the Board may establish. 4.8. Notices. Any notice or document required to be filed with the Board under the Plan will be properly filed if delivered or mailed by registered mail, postage prepaid, to the Board, in care of the Company, at its principal executive offices. The Board may, by advance written notice to affected persons, revise such notice procedure from time to time. Any notice required under the Plan (other than a notice of election) may be waived by the person entitled to notice. 4.9. Form and Time of Elections. Unless otherwise specified herein, each election required or permitted to be made by any Participant or other person entitled to benefits under the Plan, and any permitted modification or revocation thereof, shall be in writing filed with the Board at such times, in such form, and subject to such restrictions and limitations, not inconsistent with the terms of the Plan, as the Board shall require. 4.10. Agreement With Company. At the time of an Award to a Participant under the Plan, the Board may require a Participant to enter into an agreement with the Company (the "Agreement") in a form specified by the Board, agreeing to the terms and conditions of the Plan and to such additional terms and conditions, not inconsistent with the Plan, as the Board may, in its sole discretion, prescribe. 4.11. Limitation of Implied Rights. (a) Neither a Participant nor any other person shall, by reason of the Plan, acquire any right in or title to any assets, funds or property of the Company or any Related Company whatsoever, including, without limitation, any specific funds, assets, or other property which the Company or any Related Company, in 9 its sole discretion, may set aside in anticipation of a liability under the Plan. A Participant shall have only a contractual right to the amounts, if any, payable under the Plan, unsecured by any assets of the Company and any Related Company. Nothing contained in the Plan shall constitute a guarantee by the Company or any Related Company that the assets of such companies shall be sufficient to pay any benefits to any person. (b) The Plan does not constitute a contract of employment, and selection as a Participant will not give any employee the right to be retained in the employ of the Company or any Related Company, nor any right or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the terms of the Plan. Except as otherwise provided in the Plan, no Award under the Plan shall confer upon the holder thereof any right as a stockholder of the Company prior to the date on which he fulfills all service requirements and other conditions for receipt of such rights and shares of Stock are registered in his name. 4.12. Evidence. Evidence required of anyone under the Plan may be by certificate, affidavit, document or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties. 4.13. Action by Company or Related Company. Any action required or permitted to be taken by the Company or any Related Company shall be by resolution of its board of directors, or by action of one or more members of the board (including a committee of the board) who are duly authorized to act for the board or (except to the extent prohibited by applicable law or the rules of any stock exchange) by a duly authorized officer of the company. 4.14. Gender and Number. Where the context admits, words in any gender shall include any other gender, words in the singular shall include the plural and the plural shall include the singular. SECTION 5 Administration The authority to control and manage the operation and administration of the Plan shall be vested in the Board of Directors of the Company (the "Board"), subject to the following: 10 (a) Subject to the provisions of the Plan, the Board will have the authority and discretion to select employees to receive Awards, to determine the time or times of receipt, to determine the types of Awards and the number of shares covered by the Awards, to establish the terms, conditions, performance criteria, restrictions, and other provisions of such Awards, and to cancel or suspend Awards. In making such Award determinations, the Board may take into account the nature of services rendered by the respective employee, his present and potential contribution to the Company's success and such other factors as the Board deems relevant. (b) The Board will have the authority and discretion to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, to determine the terms and provisions of any agreements made pursuant to the Plan and to make all other determinations that may be necessary or advisable for the administration of the Plan. (c) Any interpretation of the Plan by the Board and any decision made by it under the Plan is final and binding on all persons. (d) Except as otherwise expressly provided in the Plan, where the Board is authorized to make a determination with respect to any Award, such determination shall be made at the time the Award is made, except that the Board may reserve the authority to have such determination made by the Board in the future (but only if such reservation is made at the time the Award is granted and is expressly stated in the Agreement reflecting the Award); provided, however, the Board, in its sole discretion, may delegate any or all of its authority under the Plan to a committee of the Board and, to the extent so delegated, references to the Board hereunder shall be deemed to refer such committee. Except to the extent prohibited by applicable law or the rules of any stock exchange, the Board or, if applicable, the committee of the Board, may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers to any person or persons selected by it. Any such allocation or delegation may be revoked by the Board or committee, if applicable, at any time. 11 SECTION 6 CHANGE IN CONTROL Except as otherwise provided in the agreement reflecting the applicable Award, upon the occurence of a Change in Control all outstanding Options and Stock Appreciation Rights shall become immediately exercisable. For purposes of the Plan, a "Change in Control" shall be deemed to occur on the earliest of the existence of one of the following events: (a) (i) any "person" (as such term is used in Sections 13(d) or 14(d) of the Exchange Act), other than one or more Permitted Holders (as defined below), 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 (as defined below) of the Company and (ii) 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 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; (b) individuals who, as of the date hereof, constitute the Board (as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened "election contest" relating to the election of the directors of the Company (as such term is used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act); or (c) approval by the Company's shareholders of a reorganization, merger or consolidation of the Company, in each case, with respect to which all or substantially all of the individuals and entities who were the respective beneficial owners of the common stock and voting securities of the Company immediately prior to such reorganization, merger or consolidation 12 do not, following such reorganization, merger or consolidation, beneficially own, directly and indirectly, more than 70% of, respectively, the then outstanding shares of common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation, or of a complete liquidation or dissolution of the Company or of the sale or other disposition of all or substantially all of the assets of the Company. For purposes of this Section 6, the term "Permitted Holders" means Donald N. Smith, The Equitable Life Assurance Society of the U.S., the Company's then existing senior management and their respective affiliates. The term "Voting Stock" of the Company means all classes of capital stock of the Company then outstanding and normally entitled to vote in the election of directors. SECTION 7 AMENDMENT AND TERMINATION The Board may, at any time, amend or terminate the Plan, provided that, subject to subsection 4.4 (relating to certain adjustments to shares), no amendment or termination may materially adversely affect the rights of any Participant or beneficiary under any Award made under the Plan prior to the date such amendment is adopted by the Board. 13 EX-10.4 6 EXHIBIT 10.4 EXHIBIT 10.4 Draft 10/9/97 FRIENDLY ICE CREAM CORPORATION 1997 RESTRICTED STOCK PLAN TABLE OF CONTENTS SECTION 1.................................................................... 1 GENERAL.................................................................. 1 1.1. Purpose....................................................... 1 1.2. Participation................................................. 1 SECTION 2.................................................................... 2 RESTRICTED STOCK AWARDS.................................................. 2 2.1. Restricted Stock Awards....................................... 2 2.2. Terms and Conditions of Awards................................ 2 SECTION 3.................................................................... 3 OPERATION OF THE PLAN.................................................... 3 3.1. Effective Date................................................ 3 3.2. Shares Subject to Plan........................................ 3 3.3. Adjustments to Shares......................................... 3 3.4. Limit on Distribution......................................... 4 3.5. Withholding................................................... 4 3.6. Agreement with Company........................................ 4 3.7. Limitation of Implied Rights.................................. 5 3.8. Evidence...................................................... 5 3.9. Action by Company or Related Company.......................... 5 3.10. Gender and Number............................................. 5 SECTION 4.................................................................... 6 ADMINISTRATION........................................................... 6 SECTION 5.................................................................... 7 CHANGE IN CONTROL........................................................ 7 FRIENDLY ICE CREAM CORPORATION 1997 RESTRICTED STOCK PLAN SECTION 1 GENERAL 1.1. Purpose. The Friendly Ice Cream Corporation 1997 Restricted Stock Plan (the "Plan") has been established by Friendly Ice Cream Corporation (the "Company") to: (a) attract and retain employees and other persons providing services to the Company and the Related Companies (as defined below); (b) motivate Participants, by means of appropriate incentives, to achieve long-range goals; (c) provide incentive compensation opportunities that are competitive with those of other major corporations; and (d) further identify Participants' interests with those of the Company's other stockholders through compensation that is based on the Company's common stock; and thereby promote the long-term financial interest of the Company and the Related Companies, including the growth in value of the Company's equity and enhancement of long-term stockholder return. The term "Related Company" means any company during any period in which it is a "subsidiary corporation" (as that term is defined in Code section 424(f)) with respect to the Company. 1.2. Participation. Subject to the terms and conditions of the Plan, the Board (as described in Section 4) shall determine and designate, from time to time, from among the Eligible Individuals, those persons who will be granted one or more Restricted Stock awards under Section 2 of the Plan, and thereby become "Participants" in the Plan. For purposes of the Plan, the term "Eligible Individual" shall mean any employee of the Company or a Related Company who is classified as salary grade 109 or above, and any other person providing material services to the Company or a Related Company that is designated by the Board as eligible for participation in the Plan. 1 SECTION 2 RESTRICTED STOCK AWARDS 2.1. Restricted Stock Awards. Subject to the following provisions of this Section 2, awards of Restricted Stock under the Plan shall be made to persons selected by the Board in accordance with subsection 1.2 and shall be subject to the applicable provisions of subsection 2.2. For purposes of the Plan, "Restricted Stock" awards under the Plan are grants of Stock to Participants the vesting of which is subject to such conditions as may be established by the Board, with some or all of those conditions relating to events (such as performance, satisfaction of Company performance targets established by lenders or continued employment) occurring after the date of grant. The period beginning on the date of a grant of Restricted Stock and ending on the vesting or forfeiture of such Restricted Stock is referred to as the "Restricted Period". Subject to the limitations of the Plan and the award of Restricted Stock, at the end of the Restricted Period, Stock will be delivered to the Participant (or his or her legal representative, beneficiary or heir). 2.2 Terms and Conditions of Awards. In addition to any other terms and conditions determined by the Board, all shares of Restricted Stock granted to Participants under the Plan shall be subject to the following terms and conditions, to the extent applicable: (a) Except as otherwise provided, Restricted Stock granted to Participants under the Plan may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered during the Restricted Period, except as designated by the Participant by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Internal Revenue Code, Title I of the Employee Retirement Income Security Act or the rules thereunder. During the Restricted Period, the Participant shall have all the rights of a stockholder, including but not limited to the right to vote such shares and, except as otherwise provided by the Board, the right to receive all dividends paid on such shares. (b) Except as otherwise determined by the Board, a Participant who ceases to perform services for the Company and the Related Companies prior to the end of the Restricted Period for any reason shall forfeit all shares of Restricted Stock remaining subject to any outstanding Restricted Stock award. 2 (c) The Company may require a written statement that the Participant is acquiring shares of Restricted Stock (or Stock at the end of the Restricted Period) for investment and not for the purpose or with the intention of distributing the shares, except for a sale to a purchaser who makes the same representation in writing, and that the holder of the shares of Restricted Stock or Stock will not dispose of them in violation of the registration requirements of the Securities Act of 1933, any other applicable law. SECTION 3 OPERATION OF PLAN 3.1. Effective Date. The Plan shall be effective as of the date it is adopted by the Board, subject to the approval of the Company's stockholders. The Plan shall be unlimited in duration and, in the event of Plan termination, shall remain in effect as long as any shares of Restricted Stock awarded under it are outstanding and not fully vested. 3.2. Shares Subject to Plan. The shares of Stock with respect to which Awards may be made under the Plan shall be shares currently authorized but unissued or currently held or subsequently acquired by the Company as treasury shares, including shares purchased in the open market or in private transactions. Subject to the provisions of subsection 4.4, the number of shares of Stock which may be issued with respect to Awards under the Plan shall not exceed 375,000 shares in the aggregate. Except as otherwise provided herein, any shares subject to an Award which for any reason expires or is terminated without issuance of shares (whether or not cash or other consideration is paid to a Participant in respect of such shares) shall again be available under the Plan. In the event that shares of Stock that are delivered under the Plan are thereafter reacquired by the Company pursuant to rights reserved upon the award thereof, such reacquired shares shall again be available for awards under the Plan. 3.3. Adjustments to Shares In the event of any merger, consolidation, reorganization, recapitalization, spinoff, stock dividend, stock split, reverse stock split, exchange or other distribution with respect to shares of Stock or other change in the corporate structure or capitalization affecting the Stock, the type and number of shares of stock which are or may be subject to awards under the Plan and the terms of any outstanding awards shall be equitably adjusted by the Board, in its sole discretion, to preserve the value of benefits awarded or to be 3 awarded to Participants under the Plan; provided, however, in the event of a merger or a sale of substantially all of the assets of the Company, the Board, in its sole discretion, may substitute awards of equal value for outstanding awards under the Plan or cancel outstanding awards, provided that the Participant receives an amount that the Board believes is reasonable payment therefor. 3.4. Limit on Distribution. Distribution of shares of Stock or other amounts under the Plan shall be subject to the following: (a) Notwithstanding any other provision of the Plan, the Company shall have no liability to deliver any shares of Stock under the Plan or make any other distribution of benefits under the Plan unless such delivery or distribution would comply with all applicable laws and the applicable requirements of any securities exchange or similar entity. (b) In the case of a Participant who is subject to Section 16(a) and 16(b) of the Securities Exchange Act of 1934, the Board may, at any time, add such conditions and limitations to any Award to such Participant, or any feature of any such Award, as the Board, in its sole discretion, deems necessary or desirable to comply with Section 16(a) or 16(b) and the rules and regulations thereunder or to obtain any exemption therefrom. (c) To the extent that the Plan provides for issuance of certificates to reflect the transfer of shares of Stock, the transfer of such shares may be effected on a non-certificated basis, to the extent not prohibited by applicable law or the rules of any stock exchange. 3.5. Withholding. All awards under the Plan are subject to withholding of all applicable taxes, which withholding obligations may be satisfied, with the consent of the Board, through the surrender of shares of Stock which the Participant already owns or to which a Participant is otherwise entitled under the Plan. 3.6. Agreement With Company. At the time of an award to a Participant under the Plan, the Board may require a Participant to enter into an agreement with the Company (the "Agreement") in a form specified by the Board, agreeing to the terms and conditions of the Plan and to such additional terms and conditions, not inconsistent with the Plan, as the Board may, in its sole discretion, prescribe. 4 3.7. Limitation of Implied Rights. (a) Neither a Participant nor any other person shall, by reason of the Plan, acquire any right in or title to any assets, funds or property of the Company or any Related Company whatsoever, including, without limitation, any specific funds, assets, or other property which the Company or any Related Company, in its sole discretion, may set aside in anticipation of a liability under the Plan. A Participant shall have only a contractual right to the amounts, if any, payable under the Plan, unsecured by any assets of the Company and any Related Company. Nothing contained in the Plan shall constitute a guarantee by the Company or any Related Company that the assets of such companies shall be sufficient to pay any benefits to any person. (b) The Plan does not constitute a contract of employment, and selection as a Participant will not give any employee the right to be retained in the employ of the Company or any Related Company, nor any right or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the terms of the Plan. Except as otherwise provided in the Plan, no Award under the Plan shall confer upon the holder thereof any right as a stockholder of the Company prior to the date on which he fulfills all service requirements and other conditions for receipt of such rights and shares of Stock are registered in his name. 3.8. Evidence. Evidence required of anyone under the Plan may be by certificate, affidavit, document or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties. 3.9. Action by Company or Related Company. Any action required or permitted to be taken by the Company or any Related Company shall be by resolution of its board of directors, or by action of one or more members of the board (including a committee of the board) who are duly authorized to act for the board or (except to the extent prohibited by applicable law or the rules of any stock exchange) by a duly authorized officer of the company. 3.10. Gender and Number. Where the context admits, words in any gender shall include any other gender, words in the singular shall include the plural and the plural shall include the singular. 5 SECTION 4 Administration The authority to control and manage the operation and administration of the Plan shall be vested in the Board of Directors of the Company, subject to the following: (a) Subject to the provisions of the Plan, the Board will have the authority and discretion to select employees to receive awards, to determine the time or times of receipt, to determine the number of shares covered by the awards, to establish the terms, conditions, performance criteria, restrictions, and other provisions of such awards, and to cancel or suspend awards. In making such award determinations, the Board may take into account the nature of services rendered by the respective employee, his present and potential contribution to the Company's success and such other factors as the Board deems relevant. (b) The Board will have the authority and discretion to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, to determine the terms and provisions of any agreements made pursuant to the Plan and to make all other determinations that may be necessary or advisable for the administration of the Plan. (c) Any interpretation of the Plan by the Board and any decision made by it under the Plan is final and binding on all persons. (d) Except as otherwise expressly provided in the Plan, where the Board is authorized to make a determination with respect to any award, such determination shall be made at the time the award is made, except that the Board may reserve the authority to have such determination made by the Board in the future (but only if such reservation is made at the time the award is granted and is expressly stated in the Agreement reflecting the award); provided, however, the Board, in its sole discretion, may delegate any or all of its authority under the Plan to a committee of the Board and, to the extent so delegated, references to the Board hereunder shall be deemed to refer such committee. Except to the extent prohibited by applicable law or the rules of any stock exchange, the Board or, if applicable, the committee of the Board, may allocate all or any portion of its responsibilities and powers to any one or more of its members and 6 may delegate all or any part of its responsibilities and powers to any person or persons selected by it. Any such allocation or delegation may be revoked by the Board or committee, if applicable, at any time. SECTION 5 CHANGE IN CONTROL Except as otherwise provided in the Agreement reflecting the applicable award, upon the occurrence of a Change in Control all restrictions on outstanding Restricted Stock awards shall lapse. For purposes of the Plan, a "Change in Control" shall be deemed to occur on the earliest of the existence of one of the following events: (a) (i) any "person" (as such term is used in Sections 13(d) or 14(d) of the Exchange Act), other than one or more Permitted Holders (as defined below), 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 (as defined below) of the Company and (ii) 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 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; (b) individuals who, as of the date hereof, constitute the Board (as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company' shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office is in connection with an actual or threatened "election contest" relating to the election of the directors of the Company (as such term is used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act); or 7 (c) approval by the Company's shareholders of a reorganization, merger or consolidation of the Company, in each case, with respect to which all or substantially all of the individuals and entities who were the respective beneficial owners of the common stock and voting securities of the Company immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation, beneficially own, directly and indirectly, more than [70]% of, respectively, the then outstanding shares of common stock or the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation, or of a complete liquidation or dissolution of the Company or of the sale or other disposition of all or substantially all of the assets of the Company. For purposes of this Section 5, the term "Permitted Holders" means Donald N. Smith, The Equitable Life Assurance Society of the U.S., the Company's then existing senior management and their respective affiliates. The term "Voting Stock" of the Company means all classes of capital stock of the Company then outstanding and normally entitled to vote in the election of directors. SECTION 6 AMENDMENT AND TERMINATION The Board may, at any time, amend or terminate the Plan, provided that, subject to subsection 3.3 (relating to certain adjustments to shares), no amendment or termination may materially adversely affect the rights of any Participant or beneficiary under any award made under the Plan prior to the date such amendment is adopted by the Board. 8 EX-10.6 7 EXHIBIT 10.6 Exhibit 10.6 DEVELOPMENT AGREEMENT BETWEEN FRIENDLY ICE CREAM CORPORATION 1855 Boston Road Wilbraham, Massachusetts 01095 AND FRIENDCO RESTAURANTS, INC. 1657 Crofton Boulevard Crofton, Maryland 21114 DATED July , 1997 TABLE OF CONTENTS Section Page 1. Schedule and Exclusivity ............ 2 2. Term.................................. 6 3. Fees.................................. 6 4. Application of Development Fee ....... 7 5. Application Procedures ............... 8 6. Restaurant Closing Procedure.......... 9 7. Assignment........................... 11 8. Non-Competition...................... 12 9. Default and Termination ............. 14 10. Agency and Indemnity................. 17 11. Notices.............................. 19 12. Miscellaneous ....................... 20 13. Acknowledgement of Risk.............. 21 EXHIBITS: Exhibit A: Territory and Time Schedule.. A-1 Exhibit B: Omitted Exhibit C: Franchise Agreement ......... C-1 Exhibit D: Commitment Agreement......... D-1 DEVELOPMENT AGREEMENT THIS AGREEMENT dated --------------, 19------, between FRIENDLY'S RESTAURANTS FRANCHISE, INC., a Delaware corporation ("Friendly's"), and FRIENDCO RESTAURANTS, INC., a Maryland corporation ("Developer"). WHEREAS, Friendly's owns, operates and licenses others to operate distinctive high quality restaurants ("Friendly's Restaurants") serving the public under the name Friendly's" (the "System"); and WHEREAS, Friendly's desires to achieve market penetration in various areas of the United States in order to more effectively expand, advertise and market the System, and WHEREAS, Friendly's has concluded that to further its goals, it desires to grant to experienced and financially qualified persons or organizations the opportunity for exclusive development of Friendly's Restaurants using the System within limited territories for specified periods of time; and WHEREAS, Developer desires to obtain the right to acquire sites within a specific territory during a specified period of time on which to construct Friendly's Restaurants using the System, to submit to Friendly's applications for franchise agreements to operate Friendly's Restaurants on such sites, and upon the approval of each such application, to enter into a franchise agreement with Friendly's to operate a Friendly's Restaurant using the System upon such sites; and WHEREAS, Developer represents that it has the organizational, operational and financial strength, experience and resources necessary to carry out the multiple development of Friendly's Restaurants within the Territory, as defined below, in the specified time set forth below. NOW, THEREFORE, in consideration of the mutual covenants contained herein and pursuant to the terms and conditions of this Agreement, the parties hereby agree as follows: 1. SCHEDULE AND EXCLUSIVITY. A. Developer agrees to construct, equip and open seventy-four (74) Friendly's Restaurants using the System within the time schedule and territory (the "Territory") set forth on Exhibit A attached hereto and made a part hereof, and to maintain the operation of an additional thirty-four (34) Friendly's Restaurants pursuant to a franchise agreement, subject to Paragraph 1.G., infra. B. Developer agrees that time is of the essence under this Agreement, and agrees to comply strictly with each and every element of the time schedule set forth on Exhibit A. Developer further agrees that Exhibit A sets forth the minimum number of Friendly's Restaurants to be constructed, that Developer will be required to have the minimum number under contract and to demonstrate the number under contract in order to qualify for any cure period for any default, and that it is the mutual goal of Friendly's and Developer that Developer construct, equip and open a greater number in an extended time period (the "Target Number") of Friendly's Restaurants as described on Exhibit A, but the failure to open the Target Number shall not be a default hereunder. C. For the purposes of this Agreement, a restaurant will be considered open or under construction in such calendar year as the construction permit is obtained and the building footings are poured. The Developer will have six (6) months for the date construction commences to have the restaurant open for business in order for the restaurant to be included in the minimum number required to be open or under construction in any given year. D. During the term of this Agreement, Friendly's shall not operate, or license or franchise others to operate restaurants using the System within the Territory except as provided in this Agreement; provided however, that if the Target Number has not been achieved, Friendly's may operate, or license others to operate Friendly's Restaurants within the Territory and, provided further, that during the term of this Agreement only, Friendly's shall not own, license or franchise any Friendly's Restaurant within the Trade Area (as defined in Paragraph 8) of any Friendly's Restaurant operated by Developer. E. Developer agrees that this Agreement does not grant it the right to use the System at any location, nor does it grant Developer any rights with respect to the System or to use any of the trademarks or trade secrets of Friendly's, such rights being exclusively governed by a Franchise Agreement for each Friendly's Restaurant opened hereunder. F. Each Friendly's Restaurant as and when constructed, equipped and opened, and the relationship of Developer and Friendly's with respect to each such restaurant, shall be governed by the terms of an individual Franchise Agreement on the form of such agreement attached hereto as Exhibit C which will be granted to Developer by Friendly's in the good faith exercise of its sole discretion; provided, however, that upon the earlier of the expiration of this Agreement, the completion the Target number or the elapse of ten (10) years from December 31, 1997, Developer shall thereafter use the then current form of Franchise Agreement. G. Developer agrees that all Friendly's Restaurants set forth on Exhibit A must be open and operating during established business hours at all times (excepting casualty or condemnation or act of God) on and after their scheduled opening date and in the event any such restaurant(s) is not at all times open and operating during established business hours, it will constitute a default hereunder, except for such restaurant closings as are permitted in accordance with Paragraph 6 hereof. H. Upon final expiration or termination of this Agreement for any reason, Developer's territorial rights and rights to construct, equip, open and operate Friendly's Restaurants shall terminate and expire and Developer's rights to use the System shall be limited to those Friendly's Restaurants operating pursuant to effective Franchise Agreements which Friendly's and Developer may have entered into prior to the final expiration or termination of this Agreement. I. Developer shall have a right of first refusal on the operation of any Friendly's Restaurant located in the Territory in an Institutional Site (such as a government office, theme park, hospital, airport, university or college, military base or similar setting serving essentially a captive audience or customer base). The sole exceptions to the exclusivity of territory granted hereunder shall be the fourteen (14) managed Restaurants, the two (2) restaurants operated by F.I.C.C. (which shall be closed and de-identified no later than four (4) months after the Effective Date and the Maryland Science Center restaurant. Any Friendly's Restaurant in the Territory which is not managed or operated by Developer may only be managed and operated by employees of Friendly Ice Cream Corporation during the term of this Agreement. Such exclusivity shall not limit the rights reserved by Friendly's or F.I.C.C. under Paragraph 1.C. of the Franchise Agreement. 2. TERM. This Agreement shall commence upon the date first written above and shall terminate upon the earlier of December 31, 2007, or the date of Developer's execution of a Termination Agreement following the opening of the seventy-fourth (74th) Friendly's Restaurant required to be constructed, equipped, opened and operating pursuant to this Agreement, unless terminated earlier as provided for herein. The feasibility of further development in the Territory shall be assessed by Friendly's and Developer after the completion of the 74th restaurant and again after the completion of the 100th restaurant, and thereafter every five (5) years. An agreement to continue the development of additional restaurants hereunder shall operate to extend the Term of this Agreement. In no event shall the completion of the 74th restaurant cause this Agreement to terminate prior to December 31, 2003. 3. FEES. In consideration of the rights granted Developer, Developer shall pay to Friendly's the sum of Nine Hundred Thirty Thousand and 00/100 Dollars ($930,000.00) (the "Development Fee") all of which is non-refundable except as provided under Paragraph 9G and all or part of which has either heretofore been paid or is tendered herewith. 4. APPLICATION OF DEVELOPMENT FEE. A. Developer agrees that Friendly's is not obligated in any event, including the termination or expiration of this Agreement, to return to Developer all or any part of the Development Fee, except as provided in Paragraph 9G of this Agreement. B. Developer has no rights in the Development Fee except as are specifically set out in this Agreement. C. Friendly's agrees that, at such time as Developer and Friendly's execute a Commitment Agreement for the issuance of a Franchise Agreement ("Commitment Agreement") for any of the Friendly's Restaurants to be constructed, equipped and opened hereunder, Friendly's shall apply the Development Fee in an amount equal to one half ( ) of the initial franchise fee required to be paid in connection with each such application and subsequent grant of a Franchise Agreement. The Franchise Fee shall be Thirty Thousand Dollars ($30,000.00) for the first two (2) restaurants constructed hereunder and Twenty-Five Thousand Dollars ($25,000.00) for each additional restaurant set forth in Exhibit A, and thereafter shall be an amount equal to the then-current initial franchise fee. D. In the event the Development Fee has been applied such that there is a balance owed against any initial fee(s) which may become due, Developer shall pay any balance of such initial fee due to Friendly's with Developer's application for a Franchise Agreement. 5. APPLICATION PROCEDURES. A. Developer acknowledges and agrees that franchise agreements are granted by Friendly's only after submission and approval of a formal application on Friendly's then-current application form supplying all information requested thereon and paying all required fees. Developer further understands that a Commitment Agreement is first executed and delivered following approval of such application and that if the terms and conditions of the Commitment Agreement are complied with, a Franchise Agreement granting a franchise to operate a Friendly's Restaurant will be executed and delivered. Developer acknowledges and agrees that the Commitment Agreement and the Franchise Agreement will be the forms of such agreements as are attached hereto as Exhibits C and D for the restaurants developed in accordance with Exhibit A . B. Developer shall comply in all respects with Friendly's franchise application policies and procedures when Developer applies for a Franchise Agreement in order to fulfill its obligations under this Agreement. Developer understands that it should obtain a Commitment Agreement before making any unconditional binding commitments to third parties, and understands and agrees that any activities undertaken in reliance on this Agreement prior to such time are at Developer's own risk and expense. C. Developer acknowledges and agrees that Friendly's may choose to grant or deny applications for franchise agreements; however, Friendly's will exercise good faith in exercising its discretion. D. Developer shall be solely responsible for locating appropriate sites for the construction of Friendly's Restaurants as contemplated hereunder and taking all other actions necessary to finance, build, and construct such restaurants. Developer understands and agrees that all proposed sites are subject to Friendly's prior approval, not to be unreasonably withheld. 6. RESTAURANT CLOSING PROCEDURE. A. Developer may discontinue operations at any Friendly's Restaurant opened or maintained pursuant to this Development Agreement (other than through condemnation or casualty loss) only in accordance with the procedure set forth in this Section 6. Developer shall notify Friendly's that the restaurant to be discontinued does not produce a profit at a restaurant operating level, and shall afford Friendly's not less than thirty (30) days to audit the operations of such restaurant, should Friendly's choose to do so. Evidence of a restaurant's failure to produce a profit shall be established through six (6) quarters of consecutive losses totaling Seventy-Five Thousand Dollars ($75,000.00) or if an aggregate loss of Seventy-Five Thousand Dollars ($75,000.00) is achieved in such shorter period when measured on the basis of restaurant operating income. Thereafter, Developer may proceed to discontinue operations at the restaurant so long as de-identification of the restaurant occurs within fifteen (15) days of the cessation of restaurant operations. B. Developer shall replace any closed restaurant with (and shall transfer the Franchise Agreement for such closed restaurant) to a newly constructed or remodeled restaurant within eighteen (18) months of the cessation of restaurant operations, if the replacement restaurant does not have a drive-thru window, or within twenty-four (24) months if the replacement restaurant does have a drive-thru window (collectively, such period shall be considered the "Replacement Period"). C. Developer shall be entitled to a moratorium on royalties and marketing fees for the Replacement Period for a total of four (4) closed restaurants; however, for each additional closed restaurant, Developer shall continue to pay the average monthly royalty and marketing fee for such restaurant as was paid during the last twelve (12) months of operation until each such additional restaurant is replaced pursuant to the terms of this Paragraph 6, and the Franchise Agreement for such closed restaurant is transferred to the replacement restaurant. D. For each closed Restaurant to be replaced, Developer shall pay a Site Replacement Fee to Friendly's to cover Friendly's costs of reviewing and approving the proposed replacement site, such Fee to be in the amount of the lesser of Friendly's actual costs or Two Thousand Five Hundred Dollars ($2,500.00). 7. ASSIGNMENT. A. Friendly's may assign all or any part of its rights or obligations hereunder to any person or entity, provided, however, that such person or entity has no right or authority, at the time of such assignment, to license others to operate Friendly's Restaurants within the Territory, unless and until this Agreement has expired or terminated. B. The rights and obligations of Developer hereunder are not assignable without the prior written consent of Friendly's which may be withheld in Friendly's sole discretion. For the purposes of this clause, an assignment includes an assignment, sale, or other transfer, directly or indirectly of any interest in Developer, but shall not include a transfer by merger with the corporate parent or other affiliate of Developer, provided that the net worth of the affiliate successor entity is the same or greater than the net worth of the Developer and its corporate parent as of the Effective Date. C. Developer shall not assign, sell or transfer any interest in Developer during the term hereof without the prior written consent of Friendly's, not to be unreasonably withheld. D. Any purported assignment contrary to the foregoing provisions shall be void and of no force and effect and shall constitute a default hereunder. 8. NON-COMPETITION. Developer acknowledges and agrees that Friendly's has invested a substantial amount of time and money in developing the System and the confidential information associated therewith (the "Confidential Information") and that Friendly's would be unable to protect its System, the Confidential Information and trade secrets against unauthorized use or disclosure and would be unable to encourage a free exchange of ideas and information among Friendly's and its licensees if prospective licensees or licensees were permitted to hold interests in or perform services for any competing business and that the following restrictions are reasonably required in order to protect Friendly's information, marketing strategies, operating policies and other elements of the System from unauthorized appropriation and to ensure that Developer is using its best efforts in employing its financial and management resources effectively to meet and exceed the minimum and target development schedule set forth in this Agreement. Therefore, Developer agrees that, during the term of this Agreement, neither Developer nor any of its corporate parent, subsidiaries or their affiliates will have any direct or indirect legal or beneficial interest or perform services in any business which owns, operates, licenses, franchises or develops any restaurant concept which both (i) has sit down, table service, and (ii) is a mid-scale priced, family style restaurant, coffee shop or ice cream/frozen yogurt shoppe (as defined by CREST operators list as of June 1, 1997) including but not limited to Denny's Shoney's Big Boy, Country Kitchen, Bob Evans, Cracker Barrel, IHOP, Village Inn, Waffle House, Dairy Queen, Swensen's, Carvel, Baskin Robbins, TCBY or similar. Notwithstanding the above, a restaurant concept which is a mid-scale priced family style restaurant will be deemed competitive if frozen deserts comprise 5% or more of the sales mix as measured on any six (6) month basis. Developer further agrees that for a period of two (2) years after the termination or expiration of this Agreement, Developer and all of such persons will be subject to the same restriction on competing activities (i) within the Territory and (ii) within the trade area (as reasonably determined by Friendly's) of any Friendly's Restaurant currently operated by Friendly's or any licensee, but in no event within a radius of three (3) miles from any such restaurant. Developer further acknowledges that this paragraph confers no exclusivity on Developer with respect to Developer's further operation of any Restaurant within the Territory after the expiration or termination of this Agreement. The restrictions of this section shall not be applicable to the Friendly's Restaurants operated under franchise agreements between Developer and Friendly's, to the ownership of shares of a class of securities listed on a stock exchange or traded on the over-the-counter market that represent five percent (5%) or less of the numbers of shares of that class of securities issued and outstanding, or to any restaurants franchised by Wendy's International and operated by the corporate parent or any affiliate of Developer. 9. DEFAULT AND TERMINATION. A. This Agreement shall terminate without further notice at the time and date set forth in Paragraph 2 hereof, unless extended or earlier terminated as set forth hereinbelow. B. This Agreement shall automatically terminate without notice in the event Developer becomes insolvent or is unable to pay its debts as they may mature or make an assignment for the benefit of creditors or an admission of inability to pay obligations as they become due or file a voluntary petition in bankruptcy or any pleading seeking any reorganization, liquidation, dissolution or composition or other settlement with creditors under any law, or admitting or failing to contest the material allegations of any such pleading filed against Developer, or its adjudicated a bankrupt or insolvent or a receiver or other custodian is appointed for a substantial part of Developer's assets or the assets of any Friendly's Restaurant owned by Developer or a final judgment remains unsatisfied or of record for ninety (90) days or longer (unless supersedeas bond is filed), or if execution is levied against any substantial part of Developer's assets is made, or suit to foreclose any lien or mortgage against Developer or any Friendly's Restaurant owned by Developer is instituted and is not dismissed within ninety (90) days, or if a substantial part of Developer's real or personal property is sold after levy of judgment thereupon by any sheriff, marshal or constable, or the claims of Developer's creditors are abated or subject to a moratorium under any law; C. In the event Developer materially fails to comply with any of the terms and conditions of this Agreement (excepting only by reason of force majeure, such as, but not limited to: civil strife or commotion, labor strike, lockout or Acts of God) or the terms and conditions of any Commitment Agreement, Franchise Agreement orother agreement between Friendly's and Developer, it shall constitute a default of this Agreement, and if Developer fails to cure such default(s) within one hundred eighty (180) days in the first year of this Agreement, or sixty (60) days in the next four (4) subsequent years, of Friendly's giving written notice of said default(s) to Developer or the cure period provided in such other agreement, Friendly's, in its sole and absolute discretion, and in addition to any other rights and remedies it may have at law or in equity, may terminate this Agreement and any Commitment Agreements in force at the time of the default without further notice. D. In the event of termination of this Agreement, Friendly's shall retain all of the Development Fee, as a liquidated damage except as provided for in Subparagraph G herein, and any unaccrued portion of the Development Fee shall be retained by Friendly's without the necessity of notice thereof. E. A default under this Agreement shall not constitute a default under any Franchise Agreement between Friendly's and Developer. However, the failure of Developer to complete the minimum development required hereunder shall grant to Friendly's the option to purchase the assets and rights relating to the original thirty-four (34) restaurants sold to Developer by Friendly Ice Cream Corporation at the same multiple of cash flow (i.e. 5.3 times EBITDA on a trailing twelve (12) month basis) as in the original transaction by Friendly Ice Cream Corporation and Developer, pursuant to the Purchase and Sale Agreement dated July 10, 1997. Upon the exercise of the repurchase option, the leases and subleases between Friendly Ice Cream Corporation and Developer, as well as any guarantee of such leases or subleases by DavCo Restaurants, Inc. will terminate, excepting only such leases or subleases which Developer shall have assigned or sublet to a third party (the "Remaining Leases"). The assignment or sublease between Developer and any third party on the Remaining Leases shall attorn to Friendly Ice Cream Corporation, and any guarantee of the Remaining Leases by DavCo Restaurants, Inc. shall remain in full force and effect throughout the remainder of the base term (and renewals at the sole discretion of such third party) of such assignment or sublease. F. Upon final expiration or termination of this Agreement for any reason, Developer's territorial rights and rights to construct, equip, open and operate Friendly's Restaurants using the System shall automatically terminate and expire and Developer's rights to use the System shall be limited to those Friendly's Restaurants pursuant to effective Franchise Agreements which Friendly's and Developer may have executed and delivered prior to such expiration or termination. G. Friendly's failure to comply with the terms and conditions of this Agreement shall constitute a default hereunder. If Friendly's fails to cure such default(s) within thirty (30) days of its receipt of written notice thereof, this Agreementshall terminate and any portion of the Development Fee not applied pursuant to Paragraph 4 hereunder shall be refunded to Developer. 10. AGENCY AND INDEMNITY. A. Developer and Friendly's agree that this Agreement does not create any fiduciary relationship between them and nothing in this Agreement is intended to make either party an agent, legal representative, joint venturer, partner, employee or servant of the other for any purpose whatsoever. Each party to this Agreement is an independent contractor and shall hold itself out to the public as an independent contractor. B. Developer shall not make any contract, agreement, warranty or representation in the name of Friendly's, and Friendly's assumes no liability for, nor shall it be deemed liable by reason of, any action or omission of Developer and its conduct of business pursuant to this Agreement or any claim or action arising therefrom. C. Developer shall indemnify and hold Friendly's harmless from and promptly reimburse it for any and all claims, demands, taxes or penalties, actions and payment of money (including, but not limited to, fines, damages legal fees and expenses) by reason of any or all claims, demands, taxes, or penalties arising directly or indirectly from, as a result of, or in connection with Developer's actions oromissions hereunder or those of its agents or employees, including those of its contractors and subcontractors. At the election of Friendly's, Developer will also defend Friendly's against same at Developer's expense. In any event, and regardless of Developer's payment of legal fees, Friendly's will have the right, through counsel of its choice, to control any claim, demand, action or matter to the extent it could directly or indirectly affect Friendly's financially, and all such expenses shall be subject to indemnity hereunder. Developer's obligations under this paragraph shall survive the termination or expiration of this Agreement. D. Except as provided above, Friendly's and Developer shall indemnify, defend and hold each other harmless from claims, demands and causes of action asserted against the indemnitee by any person for personal injury or death or for loss of or damage to property and resulting from the indemnitor's active or passive negligence or willful misconduct. Where such injury, death, loss or damage is the result of joint active or passive negligence or willful misconduct, the duty of indemnification shall be in proportion to the allocable share of the joint active or passive negligence or willful misconduct. 11. NOTICES. All notices required under this Agreement shall be in writing and shall be personally delivered, sent by facsimile or overnight courier or mailed by United States Mail, Return Receipt Requested, to the respective parties at the following addresses unless and until a different address has been designated by written notice to the other party: Friendly's: FRIENDLY'S RESTAURANTS FRANCHISE, INC. 1855 Boston Road Wilbraham, Massachusetts 01095 Attention: General Counsel Developer: FRIENDCO RESTAURANTS, INC. 1657 Crofton Boulevard Crofton, Maryland 21114 Attention: President Notices sent (i) by personal delivery or facsimile shall be effective when received; (ii) by mail on the third business day after mailing; and (iii) by overnight courier on the second business day after delivery to the courier. 12. MISCELLANEOUS. A. No failure or delay of Friendly's or Developer to exercise any rights reserved to it in this Agreement or to insist upon compliance by either party of any obligation or condition in this Agreement, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver of either party's right to demand strict compliance with the terms of this Agreement. Waiver by either party of any particular default will not affect or impair the rights of Friendly's or Developer with respect to any subsequent default of the same or a different nature. B. This Agreement is solely for the benefit of the parties hereto and their permitted assignees and is not intended to and shall not be construed to benefit any other person, firm or entity. C. The title headings of the respective paragraphs of this Agreement are for reference purposes only and shall not effect the meaning or interpretation of this Agreement in any way. D. This Agreement and any rights or liabilities arising from or in connection with this Agreement shall be governed by the laws of the State of Delaware. Any action brought to enforce any provision of this Agreement shall be brought and maintained only in a state or federal court of competent jurisdiction in Wilmington, Delaware. E. This is the entire agreement between the parties concerning the development of Friendly's Restaurants within the Territory and any modifications must be in writing and signed by both parties, or said modifications will be void and of no force and effect. F. If any term or provision of this Agreement or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons whose circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby. 13. ACKNOWLEDGEMENT OF RISK. A. Developer acknowledges the success of the business ventures contemplated by this Agreement involves substantial business risks and is dependent upon the Developer's ability. Friendly's expressly disclaims the making of, and Developer acknowledges that it has not received and is not relying upon, any warranty or guarantee, express or implied, as to the potential volume, profits, or success of the business venture contemplated by this Agreement. B. Developer represents that it has independently investigated the risks of the business venture contemplated by this Agreement and has read the disclosure documents prepared by Friendly's in accordance with the state and federal franchise laws and agrees that Friendly's has made no representation that is not fully set forth therein or herein. C. Developer acknowledges that it has not and agrees that it will not rely upon any representations not contained herein or in the disclosure documents prepared by Friendly's in accordance with state and federal franchise laws. WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date and year first above written. ATTEST: FRIENDLY'S RESTAURANTS FRANCHISE, INC. _____________________________ By: ____________________________ Print Name: Its: Date: WITNESS: DEVELOPER ____________________________ By: ____________________________ Print Name: Its: Date: E X H I B I T A to DEVELOPMENT AGREEMENT Dated: ---------------------- , 199 between FRIENDLY'S RESTAURANTS FRANCHISE, INC. and TERRITORY: States of Delaware, Maryland, the District of Columbia and following Virginia counties: Alexandria, Arlington, Caroline, Clarke, Culpeper, Essex, Fairfax, Fauquier, Frederick, King George, Lancaster, Loudoun, North Umberland, Prince William, Rappahanock, Richmond, Shenandoah, Spotsylvania, Stafford, Warren and Westmoreland. The boundaries of the Territory defined above shall, throughout the term of this Development Agreement, be those boundaries as they exist as of the date hereof. TIME SCHEDULE: No later than (Date) Minimum number of new Target number of Friendly's Friendly's Restaurants to be Restaurants to be opened or opened or under construction under construction (permits obtained, footings poured - six (6) months to to complete construction)
December 31, 1998 11 December 31, 1999 26 December 31, 2000 41 December 31, 2001 52 December 31, 2002 63 December 31, 2003 74 December 31, 2004 81 December 31, 2005 88 December 31, 2006 94 December 31, 2007 100 EX-10.7 8 EXHIBIT 10.7 Exhibit 10.7 FRANCHISE AGREEMENT BETWEEN FRIENDLY'S RESTAURANTS FRANCHISE, INC. 1855 Boston Road Wilbraham, MA 01095 AND FRIENDCO RESTAURANTS, INC. 1657 Crofton Boulevard Crofton, Maryland 21114 DATED July _____ , 1997 FOR [RESTAURANT STREET ADDRESS] [STATE, CITY] TABLE OF CONTENTS Section Page - ------- ---- 1. INTRODUCTION AND GRANT OF FRANCHISE 1 A. Introduction 1 B. Grant of Franchise 2 C. Rights Reserved by Company 4 2. TRAINING 5 3. GUIDANCE 6 A. Guidance and Assistance 6 B. Operations Manual 7 4. MARKS 8 A. Goodwill and Ownership of Marks 8 B. Limitations on Licensee's Use of Marks 9 C. Notification of Infringements and Claims 10 D. Discontinuance of Use of Marks 10 E. Indemnification of Franchisee 11 5. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION 11 A. Independent Contractors 11 B. No Liability for Acts of Other Party 12 C. Taxes 13 D. Indemnification 13 6. CONFIDENTIAL INFORMATION 14 7. FEES 17 A. Initial Franchise Fee 17 B. Royalty Fee 18 C. Definition of Gross Sales 18 D. Interest on Late Payments 19 E. Application of Payments 19 8. RESTAURANT OPERATING STANDARDS 20 A. Condition, Appearance and Operation of the Restaurant 20 B. Restaurant Menu 21 C. Approved Products, Distributors and Suppliers 22 D. Specifications, Standards and Procedures 25 E. Compliance with Laws and Good Business Practices 26 F. Management and Personnel of the Restaurant 27 G. Insurance 27 9. MARKETING 29 A. By Company 29 B. By Licensee 32 C. By Cooperative 33 10.REPORTS, FINANCIAL STATEMENTS AND FINANCIAL CONDITION 33 11. INSPECTIONS AND AUDITS 35 A. Company's Right to Inspect the Restaurant 35 B. Company's Right to Audit 36 12. TRANSFER OF FRANCHISE 37 A. By Company 37 B. Franchisee May Not Transfer Without Approval of Company 37 C. Right of First Refusal 38 D. Conditions for Approval of Transfer 40 E. Transfer to a Wholly-Owned Entity 41 F. Effect of Consent to Transfer 42 13. CONDEMNATION AND CASUALTY 42 14. TERMINATION OF THE FRANCHISE 43 15. DAMAGES 46 16. COVENANT NOT TO COMPETE; RIGHTS AND OBLIGATIONS OF COMPANY AND FRANCHISEE UPON TERMINATION OR EXPIRATION OF THE FRANCHISE 48 A. Covenant Not to Compete 48 B. Payment of Amounts Owed to Company 50 C. Marks and System 50 D. Confidential Information 51 E. Continuing Obligations 52 17. RENEWAL OF FRANCHISE 52 18. ENFORCEMENT 53 A. Severability and Substitution of Valid PROVISIONS 53 B. Waiver of Obligations 55 C. Force Majeure 56 D. Injunctive Relief 57 E. Rights of Parties Are Cumulative 57 F. Costs and Attorneys' Fees 57 G. Governing Law 58 H. Waiver of Punitive/Exemplary Damages; Limitation of Actions 58 I. Venue and Jurisdiction 59 J. Waiver of Jury Trial 59 K. Binding Effect 59 L. Interpretation 60 M. Time 61 19. NOTICES AND PAYMENTS 61 20. ACKNOWLEDGEMENTS 62 EXHIBITS: Exhibit A: Disclosure Acknowledgment Statement...... A-1 FRANCHISE AGREEMENT THIS FRANCHISE (the "Agreement") is made and entered into as of _____, 19___ (the "Agreement Date"), by and between FRIENDLY'S RESTAURANTS, FRANCHISE, INC., a Delaware corporation, whose principal address is 1855 Boston Road, Wilbraham, MA 01095 and FRIENDCO RESTAURANTS, INC. whose principal address is 1657 Crofton Boulevard, Crofton, Maryland 21114. For purposes of simplicity, we will sometimes refer to Friendly's as "us", "we" or the "Company," and we will sometimes refer to you as "you" or "Franchisee." 1. INTRODUCTION AND GRANT OF FRANCHISE A. Introduction Through expenditure of considerable time, skill, effort and money, we have developed a system for establishing, operating and franchising distinctive, high quality restaurants ("Friendly's Restaurants") serving the public under the name "Friendly's." A Friendly's Restaurant consists of all structures, facilities, appurtenances, grounds, landscaping, signs, furniture, fixtures, equipment and entry, exit, parking and other areas commonly associated with such a restaurant. The approved food, beverage and other products served and sold by Friendly's Restaurants (the "Products") for consumer consumption and not for resale are prepared in accordance with our standards, specifications and secret recipes. Friendly's Restaurants are established pursuant to our plans and specifications for construction, conversion, remodeling, decorating, equipment and layout, and are operated in accordance with our distinctive business formats, construction plans, inspection and consultation programs, signs, equipment, layouts, methods, specifications, standards, recipes (including ice cream and other frozen dessert and related toppings recipes), confidential information, trade secrets, operating procedures, training programs and materials, guidance, policy statements and related materials, designs, advertising, publicity, and marketing programs and other materials (which we may modify from time to time) (collectively, the "System"). We own, use, promote and license certain trade names, trademarks, service marks and other commercial symbols, and applications related thereto, including but not limited to "Friendly's" and "Friendly's Restaurants" (collectively, the "Marks"), and the confidential information, copyrights, and business format and related property rights which comprise the System. We may change, modify or improve the System from time to time to enhance the operations of Friendly's Restaurants. All improvements and additions you, we or anyone else makes to the System, whenever made or used in connection with the system, will inure to us and become our sole property. We grant, to qualified persons, franchises to own and operate Friendly's Restaurants pursuant to the System selling the Products and services we authorize and approve. B. Grant of Franchise (1) Grant. You have applied for a franchise to own and operate a Friendly's Restaurant (the "Restaurant") at, and only at, the location known as: (the "Premises") and we have approved your application in reliance upon all of the representations and warranties you have made to us in connection with this Agreement, including but not limited to the information contained in your application for a franchise and, if the Restaurant is newly constructed and equipped, the representations and warranties you made to us in the Commitment Agreement between you and us dated ____________, 19 __ . Subject to the provisions of the Agreement, and in reliance on such representations and warranties, we hereby grant to you, effective upon the execution of this Agreement, a franchise (the "Franchise") to operate a Friendly's Restaurant at the Premises, and to use the System and the Marks in operating the Restaurant, for a term of twenty (20) years, beginning on the date of completion, expiration or termination of the Development Agreement between you and us dated July 10, 1997, unless this Agreement is sooner terminated as provided in Section 14 of this Agreement. Termination or expiration of this Agreement will constitute a termination or expiration of the Franchise. Except as otherwise provided in the Development Agreement, you may not conduct your business pursuant to this Agreement from any location other than the Premises except upon our approval of your application for change of location, and the payment of the then current change of location fee. (2) Best Efforts. You agree that you will at all times faithfully, honestly and diligently perform your obligations under this Agreement and that you will continuously exert, during the full term of this Agreement, your best reasonable efforts to promote and enhance the business of the Restaurant and the goodwill of the Marks and the System. (3) Operation. You agree that you will continuously, from the date you open the Restaurant for business to the public, operate, occupy and do business in the Restaurant, 7 days a week, 365 days a year during the hours of 6:00 a.m. to 11:00 p.m. weekdays, and to 12:00 midnight on weekends (it being understood that the Restaurant may be closed for business while any repairs or refurbishments are being undertaken and that different hours of operation may be approved by the Vice President of Operations of the Company) and to operate the Restaurant in a manner reasonably calculated to produce the maximum volume of gross sales (as defined in Section 7C of this Agreement) and to help establish and maintain a high reputation for the Restaurant, unless the Restaurant is in the process of being replaced pursuant to the provisions of any applicable Development Agreement. C. Rights Reserved by Company We retain the right, subject to the exercise of good faith, in our sole and absolute discretion, to: (1) operate and grant to others the right to operate, Friendly's Restaurants or other restaurants using the System or the Marks at such locations which may include locations within the Trade Area (as defined in Section 16A, unless an exclusive territory has been granted pursuant to a Development Agreement, in which case the terms of the Development Agreement will apply) and on such terms and conditions as we deem appropriate; (2) operate, and grant to others the right to operate restaurants under other trade names, trademarks, service marks and commercial symbols different from the Marks, notwithstanding the fact that such restaurants may be the same as or similar to a Friendly's Restaurant; and (3) sell the Products or other products identified by the Marks or by other trademarks in any channel of distribution. 2. TRAINING Prior to the execution of this Agreement, we have furnished you and your Restaurant Managers (each as hereinafter defined) training in the operation of a Friendly's Restaurant. We will require similar training for all successors to such persons. No person shall be permitted to supervise the Restaurant until the training has been completed. The training program will include classroom instruction and field training and will be furnished at our training facility and/or at a Friendly's Restaurant, and will last for such duration as we determine to be necessary. Your Restaurant Managers must complete the training program to our reasonable satisfaction. If we, in our sole discretion, determine that any of such persons are unable to complete the training program satisfactorily, upon our request you agree to hire, as soon as practicable, a replacement who must complete our training program to our reasonable satisfaction. We may also offer such refresher or supplemental training programs to you and such persons as we, from time to time, deem appropriate at such places as we designate. By giving you prior written notice, we will have the right to require attendance at any refresher or supplemental training program by you or any of such persons. No tuition charge will be made for required initial training programs. You will be responsible for the travel, local transportation, lodging and meal expenses, and compensation of yourself and your Restaurant Managers incurred while attending the training program and any refresher or supplemental training programs we offer to you or require you or such persons to attend. Reasonable charges may be made by us for training materials and we may require you to purchase certain equipment to be used in such training. 3. GUIDANCE A. Guidance and Assistance We will furnish guidance to you with respect to: (1)preparation, packaging, sale and delivery of Products authorized for sale at Friendly's Restaurants; (2)development, preparation and packaging of new Products we develop for sale at Friendly's Restaurants; (3)specifications, standards and operating procedures utilized by Friendly's Restaurants, and any modification thereof; (4)approved equipment, furniture, furnishings, signs, food products, operating materials and supplies; (5)development and implementation of local advertising and promotional programs; and (6)general operating and management procedures of Friendly's Restaurants. In our discretion, we will furnish this guidance and assistance to you in the form of our confidential operations manual, bulletins, written reports and recommendations, electronic mail or other written or electronic materials (all of which are hereinafter referred to as the "Operations Manual"), inspection reports for the Restaurant, refresher training programs and/or telephonic consultations at our offices or at the Restaurant. If you request, we will furnish additional guidance and assistance relative to the operation of the Restaurant at per diem fees and charges we establish from time to time. If special training of Restaurant personnel or other assistance in operating the Restaurant is requested by you, and must take place at the Restaurant, all our expenses for such training, including a per diem charge and travel, local transportation, lodging and meal expenses for our personnel, must be paid by you. B. Operations Manual We will loan to you during the term of the Franchise one (1) copy of the Operations Manual which may consist of multiple parts and/or volumes. The Operations Manual will contain mandatory and suggested specifications, standards and operating procedures that we prescribe from time to time for Friendly's Restaurants and information relative to your obligations under this Agreement and in the operation of a Friendly's Restaurant. We may modify the Operations Manual from time to time to reflect changes in the specifications, standards and operating procedures of Friendly's Restaurants, to disclose information concerning new Products and services which we may develop for sale at Friendly's Restaurants, to specify types, brands and models of equipment which you must utilize to produce and sell such new Products and services, and to specify changes in the decor, format, image, Products, services and operation of a Friendly's Restaurant. You must keep your copy of the Operations Manual current by immediately inserting all modified pages we furnish to you and destroying the then obsolete pages. In the event of a dispute relative to the contents of the Operations Manual, the master copies we maintain at our principal office will be controlling. You may not at any time copy any part of the Operations Manual, disclose any part of it to employees or others not having a need to know its contents for purposes of operating the Restaurant, or permit its removal from the Restaurant without our prior approval. In the event a new version of the Operations Manual is provided to you, you must immediately return the then obsolete version to us. To the extent the Operations Manual contains any specification, standard or operating procedure concerning the operation of the Restaurant, such provision shall be deemed to be incorporated into this Agreement, unless such provision conflicts with applicable laws or ordinances. 4. MARKS A. Goodwill and Ownership of Marks You acknowledge that we have the right to license the Marks, that the Marks are represented to be valid, and that your right to use the Marks is derived solely from this Agreement (and the Trademark License Agreement if applicable) and is limited to your operation of the Restaurant pursuant to and in compliance with this Agreement and all applicable standards, specifications and operating procedures we prescribe from time to time during the term of the Franchise. Any unauthorized use of the Marks by you will constitute a breach of this Agreement and may constitute an infringement of our rights in and to the Marks. You acknowledge and agree that all of your usage of the Marks and any goodwill established by your use of the Marks will inure to our exclusive benefit, and that this Agreement does not confer any goodwill or other interests in the Marks upon you (other than the right to operate a Friendly's Restaurant in compliance with this Agreement). All provisions of this Agreement applicable to the Marks will apply to any other trademarks, service marks and commercial symbols we later develop, authorize and license you to use. B. Limitations on Franchisee's Use of Marks You agree to use the Marks as the sole trade identification of the Restaurant. You must also identify yourself as the independent owner of the Restaurant in the manner we reasonably prescribe. You must not use any Mark as part of any corporate or trade name or with any prefix, suffix or other modifying words, terms, designs or symbols (other than logos and additional trade and service marks we license to you under this Agreement), or in any modified form, nor may you use any Mark in connection with the performance or sale of any unauthorized services or products or in any other manner we have not expressly authorized in writing. You must prominently display the Marks in the manner we reasonably prescribe at the Restaurant, on menus and in connection with advertising and marketing materials. You must not employ any of the Marks in signing contracts, applications for licenses or permits, or in any manner that may imply our responsibility for, or result in our liability for, any of your indebtedness or obligations, nor may you use the Marks in any way not authorized herein. You further agree to give such notices of trade and service mark registrations as we specify, and you must obtain such fictitious or assumed name registrations as may be required under applicable law. C. Notification or Infringements and Claims You agree to immediately notify us of any apparent infringement of or challenge to your use of any Mark, or claim by any person of any rights in any mark. You agree not to communicate with any person other than us, your counsel and our counsel in connection with any such infringement, challenge or claim. We will have sole discretion to take such action as we deem appropriate in connection with any infringement, challenge or claim, and the right to exclusively control any settlement, litigation or U.S. Patent and Trademark Office or other proceeding arising out of the alleged infringement, challenge or claim or otherwise relating to any Mark. You agree to execute any and all instruments and documents, render such assistance and do such acts and things as may, in the opinion of our counsel, be necessary or advisable to protect and maintain our interest in any litigation or other proceeding or to otherwise protect and maintain our interest in the Marks. D. Discontinuance of Use of Marks If it becomes advisable at any time in our reasonable judgment to modify or discontinue use of any Mark and/or for the Restaurant to use one (1) or more additional or substitute trade or service marks, you agree, at your expense, to comply with our directions to modify or otherwise discontinue the use of such Mark, and/or use one (1) or more additional or substitute trade or service marks, within a reasonable time after we give you notice. E. Indemnification of Franchisee We agree to indemnify you against, and to reimburse you for, and to our option, to defend you against, all damages for which you are held liable in any proceeding arising out of your use of the marks "Friendly's" and "Friendly's Restaurant", pursuant to and in compliance with this Agreement, and for all costs you reasonably incur in the defense of any such claim brought against you or in any such proceeding in which you are named as a party, including reasonable attorney's fees, provided that you have timely notified us of such claim or proceeding and you have otherwise substantially complied with this Agreement. We have the right to approve any counsel employed by you in the defense of any such claim, and in the event we elect to defend any such claim, the fees and expenses of any separate counsel employed by you shall not be reimbursable. 5. RELATIONSHIP OF PARTIES/INDEMNIFICATION A. Independent Contractors It is understood and agreed that this Agreement does not create a fiduciary relationship between you and us, that we and you are and shall be independent contractors, and that nothing in this Agreement is intended to make either you or us a general or special agent, legal representative, joint venturer, partner or employee of the other for any purpose or to grant either you or us the right to direct or supervise the daily affairs of the other. You agree to identify yourself conspicuously in all dealings with customers, suppliers, public officials, Restaurant personnel and others as the owner of the Restaurant under a franchise granted by us. You also agree to place such other notices of independent ownership on forms, business cards, stationery, advertising and other materials as we may require from time to time. You acknowledge that no agreement we make with any third party is for your benefit. Neither we nor you will interfere with each other's contractual relations. B. No Liability for Acts of Other Party You agree that you will not employ any of the Marks in signing any contract, check, legal obligation, application for any license or permit, or in a manner that may imply that we are responsible, or which may result in liability to us for, any of your indebtedness or obligations. You further agree not to use the Marks in any way not expressly authorized by this Agreement. Except as expressly authorized in writing, neither we nor you may make any express or implied agreements, warranties, guarantees or representations, or incur any debt in the name of or on behalf of the other, or represent that our relationship is other than franchisor and franchisee, and neither we nor you will be obligated by or have any liability under any agreement or representations made by the other that are not expressly authorized in writing. We will not be obligated for any damages to any person or property directly or indirectly arising out of the operation of the Restaurant or your business. C. Taxes You agree that except for taxes which we are required to collect from you in connection with items you purchase from us, we will have no liability for any sales, use, service, occupation, excise, gross receipts, income, property or other taxes, whether levied upon you, the Restaurant, your property, use or the royalty fees which you pay to us, in connection with the sales made or business conducted by you. Payment of all such taxes will be your responsibility. D. Indemnification You agree, during and after the term of the Agreement, to indemnify, defend and hold us, our affiliated entities, and their and our shareholders, directors, partners, officers, employees, agents, representatives, successors and assignees harmless against and reimburse the Indemnities for all claims, obligations and damages descried in Section 5B, any and all claims arising out of the use of the Marks in any manner not in accordance with this Agreement and all losses, liabilities, claims, taxes, demands, damages, causes of action, governmental inquiries and investigations, costs and expenses, including reasonable attorneys' and accountants' fees, consequently, directly and indirectly incurred, arising from, as a result of, or in connection with the operation of the Restaurant or any of your actions, errors, omissions, breaches or defaults under this Agreement or any acts or omissions alleged or proven to be a result of your negligence or willful misconduct. Except as provided above, Friendly's and you shall indemnify, defend and hold each other harmless from laims, demands and causes of action asserted against the indemnitee by any person for personal injury or death or for loss of or damage to property and resulting from the indemnitor's active or passive negligence or willful misconduct. Where such injury, death, loss or damage is the result of joint active or passive negligence or willful misconduct, the duty of indemnification shall be in proportion to the allocable share of the joint active or passive negligence or willful misconduct. For purposes of this indemnification, "claims" shall mean and include all obligations, actual and consequential damages, expenses, losses, costs and other liabilities reasonably incurred in the defense of any claim against the Indemnities, including without limitation reasonable accountants', attorneys' and expert witness fees, costs of investigation and proof of facts, court costs, other litigation expenses and travel, lodging and meal expenses incurred in litigation or preparation for litigation, whether or not litigation is filed. If the indemnities reasonably conclude that their interests are not being adequately represented by your counsel, the indemnities will have the right to employ their own attorneys to defend any claim against them in the manner they deem appropriate or desirable in their sole discretion, and the indemnification hereunder shall apply to and include the costs incurred in any such defense. The obligation to indemnify the indemnities will continue in full force and effect subsequent to and notwithstanding the expiration or termination of this Agreement. 6. CONFIDENTIAL INFORMATION We possess certain confidential and proprietary information and trade secrets consisting of, but not limited to, the following categories of information, methods, techniques, procedures and knowledge we have developed (collectively, the "Confidential Information"): (1)methods and procedures related to the development and operation of Friendly's Restaurants, whether contained in the Operations Manual or otherwise; (2)secret recipes of ice cream and other frozen desserts and related toppings, menu analysis and methods of preparation of Products and services offered in Friendly's Restaurants; (3)methods, procedures and techniques for preparing, packaging, marketing, selling and delivering Products and services offered in Friendly's Restaurants; (4)knowledge of test programs, concepts and results relating to the planning, development and testing of the System and Products and services offered in Friendly's Restaurants; (5)sources of purchase of food, beverages and other ingredients used by Friendly's Restaurants; (6) marketing programs and image; and (7)methods, techniques, specifications, procedures, information, systems and knowledge of and experience in the development, licensing and operation of Friendly's Restaurants. We will disclose the Confidential Information to you during training, in the Operations Manual and training manuals, and in guidance and assistance furnished to you during the term of this Agreement. You may also learn additional Confidential Information and trade secrets of ours during the term of this Agreement. You acknowledge and agree that you will not acquire any interest in the Confidential Information, other than the right to utilize it in the operation of the Restaurant, and that the use of the Confidential Information in any other business, or the disclosure of the Confidential Information to any other person or entity, would constitute an unfair method of competition with us and other Friendly's Restaurant licensees. We claim that the Confidential Information, which we have invested a substantial amount of money and time in developing, is a valuable asset of ours, includes trade secrets of ours, and will be disclosed to you solely on the condition that you agree, and you do hereby agree, that you: (1)will not use the Confidential Information in any other business or capacity; (2)will maintain the absolute secrecy and confidentiality of the Confidential Information during and after the term of this Agreement (except as authorized by this Agreement); (3)will not make unauthorized copies of any portion of the Confidential Information which is in written, audio, video or other reproducible form; and (4)will adopt and implement all reasonable procedures we prescribe from time to time to prevent unauthorized use or disclosure of the Confidential Information, including requiring your Restaurant Manages and other employees who have access to the Confidential Information to execute confidential agreements in the form we approve or prescribe prior to or during their employment. Furthermore, other than for consumption in the Restaurant or approved carry-out or retail sales programs, you agree not to sell or provide to any person or entity other than us or our designee, for use, testing or any other purpose, any mixes or formulations for preparation of Products you purchase from us or our designees. Notwithstanding anything to the contrary contained in this Agreement, the restrictions on your disclosure and use of Confidential Information will not apply to the following: (i) information, processes or techniques which are or become generally known in the restaurant industry, other than through disclosure (whether deliberate or inadvertent) by you; and (ii) disclosure of Confidential Information in judicial or administrative proceedings to the extent that you are legally compelled to disclose such information, provided that you have used your best reasonable efforts, and have afforded us the opportunity, to obtain an appropriate protective order or other assurance satisfactory to us of confidential treatment of the information required to be so disclosed. You will fully and promptly disclose to us, all ideas, concepts, formulas, recipes methods and techniques relating to the development and/or operation of the Restaurant, conceived or developed by you and/or your employees during the term of this Agreement. You acknowledge that such ideas, concepts, formulas, recipes, methods and techniques shall be our sole property, and you shall not be entitled to any compensation whatsoever for the same. 7. FEES A. Initial Franchise Fee The initial franchise fee for your first franchise and second franchise is thirty thousand dollars ($30,000.00) each and the franchise fee for any additional franchises is twenty-five thousand dollars ($25,000.00) (collectively referred to as the "Fee"). The Fee is paid as follows: Five thousand dollars ($5,000.00) upon submissions of an application for a franchise. If the application is approved, that portion of the Fee becomes non-refundable. If the application is withdrawn prior to a decision by Friendly's, or if the application is denied, the Fee (less Friendly's costs and expenses in processing the application) is refunded without interest. Twenty-five thousand dollars ($25,000.00) (or twenty thousand dollars ($20,000.00) in the case of the third or additional franchises) upon your execution of a Commitment Agreement ("Commitment Agreement"). B. Royalty Fee You agree to pay to us a royalty fee equal to four percent (4%) of the Gross Sales (as defined in Subsection C of this Section) of the Restaurant. The royalty fee shall be payable by electronic funds transfer not later than the 21st day after the end of each calendar month, based on Gross Sales for the prior month. Upon the installation of an upgraded processing system by Franchisee, we may require that the royalty fee be payable by electronic funds transfer not later than the 14th day after the end of each calendar month. In any event, no default may be declared for late payment of the royalty or marketing fees unless and until seven (7) days have elapsed from the date the payment was due. C. Definition of Gross Sales As used in this Agreement, the term "Gross Sales" shall mean gross sales of all food, beverage, other menu items, merchandise, and goods and other services sold or performed by or for you or the Restaurant, in, upon, or from the Premises, or through or by means of the business conducted at the Restaurant or the Premises, whether for cash or credit. Sales and service taxes collected from customers and paid to the appropriate taxing authority, all management or employee meals, and sale of cigars, cigarettes and newspapers as well as income from pay telephones shall not be included in Gross Sales. The discounted portion of menu prices whether by way of coupons, promotions or otherwise shall not be included in Gross Sales. D. Interest on Late Payments All royalty fees, Marketing Fund contributions (as described in Section 9 of this Agreement), amounts due for your purchases from us or our subsidiaries or affiliates, and other amounts which you owe to us or our subsidiaries or affiliates will bear interest beginning on the date due at the highest applicable legal rate for open account business credit, not to exceed one and one-half percent (1.5%) per month. This Section 7D does not constitute an agreement on our part to accept payments from you after the payments are due or our commitment to extend credit to, or otherwise finance your operation of, the Restaurant. Further, you acknowledge that your failure to pay all amounts when due may constitute grounds for termination of this Agreement, as provided in Section 14 of this Agreement, notwithstanding the provisions of this Section 7D. E. Application of Payments Notwithstanding your designation, we will have sole discretion to apply any of your payments to any of your past due indebtedness for initial or royalty fees, Marketing Fund contributions, purchases from us or our subsidiaries or affiliates, interest or any other outstanding indebtedness in such order and amounts as we may elect. The acceptance of a partial or late payment will not constitute a waiver of any of our rights or remedies contained in this Agreement. 8. RESTAURANT OPERATING STANDARDS A. Condition, Appearance and Operation Of the Restaurant You agree that : (1)neither the Restaurant nor the Premises will be used for any purpose other than the operation of a Friendly's Restaurant in compliance with this Agreement, unless and until restaurant operations are appropriately discontinued on the site (pursuant to this Agreement or the terms of a Development Agreement); (2)you will maintain the condition and appearance of the Restaurant, its equipment, furniture, furnishings, signs and the Premises in accordance with our specifications and standards as in effect from time to time and consistent with the image of a Friendly's Restaurant as an efficiently operated business offering high quality food service and observing the highest standards of cleanliness and sanitation; and will, upon our reasonable request, add or alter such equipment in the Restaurant so as to efficiently and hygienically prepare and serve any new menu items approved for sale throughout the Friendly's Restaurant system; (3)you will perform all periodic maintenance with respect to the decor, equipment, furniture, furnishings and signs of the Restaurant and thePremises that is required from time to time to maintain such condition, appearance and efficient operation, including, without limitation: (a)thorough cleaning, repainting and redecorating of the interior and exterior of the Premises at reasonable intervals; (b) interior and exterior repair of the Premises; and (c)repair or replacement of damaged, worn out or obsolete equipment, furniture, furnishings and signs. (4)you will not make any material alterations to the Premises, or to the appearance of the Restaurant as originally developed, except as required by applicable real estate codes, local authorities or landlords, without our prior written approval, which approval shall not be unreasonably withheld; (5)we have the right to require that you remodel, redecorate, re-equip, modernize and refurnish in a non-structural manner the Premises and the Restaurant not more than once in any five (5) year period and only after fifty percent (50%) of the Company-operated restaurants in the Friendly's Restaurant system have been so remodeled, redecorated, re-equipped or modernized, to reflect any changes in Friendly's Restaurants that we prescribe as our then-current standards and specifications. You understand that such remodeling, redecorating, re-equipping, modernization or refurnishing may require a substantial investment on your part and that we cannot make any guarantee of any particular return on that investment. We have the right to approve the layouts, designs, and new equipment, furniture and furnishings you use in any remodeling, redecorating and re-equipping, such approval not to be unreasonably withheld; and (6)you will place or display at the Premises (interior and exterior) only such signs, emblems, lettering, logos and display and advertising materials that we from time to time approve, such approval not to be unreasonably withheld. B. Restaurant Menu You agree that the Restaurant will offer for sale all food and beverage products and services that we from time to time require. You agree that the Restaurant will sell only products that we have approved. You agree that the Restaurant will not sell any Products to any person for resale to any third person. The Restaurant must not offer for sale or sell at the Premises or any other location any unapproved products, or use the Premises for any purpose other than the operation of the Restaurant. We have the right to approve the Restaurant's offering of Products or services on a test basis, which approval we may condition in any reasonable manner. We will have the right to stop the test at any time after its commencement, upon reasonable notice. C. Approved Products, Distributors and Suppliers The reputation and goodwill of Friendly's Restaurants is based upon, and can be maintained only by, the sale of distinctive, high quality food products and beverages and the presentation, packaging, service and delivery of such products in an efficient and appealing manner. We have developed various proprietary products which are prepared by or for us according to our proprietary and secret recipes and formulas. We have developed standards and specifications for food products, ingredients, seasonings, mixes, beverages, materials and supplies incorporated in or used in the preparation, cooking, serving, packaging and delivery of prepared food products authorized for sale at Friendly's Restaurants. We have and will periodically approve suppliers and distributors of the foregoing products that meet our standards and requirements, including, without limitation, standards and requirements relating to product quality, prices, consistency, reliability, financial capability, labor relations and customer relations. You agree that for use in the Restaurant you will: (1)purchase our proprietary ice cream, frozen yogurt and other frozen desserts and related toppings, muffin and other mixes and batters, and other products developed by us from time to time pursuant to secret recipes or formulas, only from us or a third party licensed by us to prepare and sell such products; and (2)purchase all other food products, ingredients, seasonings, mixes, beverages, materials and supplies used in the preparation of Products; menus, paper, glassware, china and plastic products; packaging or other materials, utensils and uniforms that meet our standards and specifications from suppliers we have approved. You must at all times maintain an inventory of approved food products, beverages, ingredients and other products sufficient in quantity and variety to realize the full potential of the Restaurant. We may approve a single distributor or other supplier for any Product and may approve a distributor or other supplier only as to certain of the Products. We may concentrate purchases with one (1) or more distributors or suppliers to obtain lower prices and/or the best advertising support and/or services for any group of Friendly's Restaurants we license and/or operate. Approval of a distributor or other supplier may be conditioned on requirements relating to the frequency and delivery, standards of service, including prompt attention to complaints or other criteria, and concentration of purchases, as set forth above, and may be temporary, pending our further evaluation of such distributor or other supplier. Notwithstanding the above, you have the right to request our approval of alternative suppliers or distributors and we will consider alternative suppliers and distributors. Our evaluation of prospective suppliers and/or distributors will be conditioned upon payment of our reasonable evaluation costs of their products and/or services. You agree to notify us and submit to us all information, specifications and samples that we request if you propose to purchase any food products, mixes, seasonings, beverages, menus, paper, glassware, china or plastic products, packaging, uniforms or other materials or utensils from a distributor or other supplier who has not been previously approved by us. We will notify you within a reasonable time whether you are authorized to purchase such products from such distributor or other supplier. We may, from time to time, conduct market research and testing to determine consumer trends and the marketability of new food products and services. You agree to cooperate and assist us by participating in our consumer surveys and market research programs, test marketing new food products and services in the Restaurant and providing us with timely reports and other relevant information regarding such customer surveys and market research. You may from time to time conduct your own market research and testing to determine consumer trends and the marketability in your Trade Area of new food products or services. Prior to undertaking such market research or testing, you agree to provide us with written notice no less than thirty (30) days prior to the commencement of such research or testing for our approval of such research or testing, which approval shall not be unreasonably withheld. D. Specifications, Standards and Procedures You acknowledge that the operation of the Restaurant in compliance with our high standards is important to us and all other Friendly's Restaurant licensees. You agree to cooperate with us by maintaining our high standards in the operation of the Restaurant. You further agree to comply with all mandatory specifications, standards and operating procedures relating to appearance, function, cleanliness, sanitation, safety, business hours, delivery services, new Products, purchasing or leasing new or different equipment for preparation and sale of new Products, compliance with the decor, format and image, including equipment, furniture, fixtures and signage, of a Friendly's Restaurant. Mandatory specifications, standards and operating procedures we prescribe from time to time in the Operations Manual, or otherwise communicate to you in writing, will constitute provisions of this Agreement as if fully set forth in this Agreement unless such provisions conflict with applicable laws or local ordinances. All references to this Agreement include all such mandatory specifications, standards and operating procedures. You agree that the Restaurant will conduct business in the ordinary course seven days a week (excluding holidays we specify if any) and 17 hours a day, except as we may otherwise authorize in writing. You acknowledge that approved restaurant hours may vary from one location to another depending on conditions in the market where the restaurant is located. E. Compliance with Laws and Good Business Practices You agree to secure and maintain in force in your name all required licenses, permits and certificates relating to the operation of the Restaurant. You further agree to operate the Restaurant in full compliance with all applicable laws, ordinances and regulations, including, without limitation, all government regulations relating to health and sanitation, workers' compensation insurance, unemployment insurance and withholding and payment of federal, state and local income taxes, social security taxes and sales taxes. All of your advertising must conform to applicable legal standards, be in good taste in our reasonable judgment and conform to the highest standards of ethical advertising. You agree that in all dealings with us, your customers, suppliers and public officials, you will adhere to the highest standards of honesty, integrity, fair dealing and ethical conduct. You agree to refrain from any business or advertising practice which may be injurious to our business or to the goodwill associated with the Marks and other Friendly's Restaurants. You agree to notify us, by telephone within seventy-two (72) hours followed within five (5) days by written notification, including copies of any pleadings or process received of: (i) the commencement of any action, suit or proceeding relative to the Restaurant; (ii) the issuance of any order, writ, injunction, award or decree of any court, agency or other governmental instrumentality which may adversely affect the operation or financial condition of the Restaurant; and (iii) any notice of violation of any law, ordinance or regulation relating to health or safety. You agree that you will not accept service of process for us and on our behalf. F. Management and Personnel of the Restaurant You agree that at all times you will (i) employ on terms reasonably satisfactory to us a General Manager who shall have principal operational responsibility for the Restaurant and who shall have such qualifications and experience as we shall reasonably require and who shall have completed our training program and (ii) employ on a full-time basis a Manager and an Assistant Manager, each of whom has completed our training program (collectively, the General Manager and Manager and Assistant Manager are referred to as "Restaurant Managers"). The Restaurant shall during all business hours be under the direct on-premises supervision of a Restaurant Manager. You agree to hire all employees to maintain a neat and clean appearance and to conform to the standards of dress and/or uniforms that we specify from time to time for Friendly's Restaurants. You shall not recruit or hire any of our employees or any employees of any Friendly's Restaurant operated by us or by a Friendly Restaurant licensee without obtaining our prior written permission or the prior written permission of the other licensee unless six months have expired since such employee's termination of employment with us or the licensee. G. Insurance During the term of the Franchise, you agree to comply with all insurance requirements related to the Restaurant's lease or mortgage and to maintain in force at all times, under policies of insurance issued by carriers we have approved: (1)employer's liability and workers' compensation insurance as prescribed by applicable law; (2)comprehensive general liability insurance (with products, completed operations and contractual liability and independent contractors and escalators coverage) and comprehensive motor vehicle liability insurance (for owned and non-owned vehicles) against claims for bodily and personal injury, death and property damage caused by or occurring in conjunction with the operation of the Restaurant (or otherwise in conjunction with your conduct of business pursuant to this Franchise) under one (1) or more policies of insurance, each on an occurrence basis, with single-limit coverage for personal and bodily injury, death and property damage of at least one million dollars ($1,000,000.00) (or such other amount as we may reasonably require), with no less than a five million dollar ($5,000,000.00) umbrella liability policy in force; (3)All-risk building and contents insurance including flood and earthquake, vandalism and theft insurance for the replacement value of the Restaurant and its contents; (4)business interruption insurance for a period adequate to reestablish normal business operations; and (5)builders' risk insurance on a completed value non-reporting basis during the period of any remodeling of the Restaurant. We may periodically increase the amounts of insurance you will be required to maintain, and we may require different or additional kinds of insurance at any time, including excess liability insurance, to reflect inflation, identification of new risks, changes in law or standards of liability, higher damage awards, or other relevant changes in circumstances. Each insurance policy must name us as an additional insured and must provide for thirty (30) days' prior written notice to us of any material modification, cancellation, termination or expiration of such policy. Prior to the expiration of the term of each insurance policy, you agree to furnish us with a certificate of insurance or with a certified copy of each renewal or replacement insurance policy you will maintain for the immediately following term and evidence of the payment of the premium for the insurance policy. If you fail or refuse to maintain required insurance coverage, or to furnish satisfactory evidence of required insurance coverage and payment of the premiums we, at our option and in addition to our other rights and remedies under this Agreement, may obtain the required insurance coverage on your behalf. You must cooperate fully with us in our effort to obtain such insurance policies, promptly execute all forms or instruments required to obtain or maintain such insurance and pay to us, on demand any costs and premiums we incur. Your obligations to maintain insurance coverage as described above will not be affected in any manner by reason of any separate insurance we maintain, nor will the maintenance of insurance relieve you of any obligation under Section 5 of this Agreement. 9. MARKETING A. By Company You agree that because of the value of advertising to the goodwill and public image of Friendly's Restaurants, we may maintain and administer a marketing fund (the "Marketing Fund") for the marketing program that we deem necessary or appropriate, in our sole discretion. You agree to contribute to the Marketing Fund three percent (3%) of Gross Sales of the Restaurant calculated in the same manner as, and payable monthly together with, the royalty fees due under this Agreement. You agree that we will direct all marketing programs financed by the Marketing Fund, and we will have sole discretion over the creative concepts, materials and endorsements used in the programs, and the geographic, market and media placement and allocation of the programs. You agree that the Marketing Fund may be used to pay the costs of preparing and producing video, audio and written advertising materials; administering multi-regional advertising programs, including, without limitation, purchasing direct mail and other media advertising, and employing advertising agencies to assist therewith; supporting public relations, market research, and menu development; and other advertising and marketing activities that we, in our sole discretion, deem appropriate. The Marketing Fund will be accounted for separately from our other funds and will not be used to defray any of our general operating expenses, except for such reasonable salaries, administrative costs and overhead as we may incur in activities reasonably related to the administration of the Marketing Fund and its marketing programs including, without limitations, conducting market research and menu development, preparing advertising and marketing materials, and collecting and accounting for contributions to the Marketing Fund (including, but not limited to, attorneys' and accountants' fees and other expenses of litigation). You agree that we may spend in any fiscal year an amount greater or less than the aggregate contribution of all Friendly's Restaurants to the Marketing Fund in that year and the Marketing Fund may borrow from us or from other lenders to cover deficits of the Marketing Fund or cause the Marketing Fund to invest any surplus for future use by the Marketing Fund. You authorize us to collect for the Marketing Fund any advertising or promotional monies or credits offered by any supplier based upon your purchases. All interest earned on monies contributed to the Marketing Fund will be used to pay the expenses of the Marketing Fund incurred in advertising and promotion, including the reasonable administrative expenses related thereto before other assets of the Marketing Fund are expended. We will prepare an annual statement of monies collected and costs incurred by the Marketing Fund within one hundred twenty (120) days after the end of our fiscal year and will furnish this statement to you upon your written request. We have the right to cause the Marketing Fund to be incorporated or operated through a separate entity at such time as we deem appropriate, and if we do so, that entity will have all of our rights and duties pursuant to this Section 9A. You understand and acknowledge that the Marketing Fund is intended to enhance recognition of the Marks and patronage of Friendly's Restaurants and Friendly's proprietary branded products. Although we will endeavor to utilize the Marketing Fund to develop advertising and marketing materials and programs, and to place advertising that will benefit all Friendly's Restaurants, we undertake no obligation to ensure that expenditures by the Marketing Fund in or affecting any geographic area are proportionate or equivalent to the contributions to the Marketing Fund by Friendly's Restaurants operating in that geographic area or that any Friendly's Restaurant will benefit directly or in proportion to the contributions to the Marketing Fund from the development of advertising and marketing materials or the placement of advertising. Except as expressly provided in this Section 9A, we assume no direct or indirect liability or obligation to you with respect to our maintenance, direction or administration of the Marketing Fund. You acknowledge that we have the right, and you hereby authorize us, to settle or otherwise compromise all disputes with regard to the Marketing Fund. B. By Franchisee Until such time as a Cooperative Marketing Fund is established and funded, you agree we may expend the marketing contribution less administrative expenses not to exceed one-half percent (1/2%) required in Section 9A in your DMA in accordance with marketing plans reviewed and approved by Friendly's. Samples of any advertising and promotional material we have not prepared or previously approved must be submitted to us for approval prior to your use. You may not use any advertising or promotional materials that we have not approved or which we have disapproved. You agree to cooperate in the development of a Cooperative Marketing Fund and to coordinate any local or DMA advertising with Friendly's. Local advertising programs approved by Friendly's will be paid for or credited against the three percent (3%) marketing expenditure required hereunder at the option of Friendly's. C. By Cooperative Unless your franchise is granted pursuant to a Development Agreement for an exclusive territory covering an entire DMA, Friendly's reserves the right to form and you agree to join a cooperative marketing fund organized on a regional basis. Each franchisee within the affected region may contribute up to two percent (2%) of its Gross Sales to the cooperative marketing fund in addition to the marketing and advertising expense obligations under Section 9A and 9B of this Agreement. Each company operated restaurant within the region of the cooperative marketing fund shall likewise be required to contribute to the cooperative fund on a per restaurant basis equal to the franchisee's percentage of the Gross Sales contribution. Each franchised and company operated restaurant contributing to the cooperative shall have one (1) vote per restaurant in determining how the cooperative will apply the funds of such cooperative. 10. REPORTS, FINANCIAL STATEMENTS AND FINANCIAL CONDITION Unless otherwise agreed to by us in writing, you agree to adopt the Company's financial and operational reporting chart of accounts format, as set forth in the Operations Manual or otherwise furnished to you, which may be amended from time to time. You also agree to maintain accurate books of account, governmental reports, register tapes, guest checks, daily reports and complete copies of all federal and state income tax returns, property and sales and use tax returns. Such records, reports and returns must be preserved for such periods of time as are reasonably specified by us from time to time in the Operations Manual or otherwise but not less than the minimum time prescribed by applicable law. With respect to the operation and financial condition of the Restaurant, you agree to furnish us, in the form we from time to time prescribe: (1)by the tenth (10th) day of each month for the preceding calendar month, a report of the Gross Sales of the Restaurant, other revenues generated at the Restaurant and other information which we may reasonably request that may be useful in connection with our marketing and other legitimate functions. This report must also include a statement computing amounts then due for royalty fees and Marketing Fund contributions and be certified by you or by your chief executive or financial officer; (2)by the twentieth (20th) day of each month for the preceding calendar month, a profit and loss statement for the Restaurant and be certified by you or by your chief executive or financial officer; (3)upon our request, such other data, information and supporting records for such periods as we from time to time reasonably require; and (4)within one hundred twenty (120) days after the end of your fiscal year, a fiscal year-end balance sheet, income statement and statement of changes in financial position (cash flow) of the Restaurant for such fiscal year, reflecting all year-end adjustments (audited if available) and a statement of annual Gross Sales certifying that your Gross Sales for the immediately preceding fiscal year have been calculated and reported in compliance with the terms of this Agreement, each of which shall be certified by you or by your chief executive or financial officer. If at any time you are delinquent in the payment of any amount owed to us or our affiliates, you agree: (1) upon our request, to furnish us income statements and balance sheets for such periods and as of such dates and all in such detail as we may request, for you and each entity affiliated with you, whether or not such entity conducts any business with the Restaurant, (2) that we may directly contact any lender, lessor, supplier or vendor for the purpose of obtaining information relating to the Restaurant and any lease or financial arrangements and you hereby authorize such persons to disclose all such information to us and, if you are an entity, you agree that we may contact any of your officers, directors, shareholders or partners for any purpose reasonably related to your undertakings contained in this Agreement and (3) to furnish, at our request, books of account, governmental reports, register tapes, guest checks, daily reports and complete copies of federal and state income tax returns, property and sales and use tax returns. 11. INSPECTIONS AND AUDITS A. Company's Rights to Inspect the Restaurant To determine whether you and the Restaurant are complying with this Agreement, and with specifications, standards and operating procedures we prescribe for the operation of Friendly's Restaurants, we or our agents will have the right, at any reasonable time, to: (1)inspect the Restaurant and the Premises; (2)observe and video tape the operations of the Restaurant for such consecutive or intermittent periods as we deem necessary; (3)remove, in reasonable quantities, samples of any food and beverage product, material or other products for testing and analysis; (4)interview personnel of the Restaurant; (5) interview customers of the Restaurant; and (6)inspect and copy any books, records and documents relating to the operation of the Restaurant. You agree to fully cooperate with us in connection with any such inspections, observations, video taping, product removal and interviews. You agree to present to your customers any evaluation forms we periodically prescribe and to participate and/or request your customers to participate in any surveys performed by us or on our behalf. B. Company's Right to Audit We have the right at any time during the business hours, and without prior notice to you, to inspect and audit, or cause to be inspected and audited, the business records of the Restaurant and the books and records and tax returns of any entity which holds the Franchise granted under this Agreement. You must fully cooperate with our representatives and any independent accountants that we hire to conduct any such inspection or audit. If any such inspection or audit discloses an understatement of the Gross Sales of the Restaurant, you agree to pay to us, within fifteen (15) days after receipt of the inspection or audit report, the royalty fees and Marketing Fund contributions due on the amount of such understatement, plus interest (at the rate and on the terms provided in Section 7D of this Agreement) from the date originally due until the date of payment. Further, in the event such inspection or audit is made necessary due to your failure to furnish us with reports, supporting records, other information or financial statements, as required by this Agreement, or to furnish such reports, records, information or financial statements on a timely basis, or if an understatement of Gross Sales for the period of any audit is determined by any such audit or inspection to be greater that two percent (2%), you agree to reimburse us promptly upon notice for the cost of the inspection or audit, including, without limitation, the charges of attorneys and independent accountants, and the reasonable travel, lodging and meal expenses and applicable per diem charges for our employees. The forgoing rights will be in addition to all other remedies and rights that we may have under this Agreement or under applicable law. 12. TRANSFER OF FRANCHISE A. By Company This Agreement is fully transferable by us and will inure to the benefit of any transferee or other legal successor to our interests in this Agreement. B. Franchisee May Not Transfer Without Approval of Company The rights and duties created by this Agreement are personal to you. We have granted the Franchise to you in reliance upon the individual and collective character, skill, aptitude, attitude, and business ability of the persons who will be engaged in the ownership and management of the Restaurant, your financial capacity and the representations and warranties made to us in the application and the Commitment Agreement, if applicable, and the representations, warranties and covenants contained in this Agreement. Accordingly, neither this Agreement nor the Franchise (or any interest therein), nor any part or all of the ownership of Franchisee (if an entity) or the Restaurant (or any interest therein), may be transferred, directly or indirectly, except by operation of legal merger with your corporate parent or other affiliate (subject to the successor merged entity having a net worth equal to the net worth of the Franchisee and corporate parent on the effective date hereof) without our prior written approval, and any attempted transfer without our prior written approval will constitute a breach of this Agreement and convey no rights to or interests in this Agreement or the Franchise. As used in this Agreement the term "transfer" means and includes the voluntary, involuntary, direct or indirect assignment, sale, gift, pledge, grant of security interest or other transfer by you of any interest in: (i) this Agreement or any related agreement between you and us; (ii) the Franchise; (iii) the Franchisee; (iv) the Restaurant or (v) the Premises. This Section 12B shall not apply to any interest in the Restaurant or the Premises conditionally transferred to any bona fide lender as collateral security for any loans to you or to any financing or refinancing structured as a sale-leaseback, provided that upon the sale of the Restaurant, it is simultaneously leased back pursuant to a Lease Agreement which is subject to our rights under this Agreement. C. Right of First Refusal If at any time during the term of this Agreement and for a period of one (1) year thereafter, any interest in this Agreement or the Franchise is proposed to be sold, the seller shall obtain a bona fide, executed, written offer from a responsible and fully disclosed purchaser and shall submit an exact copy of such offer to us along with any other information that we may reasonably request to evaluate the offer and the identity of the proposed purchaser shall be disclosed to us. We shall have the right, exercisable by written notice delivered to you within thirty (30) days after the date of delivery of an exact copy of such offer and all requested information to us, to purchase such interest for the price and on the terms and conditions contained in such offer. Regardless of the terms of the offer, we may, in our discretion, structure the transaction as an asset purchase, rather than a stock purchase and to substitute cash for securities or other property as consideration. If less than the entire interest in this Agreement or the Franchise is proposed to be sold, we shall have the right to purchase the entire interest for a price equal to the proposed price plus a pro-rata increase based on the value of the interest to be purchased. Our credit shall be deemed equal to the credit of any proposed purchaser and we shall have not less than ninety (90) days to prepare for closing. We shall be entitled to all representations and warranties given by the seller to the proposed buyer. We shall not be obligated to pay any finder's or broker's fee or commission. If we do not exercise our right of first refusal, the sale or other transfer may be completed pursuant to and on the terms of such offer, subject to our approval of the transfer as otherwise provided in this Agreement; provided, however, that if the proposed sale or other transfer is not completed within one hundred eighty (180) days after delivery of such offer to us, or if there is any change in the terms of the proposed transaction, we shall have an additional right of first refusal for an additional thirty (30) days. Our right of first refusal shall not apply to the sale or transfer of an interest in this Agreement or the Franchise, to a member of Franchisee's immediate family or, if Franchisee is an entity, between or among the owners of Franchisee or their affiliates provided that such transfer is otherwise permissible under this Agreement. D. Conditions for Approval of Transfer The proposed transferee and its owners (if the proposed transferee is an entity) must meet our then applicable standards for Friendly's Restaurant licensees. In addition, if the transfer is one of a series of transfers which in the aggregate constitute the transfer of the Franchise, all of the following conditions must also be met prior to, or concurrently with, the effective date of the transfer: (1)the transferee must have sufficient business experience, aptitude and financial resources to operate the Restaurant; (2)prior to the effective date of the transfer, you or the transferee must pay all royalty fees, Marketing Fund contributions and all other amounts owed to us or our subsidiaries and affiliates, which are then due and unpaid, and cure all defaults under this Agreement or any other agreement between you and us to our satisfaction (or make provision for their cure satisfactory to us); (3)the transferee and its management personnel must have completed our training program to our satisfaction; (4)the transferee must apply for a new license agreement in accordance with our then current standards for a term equal to the remaining term of this Agreement or for a full term. If the application is approved, we and the transferee will enter into a commitment agreement to govern the operation of the Restaurant until commencement of the new license agreement, provided that the transferee upgrades and modernizes the Restaurant to our then-current standards and meets the other requirements of the commitment agreement; (5)you or the transferee must pay us the then current transfer fee to defray expenses incurred by us in connection with the transfer; (6)you, and if you are an entity (and have signed the Entity Addendum (the "Entity Addendum")), your owners, officers and directors must execute a general release, in a form satisfactory to us, of any and all existing claims against us, our subsidiaries and affiliates, and our and their officers, directors, partners, employees and agents; (7)we must approve the material terms and conditions of such transfer, including, without limitation, our determination that the price and terms of payment are not so burdensome as to adversely affect the subsequent operation or financial results of the Restaurant; (8)you and any guarantors must execute a non-competition covenant in favor of us and the transferee, containing the terms contained in Section 16A; (9)the lessor and lender, if any, of the Premises must give you its or their advance written consent to the transfer of the Premises, if required, and you must provide us with a copy of such consent; and (10)you and any guarantors must guarantee the transferee's financial obligations to us in its commitment agreement and license agreement for two years from the date of transfer. If the proposed transfer is to or among owners of you, subsection (5) of the above requirements shall not apply. E. Transfer to a Wholly-owned Entity If you are in full compliance with this Agreement, we will not unreasonably withhold our approval of a transfer to an entity which conducts no business other than the Restaurant (or other Friendly's Restaurants), which is actually managed by you and in which you maintain management control and own and control one hundred percent (100%) of the equity and voting power of all issued and outstanding securities, provided that you (i) guarantee, in accordance with our then current form, the performance of such transferee's obligations under this Agreement, and (ii) execute our current form of Entity Addendum. Transfers of interests in such entity will be subject to the other provisions of this Section 12. F. Effect of Consent to Transfer Our consent to a transfer of this Agreement, the Franchise, the Restaurant or an interest in you will not constitute a waiver of any claims we may have against you (or your owners if you are an entity), nor shall it be deemed a waiver of our right to demand exact compliance with any of the terms or conditions of this Agreement by the transferee. 13. CONDEMNATION AND CASUALTY You must give us immediate notice in writing of any proposed taking of the Restaurant or the Premises by eminent domain. If we agree that the Restaurant or the Premises (or substantial parts thereof) will be taken, we will give due and prompt consideration to transferring the License to a nearby location which you select within two (2) months of the taking. If we approve the location and authorize the transfer, and if you open a new restaurant at such location in accordance with our specifications within eighteen (18) months if the new restaurant does not have a drive-thru, or if the new restaurant does have a drive-thru, within two (2) years of the closing of the Restaurant, the new restaurant will henceforth be deemed to be the Restaurant under this Agreement. If a condemnation takes place and the new restaurant does not, for whatever reason, become the Restaurant under this Agreement in strict accordance with this Section 13 (or if it is reasonably evident that such will be the case), the Franchise and this Agreement will terminate as provided for in Section 14. If the Restaurant is damaged by fire or other casualty, you will expeditiously repair the damage. If the damage or repair requires closing the Restaurant, you will immediately notify us, will repair or rebuild the Restaurant in accordance with our standards, will commence reconstruction within four (4) months after closing, and will reopen the Restaurant for continuous business operations as soon as practicable but in no event later than twelve (12) months after closing of the Restaurant, giving us ample advance written notice of the date of reopening. If the Restaurant is not reopened in accordance with this Section 13, the Franchise and this Agreement will terminate as prescribed in Section 14. Nothing in this Section 13 will extend the term of this Agreement but you will not be required to pay us any royalty fee or Marketing Fund contribution payments for periods during which the Restaurant is closed by reason of condemnation or casualty. 14. TERMINATION OF THE FRANCHISE A. Unless cured to our satisfaction, this Agreement shall terminate 30 days from the date notice is given to you in accordance with Section 19, if you or any guarantor: (1)fail to report accurately the Gross Sales of the Restaurant or fail to make payments of any amounts due to us for royalty fees, Marketing Fund contributions, or any other amounts due to us, our affiliates or our subsidiaries; (2)fail to comply with any other provision of this Agreement or any mandatory specification, standard or operating procedure we prescribe, unless such failure cannot reasonably be corrected within such thirty (30) day period and you undertake within ten (10) days after such written notice is delivered to you, and continue, efforts to bring the Restaurant and the Premises into full compliance, and furnish proof acceptable to us of such efforts and the date by which full compliance will be achieved; (3)you or any person controlling you, controlled by you, or under common control with you is in default of any other agreement with us (for purposes of this clause control means the ownership by a person or entity, directly or indirectly, of ten percent (10%) or more of another person or entity or the power to affect the policies of another person or entity); (4)in our good faith reasonable judgment, fail to use your reasonable efforts employ on a full time basis qualified Restaurant Managers with qualifications and experience acceptable to us. (5)if you violate the Continuous Operation covenant set forth in Section 1B(3) of this Agreement, or there are three (3) or more breaches of any duration during any twelve-month period. B. Unless we have notified you in writing to the contrary after discovering the relevant facts, this Agreement will terminate automatically and immediately without further action by us or notice to you, if you: (1)become insolvent or are unable to pay your or their debts as they mature or make an assignment for the benefit of creditors or an admission of inability to pay obligations as they become due or file a voluntary petition in bankruptcy or any pleading seeking any reorganization, liquidation, dissolution or composition or other settlement with creditors under any law, or admit or fail to contest the material allegations of any such pleading filed against you, or are adjudicated a bankrupt or insolvent or a receiver or other custodian is appointed for a substantial part of your assets or the Restaurant or a final judgment remains unsatisfied or of record for ninety (90) days or longer (unless a supersedeas bond is filed), or if execution is levied against any substantial part of your assets or a tax levy is made, or suit to foreclose any lien or mortgage against you or the Restaurant is instituted and is not dismissed within ninety (90) days, or if a substantial part of your real or personal property is sold after levy of judgment thereupon by any sheriff, marshal or constable, or the claims of your creditors are abated or subject to a moratorium under any law; (2)except as provided in Section 13, discontinue operating the Restaurant as a Friendly's Restaurant, or abandon, surrender or transfer control of the Restaurant without our prior approval; (3)have made any material misrepresentation or omission in the application for the Franchise or in the Commitment Agreement or in this Agreement or in any other material submitted to us on which we have relied in determining whether to grant you the Franchise. (4)are, or are discovered to have been, convicted of or plead no contest to a felony, or other crime or offense that is likely to have a material adverse effect on your reputation or the reputation of the Company, the System, or the Restaurant; (5)make or attempt to make an unauthorized transfer in violation of Section 12; (6)make any unauthorized use or disclosure of any Confidential Information or any portion of the Operations Manual; (7)lose the right to possession of the Premises or a substantial part thereof, whether or not due to your fault, except as otherwise provided in Section 13 of this Agreement regarding condemnation and casualty; (8)take action toward dissolving or liquidating the entity owning the Franchise, or any such action is taken against you, without providing us advance written notice or complying with Section 12 of this Agreement; (9)deny our representatives the right to enter and inspect the Restaurant or to examine or audit its books and records pursuant to Section 11B of this Agreement; (10)make any unauthorized use of the Marks or contest in any court or proceeding our ownership of the Marks or the System or any part thereof; (11)fail on three (3) or more separate occasions, for which notices of default were given, within any period of twelve (12) consecutive months to comply with this Agreement whether or not such failures to comply are corrected after notice of default is given, or fail on two (2) or more separate occasions, for which notices of default were given, within any period of twelve (12) consecutive months to comply with the same obligation under this Agreement whether or not such failures to comply are corrected after notice of default is given; (12)you breach a material obligation, representation or warranty contained in this Agreement and such breach by its nature cannot be cured; or (13)have made any material misrepresentation to us regarding your organizational or financial structure of financial condition. In any judicial proceeding in which the validity of termination is at issue, we will not be limited to relying on the reasons for termination which are set forth in any notice sent to you in accordance with this Section 14. C. You may terminate this Agreement at any time by giving us at least twelve (12) but not more than fifteen (15) months written notice. D. Our rights to terminate this Agreement are in addition to all rights or remedies available at law or in equity in case of any breach, failure or default, or threatened breach, failure or default, all of which rights and remedies shall be cumulative and not alternative. 15. DAMAGES Except as otherwise provided in this Agreement, if this Agreement and the Franchise granted hereby terminate under any of the provisions of Section 14 of this Agreement, you agree to promptly pay us (as liquidated damages for the loss of the benefit bargained for in this Agreement due to premature termination only, and not as a penalty or as damages for breaching this Agreement or in lieu of any other payment) a lump sum equal to the royalty fees and Marketing Fund contributions payable to us during the thirty-six (36) calendar months immediately preceding the termination. In the event the Restaurant shall not have been open for thirty-six (36) months prior to termination, the monthly average of such payments during such shorter period shall be multiplied by thirty-six (36) for purposes of this section. In the event there are fewer than thirty-six (36) months remaining in the term hereof, the amount that you agree to pay shall be equal to the number of months remaining in the term of this Agreement multiplied by the average monthly royalty fees and Marketing Fund contributions payable to us during the thirty-six (36) months immediately preceding termination. In no event shall the damages for the termination of this Agreement, if any, exceed the greater of the liquidated damages set forth above or the actual damages proven by Friendly's. If we are unable to determine the amount payable to us by you by reason of your failure to submit some or all of your Gross Sales reports as required pursuant to Section 10 of this Agreement, you agree that we may estimate the Gross Sales of your Restaurant for the applicable periods described above for the purpose of computing the amount payable to us by you under this Section 15. 16.COVENANT NOT TO COMPETE; RIGHTS AND OBLIGATIONS OF COMPANY AND LICENSE UPON TERMINATION OR EXPIRATION OF THE LICENSE A. Covenant Not to Compete You acknowledge and agree that we have invested a substantial amount of time and money in developing the System, the Marks, and the Confidential Information and that we would be unable to protect our System, the Marks, Confidential Information and trade secrets against unauthorized use or disclosure and would be unable to encourage a free exchange of ideas and information among us or our licensees if prospective licensees or licensees were permitted to hold interests in or perform services for any competing business and that the following restrictions are reasonably required in order to protect our information, marketing strategies, operating policies and other elements of the System from unauthorized appropriation. Therefore, you agree that during the term of this Agreement, you will not have any direct or indirect or beneficial interest or perform services as an officer, director, manager, employee or consultant or otherwise for or in any business which owns, operates, licenses, franchises or develops any restaurant concept which both (i) has sit down, table service, and (ii) is a mid-scale priced, family style restaurant, coffee shop or ice cream/frozen yogurt shoppe (as defined by CREST operators list as of June 1, 1997) including but not limited to Denny's Shoney's Big Boy, Country Kitchen, Bob Evans, Cracker Barrel, IHOP, Village Inn, Waffle House, Dairy Queen, Swensen's, Carvel, Baskin Robbins, TCBY or similar. Notwithstanding the above, a restaurant concept which is a mid-scale priced family style restaurant will be deemed competitive if frozen deserts comprise five percent (5%) or more of the sales mix as measured on any six (6) month basis. You further agree that for a period of two (2) years after the termination or expiration of this Agreement, you and all of such persons will be subject to the same restriction on competing activities within the trade area (the "Trade Area") of the Restaurant or within the trade area (as reasonably determined by us) of any Friendly's Restaurant operated currently by us or any other licensee of ours, but in no event within a radius of three (3) miles from any such restaurant. You and all of such persons also agree during such periods of time not to offer to employ or employ any person who is then employed by us, our affiliates or any other licensee. You acknowledge and agree that the Trade Area is an area equal to a three (3) mile radius with its epicenter at the Restaurant. You acknowledge that the determination of the Trade Area is based on many factors, some of which are subjective, and that the Trade Area as described in this Agreement is reasonable under the circumstances. The restrictions of this Section shall not be applicable to the ownership of a Friendly's Restaurant operated pursuant to a License Agreement with us, to the ownership of shares of a class of securities listed on a stock exchange or traded on the over-the-counter market that represent five percent (5%) or less of the number of shares of that class of securities issued and outstanding, or to the ownership or operation of any restaurant franchised by Wendy's International to your corporate parent or affiliate. You further acknowledge that this Agreement does not confer any rights of exclusivity on you with respect to your operation of a Friendly's Restaurant within the Trade Area and will not prevent us from placing another Friendly's Restaurant or other food service establishment within the Trade Area. B. Payment of Amounts Owed to Company You must pay to us within fifteen (15) days after the effective date of termination or expiration of this Agreement, or such later date that the amounts due to us are determined, all royalty fees, Marketing Fund contributions, amounts owed for your purchases from us or our subsidiaries and affiliates, predecessors, successors and assigns, interest due on any of the foregoing, and all other amounts owed to us or our subsidiaries and affiliates under this Agreement or otherwise. C. Marks and System You agree that immediately after the termination or expiration of this Agreement, you will: (1)not directly or indirectly at any time or in any manner identify yourself or any business as a current or former Friendly's Restaurant, or as a franchisee or licensee of, or as otherwise associated with us, or use any Mark or any colorable imitation thereof in any manner or for any purpose, or utilize for any purpose any trade name, trade or service mark or other commercial symbol that suggests or indicates a connection or association with us; (2)remove from the Premises, discontinue using for any purpose and return to us (or with our consent, destroy) any and all signs, menus, fixtures, furniture, furnishings, equipment, advertising, materials, stationary supplies, forms or other articles that display or contain any Mark or that otherwise identify or relate to a Friendly's Restaurant; (3)remove all Marks that are affixed to uniforms and/or, at our direction, cease to use all uniforms that have been used in the Restaurant; (4)take such action as may be required to cancel all fictitious or assumed name or equivalent registrations relating to your use of any Mark; (5)change the telephone number of the Restaurant and instruct all telephone directory publishers to modify all telephone directory listings of the Restaurant associated with any Marks when the directories are next published; (6)take such action to alter the physical interior and exterior decor of the Restaurant as will effectively de-identify and distinguish the Premises from the System; and (7)furnish to us, within thirty (30) days after the effective date of termination or expiration, evidence satisfactory to us of your compliance with the foregoing obligations. In the event that you fail to take such actions as required above to our satisfaction within the thirty (30) days to termination or expiration of this Agreement, you grant us the right to enter the Premises to remove all items bearing the Marks and take such actions as we deem necessary to de-identify the Restaurant from the System without committing any trespass or incurring any liability for such actions. You acknowledge and agree that you will be responsible for all costs and expenses that we incur in taking such actions. D. Confidential Information You agree that upon termination or expiration of this Agreement, you will immediately cease to use in any business or otherwise any of our Confidential Information disclosed to, or otherwise learned or acquired by you, and that you will return to us all copies of the Operations Manual and all other Confidential Information which we have loaned or made available to you or which is otherwise in your possession. You must also provide us with any and all supplies of our proprietary frozen desserts and toppings for which you will be compensated at the lower of their costs or market value. E. Continuing Obligations All obligations of the Company and Licensee which expressly or by their nature survive the expiration or termination of this Agreement shall continue in full force and effect subsequent to and notwithstanding its expiration or termination and until they are satisfied in full or by their nature expire. 17. RENEWAL OF FRANCHISE You understand that you have the conditional right to renew this Agreement one time to operate the Restaurant in the System for twenty (20) years beyond the expiration date provided for in this Agreement. However, if you desire to obtain a new license upon the expiration of this Agreement, you must apply to us for a new license agreement at least ninety (90) days, but not more than twelve (12) months, before expiration of the term of this Agreement. Upon payment of a renewal fee, which will not exceed our then standard initial license fee, we will process your application in good faith and in accordance with our procedures, criteria and requirements regarding upgrading of facilities, credit, market feasibility and related criteria then being applied by us in issuing new licenses to use the System. If you fulfill our upgrading and other then-current requirements, we will grant you a new license in the form of agreement then in use by us. If you are granted a new license, you (and if you are an entity, your owners) will be required to execute a general release, in a form satisfactory to us, of any and all claims against us and our subsidiaries, affiliates, partners, agents, employees, representatives and servants, including claims arising under this Agreement and federal, state and local laws, rules and regulations. If you are not granted a new license, we will return the renewal fee less expenses incurred in processing your application. During the pendency of your application for the issuance of a new license, royalty fees and Marketing Fund contributions will be paid at the rate specified in this Agreement. Upon issuance of the new license agreement, fees must be paid at the rates specified in the new license agreement, which may be greater than the rates specified in this Agreement. 18. ENFORCEMENT A. Severability and Substitution of Valid Provisions Except as expressly provided to the contrary, each section, paragraph, term and provision of this Agreement, and any portion thereof, shall be considered severable and if, for any reason, any such provision of this Agreement is held to be invalid, contrary to, or in conflict with any applicable present or future law or regulation in a final, unappealable ruling issued by any court, agency or tribunal with competent jurisdiction in a proceeding to which we are a party, that ruling shall not impair the operation of, or have any other effect upon, such other portions of this Agreement as may remain otherwise enforceable, all of which shall continue to be given full force and effect and bind the parties to this Agreement, although any portion held to be invalid shall be deemed not to be a part of this Agreement from the date the time for appeal expires, if you are a party thereto, or otherwise upon your receipt of a notice of non-enforcement thereof from us. To the extent that any provision of Section 12D(8) or Section 16A is deemed unenforceable by virtue of its scope in terms of area, business activity prohibited and/or length of time, but could be made enforceable by reducing any or all thereof, you and we agree that such provisions shall be enforced to the fullest extent permissible under the laws and public policies applied in the jurisdiction in which enforcement is sought. If any applicable and binding law or rule of any jurisdiction requires a greater prior notice of the termination of or refusal to renew this Agreement, than is required in this Agreement, or if under any applicable and binding law or rule of any jurisdiction, any provision of this Agreement or any specification, standard or operating procedure we prescribe is invalid or unenforceable, the prior notice and/or other action required by such law or rule shall be substituted for the comparable provisions of this Agreement, and we will have the right, in our sole discretion, to modify such invalid or unenforceable provision, specification, standard or operating procedure to the extent required to be valid and enforceable. You agree to be bound by any promise or covenant imposing the maximum duty permitted by law which is contained within the terms of any provision of this Agreement, as though it were separately articulated in and made a part of this Agreement, that may result from striking from any of the provisions of this Agreement, or any specification, standard or operating procedure that we prescribe, any portion or portions which a court may hold to be unenforceable in a final decision to which we are a party, or from reducing the scope of any promise or covenant to the extent required to comply with such a court order. Such modifications to this Agreement shall be effective only in such jurisdiction, unless we elect to give them greater applicability, and shall be enforced as originally made and entered into in all other jurisdictions. B. Waiver of Obligations You and we may by written instrument unilaterally waive or reduce any obligation of or restriction upon the other under this Agreement, effective upon delivery of written notice thereof to the other or such other effective date stated in the notice of waiver. Any waiver granted by us shall be without prejudice to any other rights we may have, will be subject to continuing review by us, and may be revoked, in the good faith exercise of our sole discretion, at any time and for any reason, effective upon delivery to you of ten (10) days' prior written notice. You and we shall not be deemed to have waived or impaired any right, power or option reserved by this Agreement (including, without limitation, the right to demand strict compliance with every term, condition, and covenant herein, or to declare any breach thereof to be default and to terminate the License prior to the expiration of its term), by virtue of any custom or practice of the parties at variance with the terms hereof; any failure, refusal, or neglect by you or us to exercise any right under this Agreement or to insist upon exact compliance by the other with its obligations hereunder, including, without limitation, any mandatory specification, standard, or operating procedure; any waiver, forbearance, delay, failure, or omission by us to exercise any right, power, or option, whether of the same, similar or different nature, with respect to any other Friendly's Restaurant; or the acceptance by us of any payments from you after any breach by you of this Agreement. C. Force Majeure Neither you nor we shall be liable for loss or damage or deemed to be in breach of this Agreement if a failure to perform particular obligations results from: (i) transportation shortages, inadequate supply or unavailability from the manufacturers or suppliers of equipment, merchandise, supplies, labor, material, or energy, or the voluntary surrender of the right to acquire or use any of the foregoing in order to accommodate or comply with the orders, requests, regulations, recommendations, or instructions or any federal, state or municipal government or any department or agency thereof; (ii) compliance with any law, ruling, order, regulation, requirement or instruction of any federal, state or municipal government or any department or agency thereof; (iii) acts of God; (iv) fire, strikes, embargos, war or riot; or (v) any other similar event or cause. Any delay resulting from any of such causes shall extend the time for performance or excuse performance, in whole or in party, as may be reasonable, except that such causes shall not excuse payments of amounts owed at the time of such occurrence or payment of any amounts due thereafter. D. Injunctive Relief You agree that we will have the right to preliminary injunctive relief to restrain any conduct by you in the development or operation of the Restaurant that could materially damage the goodwill associated with the System, the Marks and Friendly's Restaurants. You further agree that we will not be required to post a bond to obtain injunctive relief. E. Rights of Parties Are Cumulative Your and our rights under this Agreement are cumulative and no exercise or enforcement by you or us of any right or remedy hereunder shall preclude the exercise or enforcement by you or either of us of any right or remedy hereunder or which you or we are entitled by law to enforce. F. Costs and Attorneys' Fees In any proceeding by either party to enforce or interpret any provision of this Agreement, or appeal thereof, the party prevailing in such proceeding shall be entitled to reimbursement of its costs and expenses, including but not limited to, reasonable accounting and attorneys' fees. Attorneys' fees shall include, without limitation, reasonable legal and expert witness fees, cost of investigation and proof of facts, court costs, other litigation expenses and travel and living expenses, whether incurred prior to or in preparation for or in contemplation of the filing of any written demand or claim, action, hearing or proceeding. In any such proceeding involving more than one (1) allegation, issue or provision of this Agreement under circumstances where neither party prevails on all allegations or issues, the presiding court or other body may apportion costs and expenses between the parties. G. Governing Law EXCEPT TO THE EXTENT GOVERNED BY THE UNITED STATES TRADEMARK ACT OF 1946 OR OTHER FEDERAL LAW, THIS AGREEMENT AND THE LICENSE SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO CONFLICT OF LAWS RULES. H. Waiver of Punitive/Exemplary Damages: Limitations of Actions THE PARTIES HEREBY WAIVE TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT OR CLAIM TO ANY PUNITIVE OR EXEMPLARY DAMAGES AGAINST THE OTHER AND AGREE THAT IN THE EVENT OF A DISPUTE BETWEEN THEM EACH SHALL BE LIMITED TO THE RECOVERY OF ANY ACTUAL DAMAGES SUSTAINED. ANY AND ALL CLAIMS, EXCEPT CLAIMS FOR MONIES DUE US OR OUR AFFILIATES, ARISING FROM OR RELATING TO THIS AGREEMENT OR THE RELATIONSHIP AMONG THE PARTIES SHALL BE BARRED UNLESS AN ACTION OR LEGAL PROCEEDING IS COMMENCED WITHIN ONE (1) YEAR FROM THE DATE THE CLAIMANT KNEW OR SHOULD HAVE KNOWN OF THE FACTS GIVING RISE TO SUCH CLAIMS. I. Venue and Jurisdiction YOU AGREE THAT WE MAY INSTITUTE ANY ACTION AGAINST YOU TO ENFORCE THE PROVISIONS OF THIS AGREEMENT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF DELAWARE AND YOU IRREVOCABLY SUBMIT TO THE JURISDICTION AND VENUE OF SUCH COURTS AND WAIVE ANY OBJECTION YOU MAY HAVE TO EITHER THE JURISDICTION OR VENUE OF SUCH COURTS. YOU AGREE THAT ANY ACTION BROUGHT BY YOU TO ENFORCE ANY PROVISION OF THIS AGREEMENT WILL BE BROUGHT AND MAINTAINED ONLY IN A STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF DELAWARE. J. Waiver of Jury Trial THE PARTIES HEREBY IRREVOCABLY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM, WHETHER AT LAW OR IN EQUITY, BROUGHT BY EITHER OF THEM. K. Binding Effect This Agreement is binding upon the parties hereto and their respective executors, administrators, heirs, assigns and successors in interest, and shall not be modified except by written agreement signed by both you and us. L. Interpretation The preambles and exhibits are a part of this Agreement, which together with the Commitment Agreement and the Development Agreement, if any, constitutes the entire agreement of the parties, and there are no other oral or written understandings or agreements between the Company and the Franchisee relating to the subject matter of this Agreement except for the Commitment Agreement, certain portions of which survive the execution and delivery of this Agreement. In the event of a conflict between this Agreement and the Commitment Agreement (if applicable), the provisions of this Agreement shall control. In the event of a conflict between this Agreement and the Purchase and Sale Agreement or the Development Agreement, the provisions of the Purchase and Sale Agreement shall first control the interpretation, with the Development Agreement also superseding this Agreement. This Agreement may be modified only by a writing signed by both you and us. Nothing in this Agreement is intended, nor shall be deemed, to confer any rights or remedies upon any person or legal entity not a party hereto. Except where this Agreement expressly obligates the Company to reasonably approve or not unreasonably withhold its approval of any action or request of the Franchisee, the Company has the absolute right to refuse any request by the Franchisee or to withhold its approval of any action or omission by the Franchisee. The headings of the several sections and paragraphs hereof are for convenience only and do not define, limit or construe the contents of such sections or paragraphs. The term "attorneys' fees" shall include, without limitation, reasonable legal fees, whether incurred prior to, in preparation for or in contemplation of the filing of any written demand or claim, action, hearing or proceeding, including appellate proceedings, to enforce the obligations of this Agreement. The term "family member" as used herein refers to parents, spouses, offspring and siblings, and the spouses of parents and siblings. The term "affiliate" as used herein means any person or entity that directly or indirectly owns or controls, or is owned or controlled by, or is under common ownership or control with, another person or entity. References to a "controlling interest" in the Franchisee means fifty-one (51%) or such lesser percentage that may have the power to control the management and affairs of the Restaurant or the Licensee. The term "Franchisee" as used herein is applicable to one (1) or more persons, a corporation or a partnership or other entity, as the case may be, and the singular usage includes the plural and the masculine and neuter usages include the other and the feminine. If two or more persons are at any time the Franchisee hereunder, whether or not as partners or joint venturers, their obligations and liabilities to the Company shall be joint and several. This Agreement may be executed in counterparts, each of which shall be deemed an original. M. Time Time is of the essence of this Agreement 19. NOTICES AND PAYMENTS All written notices and reports permitted or required to be delivered hereunder shall be deemed so delivered at the time delivered by hand, the day of transmission by facsimile or other electronic system, one (1) business day after being placed in the hands of a commercial courier service for overnight delivery, or three (3) business days after placement in the United States Mail by Registered or Certified Mail, Return Receipt Requested, postage prepaid and addressed to the party to be notified at its most current principal business address of which the notifying party has been notified. All payments and reports required by this Agreement shall be directed to the Company at the address notified to the Franchisee from time to time, or to such other persons and places as the Company may direct from time to time. Any required payment or report not actually received by the Company during regular business hours on the date due (or postmarked by postal authorities at least two (2) days prior thereto) shall be deemed delinquent. 20. ACKNOWLEDGEMENTS Contemporaneously with the execution of this Agreement, you have carefully reviewed and executed the Disclosure Acknowledgement Statement attached and incorporated into this Agreement as Exhibit A. You acknowledge that, due to the length of time we have been granting licenses to operate Friendly's Restaurants or other food service concepts using the Marks, there is more than one form of license agreement in effect between us and our various licensees and that such agreements contain provisions that may be materially different from the provisions contained in this Agreement and that you are not entitled to rely on any provision of any other such agreement, whether to establish course of dealing, waiver, estoppel or for any other purpose. IN WITNESS WHEREOF the parties hereto have executed and delivered this Agreement as of the Agreement Date. FRIENDLY'S RESTAURANTS FRANCHISEE: FRANCHISE, INC. By:____________________ By: Its:____________________ Its: EX-10.8 9 EXHIBIT 10.8 Exhibit 10.8 MANAGEMENT AGREEMENT BETWEEN FRIENDLY ICE CREAM CORPORATION 1855 Boston Road Wilbraham, Massachusetts 01095 AND FRIENDCO RESTAURANTS, INC. 1657 Crofton Boulevard Crofton, Maryland 21114 DATED July_____, 1997 TABLE OF CONTENTS Section Page ------- ----- 1. Defined Terms 1 2. Scope 4 3. Term 4 4. Authority to Act 5 5. Compensation 5 6. Restaurant Capital Requirements 6 7. Non-Solicitation 6 8. Termination 7 9. Indemnification 8 10. Breach; Notice and Right to Cure 9 11. Reporting of Sales 9 12. Assignment 9 13. Conflict of Interest 10 14. Choice of Law; Arbitration of Disputes 10 15. Insurance 10 16. Notices 11 17. General Provisions 12 EXHIBITS: Exhibit A: List of Managed Restaurants Exhibit B: Arbitration Program MANAGEMENT AGREEMENT This Management Agreement is made and dated this _____day of_____, 1997, by and between Friendly Ice Cream Corporation, a Massachusetts Corporation with its principal location at 1855 Boston Road, Wilbraham, Massachusetts, 01095 (hereinafter "FICC"), and FriendCo Restaurants, Inc., a Maryland Corporation with its principal location at 1657 Crofton Boulevard, Crofton, Maryland, 21114 (hereinafter "FriendCo"). 1. DEFINED TERMS a. "Definitive Agreement" shall mean all documents executed between FriendCo, FICC and Friendly's Restaurants, Franchise, Inc. relating to the acquisition by FriendCo of the right to lease and operate thirty-four (34) Friendly's Restaurants and to construct an additional seventy-four (74) Friendly's Restaurants. b. "Dispute" shall mean any claim of breach, action to enforce, material disagreement in interpretation, or legal proceeding involving or arising out of this Agreement. c. "Exclusive Territory" shall mean the territory in the States of Delaware and Maryland, the District of Columbia, and such portion of Northern Virginia as is assigned to FriendCo in the Definitive Agreement wherein FriendCo has the exclusive right to construct and to operate Friendly's Restaurants. d. "Net Sales" shall mean all sales of all food, beverage, other menu items, merchandise, and goods and other services sold or performed by or for you or the Restaurant, in, upon, or from the Premises, or through or by means of the business conducted at the Restaurant or the Premises, whether for cash or credit. Sales and service taxes collected from customers and paid to the appropriate taxing authority, all management or employee meals, and sale of cigars, cigarettes and newspapers as well as income from pay telephones shall not be included in Net Sales. The discounted portion of on menu prices whether by way of coupons, promotions or otherwise shall not be included in Net Sales. e. "Restaurant Capital Requirements" shall mean any replacement, improvement or addition of equipment, fixtures or improvements which, in accordance with generally accepted accounting principles would be treated as a capitalized cost rather than an expense. f. "Restaurant Cash Flow" shall mean Net Sales less (i) restaurant cost of food and merchandise, (ii) restaurant labor including all restaurant employee wages, sick, holiday and vacation pay and in-restaurant cleaning services, (iii) restaurant fringes including payroll taxes, group and workers' compensation insurance and pension, (iv) restaurant supplies including china, glassware, utensils, cleaning supplies, uniforms, and paper & plastic supplies, (v) restaurant utilities including electricity, allocated Friendly Ice Cream energy management fees, natural gas, telephone and water and sewer, (vi) restaurant maintenance costs including landscaping, snow removal, maintenance service contracts and repairs to property and equipment that would not be considered a Restaurant Capital Requirement, (vii) restaurant administrative costs including office expense, trash, other services (rug cleaning services, music, etc.) allocated property and general liability insurance, employee relocation expense, travel costs, credit card expenses, bank service charges, commission income, safety program costs, police and security costs, use taxes and other miscellaneous restaurant expenses, (viii) restaurant advertising and promotional costs including allocated advertising costs, local restaurant promotions (team sponsorships, etc.), required lease advertising, specific billboard costs and mall displays and (ix) restaurant occupancy costs including rent, common area maintenance, real estate and personal taxes and decorating expenses. Restaurant Cash Flow specifically excludes (i) restaurant depreciation, amortization, interest or taxes, (ii) any allocation of costs except for insurance, pension, energy management, maintenance contracts and advertising and (iii) costs relating to the supervision of the restaurants by district, division, area and corporate personnel. 2. SCOPE Upon execution of this Agreement, FICC grants to FriendCo the exclusive right to manage the Friendly's Restaurants identified on Exhibit A, attached hereto, for the duration of the Term, unless this Agreement is terminated by either party as of some earlier date. 3. TERM This Agreement shall be in effect for one (1) year from the date first written above, unless terminated by either party in accordance with Paragraph 8, infra. At the option of FICC, this Agreement may be extended for two (2) successive six (6) month periods, as long as all payments due hereunder are current and timely made. Thereafter, the parties agree to negotiate in good faith concerning any further extensions hereof. 4. AUTHORITY TO ACT For each managed restaurant, FriendCo and its management employees shall have the authority to approve hiring, discipline, and termination of all crew (i.e. waiter/waitress, host/hostess, Guest Service Supervisor, grill worker, fountain worker, and dish washers) providing all FICC policies and procedures are followed. Failure by FriendCo to adhere to FICC's policies and procedures in performing the foregoing functions shall obligate FriendCo to indemnify FICC (pursuant to Section 9 of this Agreement) from any liabilities caused therefrom. FriendCo shall have the right to seek guidance from FICC on a case-by-case basis to interpret FICC's policies and procedures as applied to case specific situations. FriendCo will have authority to schedule and assign employee jobs as well as schedule deliveries of milk, bread and produce. FriendCo will also have authority to perform routine restaurant maintenance and such other incidences of routine restaurant operations. FriendCo and its management employees will not have authority to alter any other secondary restaurant management position (i.e. general managers or assistant managers) without FICC approval as well as contract for or approve any extraordinary expenses, hire consultants or arrange for or approve capital expenditures without the prior express written consent of FICC. 5. COMPENSATION For each fiscal month or partial fiscal month during the Term for which this Agreement is in effect, FICC shall pay to FriendCo a management fee equal to four percent (4%) of the Net Sales for each managed restaurant prorated for such days the restaurant was open. This management fee shall be paid on or before the 20th day following the end of such month or partial month. In addition to the management fee, FICC shall pay FriendCo an operations improvement fee in an amount equal to fifteen percent (15%) of the improvement in Restaurant Cash Flow ("RCF") which will be calculated based upon one of two ways: (1)FriendCo manages for a full year -- to the anniversary date of this agreement; operations improvement is calculated based on aggregate RCF for the twelve (12) month period of FriendCo's oversight less aggregate RCF for prior twelve (12) month corresponding period; (2)FriendCo manages less than a full year (i.e., to a termination date for the Agreement); operations improvement is calculated based on aggregate RCF corresponding partial period of the prior year (in whole months). This operations improvement fee will be paid on or before the 45th day following the end of the measurement period. 6. RESTAURANT CAPITAL REQUIREMENTS Any Restaurant Capital Requirements shall be determined on a monthly basis by mutual agreement between FICC and FriendCo. All agreed upon Restaurant Capital Requirements shall be the sole responsibility of FICC, and FICC agrees to reimburse FriendCo for any expenditures made by FriendCo for any approved Restaurant Capital Requirements. 7. NON-SOLICITATION During the Term of this Agreement, and for a period of six (6) months following the termination of this Agreement, FriendCo and its affiliates agree that they shall not solicit for employment, offer to employ or employ any employees of FICC employed at any managed restaurant without the express written consent of FICC. FriendCo agrees that, in addition to other remedies, FICC may seek an injunction in a court of competent jurisdiction to enforce this provision. During the term of this Agreement and for a period of six (6) months following the termination of this Agreement, FICC agrees that it shall not solicit for employment, offer to employ or employ any employees of FriendCo or its affiliates without the express written consent of FriendCo. FICA agrees that, in addition to other remedies, FriendCo may seek an injunction to a court of competent jurisdiction to enforce this provision. 8. TERMINATION a. This Agreement may be terminated by FICC without cause, with such termination effective upon the ninetieth (90th) day following the receipt of a written notice of termination. b. Termination for failure of payment or abandonment of any restaurant shall be effective upon the tenth (10th) day following the receipt of a written notice of Termination for Cause issued by either party. c. The termination of this Agreement pursuant to Subparagraph a., supra, shall operate to release both parties from any claims for lost business opportunities, lost future economic benefit, interference with existing or future contractual relations or trade disparagement, as well as from any claims for consequential damages arising from such termination. d. The termination of this Agreement pursuant to either Subparagraph a. or Subparagraph b. shall not operate to release either party from any obligation arising under this Agreement. 9. INDEMNIFICATION FICC and FriendCo shall indemnify, defend and hold each other harmless from claims, demands and causes of action asserted against the indemnitee by any person (including, without limitation, FICC's and FriendCo's employees) for personal injury, death, or loss of or damage to property resulting from the indemnitor's active or passive negligence or willful misconduct. Where such personal injury, death, or loss of or damage to property is the result of joint active or passive negligence or willful misconduct of FICC and FriendCo, the indemnitor's duty of indemnification shall be in proportion to its allocable share of joint active or passive negligence or willful misconduct. If FICC is strictly liable under law, FriendCo's duty of indemnification shall be in the same proportion that the negligent acts or omissions or willful acts of FriendCo contributed to the personal injury, death, or loss of or damage to property for which FICC is strictly liable. If FriendCo is strictly liable under law, FICC's duty of indemnification shall be in the same proportion that the negligent acts or omissions or willful acts of FICC contributed to the personal injury, death, or loss of or damage to property for which FriendCo is strictly liable. 10. BREACH; NOTICE AND RIGHT TO CURE For any claim of breach of this Agreement to be effective, the breaching party must be sent written notice detailing the particulars of the breach and provided not less than ten (10) days in which to cure the claim of breach or to dispute such claim. For any claim of breach which does not create grounds for a Termination for Cause, the breaching party may cure the breach within such ten (10) day period, or, if such breach is not capable of being cured within such ten (10) day period, the breaching party must commence its efforts to cure the breach within such ten (10) day period and thereafter must diligently pursue such cure. 11. REPORTING OF SALES FICC shall provide FriendCo with a complete report of monthly sales and a unit level profit and loss statement within ten (10) days of the close of each financial reporting period. 12. ASSIGNMENT Neither party to this Agreement can assign its interest herein (other than to an affiliate or subsidiary) without the prior written consent of the other party, and the granting of such consent is at the sole discretion of the granting party. 13. CONFLICT OF INTEREST FICC and FriendCo will exercise utmost care and diligence in the application of reasonable business practices, to prevent any actions or conditions which could result in a conflict with the other's best interest. 14. CHOICE OF LAW; ARBITRATION OF DISPUTES This Agreement shall be governed and interpreted in accordance with the substantive laws (but not the choice of law provisions) of the State of Delaware. No party to this Agreement may bring or maintain an action against, or which includes, another party to this Agreement except in the federal or state courts located in the State of Delaware. All parties to this Agreement expressly waive any defense of lack of jurisdiction or improper venue to any action brought in the State of Delaware. For any action or Dispute arising under this Agreement, the parties expressly agree that the sole forum shall be in arbitration before the American Arbitration Association pursuant to the terms of the Arbitration Program attached hereto as Exhibit B. Add attorneys fees/cost to prevailing party. 15. INSURANCE During the term of this Agreement, and for a period of one (1) year following the termination of this Agreement, FICC agrees to maintain in effect such policies of commercial general liability, workers compensation, unemployment, property and hazard insurance as are commercially reasonable and necessary to fulfill each of its obligations under Paragraph 11, supra; and to provide FriendCo with certificates of insurance naming FriendCo as an additional insured on such policies. 16. NOTICES To F.I.C.C.: Friendly Ice Cream Corporation 1855 Boston Road Wilbraham, Massachusetts 01095 Attention: Donald N. Smith Chairman and President Facsimile No.: (413)543-3282 with a copy to: Aaron B. Parker Associate General Counsel Friendly Ice Cream Corporation 1855 Boston Road Wilbraham, Massachusetts 01095 Facsimile No.: (413)543-3282 To FriendCo: FriendCo Restaurants, Inc. 1657 Crofton Boulevard Crofton, Maryland 21114 Attention: Ronald D. Kirstien Chairman, President and CEO Facsimile No.: (410)793-0754 with a copy to: David J. Norman Mason, Ketterman & Morgan, P.A. 1657 Crofton Boulevard Suite 100 Crofton, Maryland 21114 Facsimile No.: (410)793-0522 17. GENERAL PROVISIONS a. Modifications. No change or modification of this Agreement shall be valid or binding upon the parties hereto, nor shall any waiver of any term or condition in the future unless such change, modification or waiver shall be in writing and signed by all of the parties hereto. b. Binding Effect. This Agreement shall inure to the benefit of and shall be binding upon the parties, their transferees, successors and assigns. c. Entire Agreement. This Agreement represents the entire and integrated agreement of the parties with respect to the subject matter hereof, and supersedes all prior agreements, oral and written, relating to the subject matter hereof. d. Exhibits. All exhibits which are referenced herein and attached hereto are incorporated herein by reference. e. Severability. In the event any provision of this Agreement is held to be unenforceable or invalid, such finding of unenforceability or invalidity shall not affect the enforceability or validity of the remaining provisions of this Agreement. f. Continuing Obligations. Each indemnity provided for herein shall survive the termination of this Agreement for any reason whatsoever and each covenant which provides for or permits performance hereunder after termination or by its nature requires performance after termination shall survive the termination of this Agreement. g. Audit. Either party, at its expense, shall have the right to audit the other's books and records relating to any managed restaurant from time-to-time, limited, however, to two (2) times during the Term of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and date first written above. ATTEST: FRIENDLY ICE CREAM CORPORATION By:___________________________ By: Name:_________________________ Name: Title:________________________ Title: ATTEST: FRIENDCO RESTAURANTS, INC. By:___________________________ By: Name:_________________________ Name: Title:________________________ Title: E X H I B I T A Management Agreement Properties (14 Total) No. Rest. No. City Address State 1 0384 Baltimore 6901 Security Boulevard MD 2 0780 Cockeysville 240 Hunt Valley MD 3 0880 Randallstown 9428 - 30 Liberty Road MD 4 0905 Laurel 14750 Baltimore Washington Blvd. MD 5 0919 Gaithersburg 701 Russell Avenue MD 6 0929 Fredericksburg 280 Spotsylvania Mall VA 7 0939 Waldorf 2850 Crain Highway MD 8 0956 Manassas 8891 Centerville Road VA 9 0972 Alexandria 6550-A Little River Turnpike VA 10 1013 Columbia 8660 Guilford Road MD 11 1028 Glen Burnie 7900 Ritchie Highway MD 12 0393 Wilmington Concord Mall DE 13 0452 Towson 825 Dulaney Valley Road MD 14 0835 Woodbridge 14510 Jefferson Davis Highway VA EX-10.9 10 EXHIBIT 10.9 Exhibit 10.9 PURCHASE AND SALE AGREEMENT BETWEEN FRIENDLY ICE CREAM CORPORATION 1855 Boston Road Wilbraham, Massachusetts 01095 AND FRIENDCO RESTAURANTS, INC. 1657 Crofton Boulevard Crofton, Maryland 21114 DATED July , 1997 TABLE OF CONTENTS Section Page 1. Assets Purchased........................................1 A. Franchise Rights...................................2 B. Management Rights 2 C. Development Rights 2 D. Equipment and Tenant Improvements 3 E. Software Rights 3 F. Trademark and Service Mark Rights 3 G. Inventory and Restaurant Cash 3 2. Purchase Price and Allocation 4 3. Purchase Price Refunded on Loss of Franchised Restaurant 5 4. Holdback of Portion of Purchase Price 6 A. Creation of Escrow Account 6 B. Application of Escrow 7 C. Notice of Claims 8 D. Disbursement by Escrow Agent 9 5. Closing 9 A. Time and Place 9 B. Documents Executed at Closing 10 C. Documents Delivered at Closing 10 D. Real Estate Closing 11 E. Documents Executed at Real Estate Closing 11 F. Documents Delivered at Post-Real Estate Closing 11 6. Conditions of F.I.C.C.'s Obligation to Close 12 A. Board of Director Approval 12 B. Approval of Non-Disturbance Agreement By Voting Majority of Lending Group 12 C. Representations and Warranties 13 D. Opinion of FriendCo's Counsel 13 E. Evidence of Payment 13 7. Conditions of FriendCo's Obligation to Close 13 A. Board of Director Approval of FriendCo and DavCo Restaurants, Inc. 14 B. Receipt of Executed Non-Disturbance Agreement 14 C. Representations and Warranties 14 8. Representations and Warranties of F.I.C.C. 14 A. Organization 14 B. Authorization 15 C. No Violations 15 D. Title to Assets 16 E. Joint Inspection 16 F No Brokers 16 G. Post Closing 17 9. Representations and Warranties of FriendCo 17 A. Organization 17 B. Authorization 17 C. No Violations 18 D. No Conflict with Wendy's International 18 E. No Brokers 19 F. Offer of Employment 19 10. Indemnification 19 A. Pre-Effective Date 19 B. Post-Effective Date Expenses 20 C. General Indemnification 20 D. Environmental Indemnification 20 11. Definitions 21 12. Choice of Law and Jurisdiction 23 A. Governing Law and Forum 23 B. Arbitration of Minor Disputes 23 C. Award of Costs and Attorney's Fees 23 13. Survival of Terms, Representations and Warranties 24 14. Severability 24 15. Notices 25 EXHIBITS: SCHEDULES: Exhibit A: Franchise Agreement Schedule A: List of Franchised Restaurants Exhibit B: Management Agreement Schedule B: List of Managed Restaurants Exhibit C: Development Agreement Schedule C: List of Exempted Equipment Exhibit D: Software License Agreement Exhibit E: Trademark License Agreement Exhibit F: Escrow Agreement Exhibit G: Non-Disturbance Agreement Exhibit H: Guaranty PURCHASE AND SALE AGREEMENT THIS AGREEMENT is dated , 1997, by and between Friendly Ice Cream Corporation, a Massachusetts corporation ("F.I.C.C.") and FriendCo Restaurants, Inc., a Maryland corporation ("FriendCo"). WHEREAS, F.I.C.C. owns and operates 51 Friendly's Restaurants in Delaware, Maryland and certain counties of Northern Virginia; and WHEREAS, F.I.C.C. desires to achieve additional market penetration in the above-mentioned territory, and FriendCo desires to operate Friendly's Restaurants and to construct new Friendly's Restaurants; NOW, THEREFORE, in consideration of the exchange of mutual covenants and the consideration contained herein, F.I.C.C. hereby agrees to sell, and FriendCo hereby agrees to buy, the following rights and assets pursuant to the terms and conditions of this Agreement. 1. ASSETS PURCHASED Upon the Effective Date of this Agreement, FriendCo will acquire from F.I.C.C. and its relevant subsidiaries all right, title and interest in the following assets: A. Franchise Rights. FriendCo will receive the right to operate the thirty-four (34) Friendly's Restaurants identified in Schedule A pursuant to the terms of a Franchise Agreement with Friendly's Restaurants Franchise, Inc. ("F.R.F.I.") in the form attached hereto as Exhibit A. B. Management Rights. FriendCo will receive the right to manage fourteen (14) Friendly's Restaurants identified in Schedule B pursuant to the terms of a Management Agreement with F.I.C.C. in the form attached hereto as Exhibit B. FriendCo will also receive the right to convert any managed restaurant to a franchised restaurant during the term of the Management Agreement at FriendCo's sole option (subject only to landlord consent to lease assignment or subletting, if necessary) upon notice to F.I.C.C., payment of an initial franchise fee, execution of a Franchise Agreement, execution of a sublease in substantially the form of the subleases employed the parties pursuant to this transaction and payment to F.I.C.C. of an amount equal to a 5.3 multiple of the restaurant earnings before interest, taxes, depreciation and amortization (hereinafter "Restaurant EBITDA") as measured on a trailing twelve (12) month basis from the last day of the last full month preceding the notice to F.I.C.C. (but in no event shall the payment be less than the amount of the depreciated book value of the restaurant equipment, cash and inventory). C. Development Rights. FriendCo will receive the right to construct and operate up to one hundred (100) additional Friendly's Restaurants in an exclusive territory consisting of the States of Delaware and Maryland, the District of Columbia, and certain counties of Northern Virginia, all as is more specifically set forth in the Development Agreement between F.R.F.I. and FriendCo, in the form attached hereto as Exhibit C. D. Equipment and Tenant Improvements. FriendCo will receive all of F.I.C.C.'s rights, title and interest to the equipment and tenant improvements (but not fixtures) in each of the thirty-four (34) Friendly's Restaurants identified in Schedule A, with the sole exception of such equipment identified in Schedule C, attached hereto. E. Software Rights. FriendCo will receive the rights to use all current F.I.C.C. operating software in all franchised restaurants, and will be entitled to receive all improvements and upgrades to such software, pursuant to the terms of a Software License Agreement with F.I.C.C. in the form attached hereto as Exhibit D. F. Trademark and Service Mark Rights. FriendCo will receive the non-exclusive rights to utilize for the benefit of each franchised or managed restaurant all valid Trademarks and Service Marks owned or licensed by F.I.C.C. pursuant to the terms of the Franchise Agreements with F.R.F.I. and a Trademark License Agreement with F.I.C.C. in the form attached hereto as Exhibit E. G. Inventory and Restaurant Cash. FriendCo will receive on the Effective Date the rights to all inventory and restaurant cash for each of the thirty-four (34) franchised restaurants identified in Schedule A. 2. PURCHASE PRICE AND ALLOCATION A. With respect to the assets listed in subparagraphs 1.A., 1.B., 1.C., 1.D., 1.E. and 1.F., the purchase price shall be Seven Million Five Hundred Fifty-Six Thousand Dollars ($7,556,000.00), representing approximately a 5.3 times multiple of the represented Restaurant EBITDA of the thirty-four (34) restaurants identified in Schedule A. B. With respect to the assets listed in category 1.G., the purchase price shall be an amount agreed upon by F.I.C.C. and FriendCo following the conclusion of an Inventory and Restaurant Cash audit performed jointly by F.I.C.C. and FriendCo on the Effective Date. C. The purchase price set forth in subparagraph 2.A. shall be allocated as follows: first, in the amount of Eight Hundred Sixty Thousand Dollars ($860,000.00) to initial franchise fees for the thirty-four (34) franchised restaurants; second, in the amount of Two Million Seven Hundred Thousand Dollars ($2,700,000.00) to equipment and tenant improvements in the thirty-four (34) franchised restaurants; third, in the amount of Three Million Four Hundred Ninety-Six Thousand Dollars ($3,496,000.00) to goodwill; and fourth in the amount of Five Hundred Thousand Dollars ($500,000.00) to franchise development rights for the States of Delaware and Maryland, the District of Columbia and Northern Virginia. 3. PURCHASE PRICE REFUNDED ON LOSS OF FRANCHISED RESTAURANT A. For any of the thirty-four (34) franchised restaurants being acquired by FriendCo from F.I.C.C., if the right to occupy and operate such restaurant is terminated by a landlord, lender or governmental agency or if primary access to such restaurant is lost due to a defect in title existing as of the Effective Date, within ten (10) years of the Effective Date hereof, and such termination was neither caused nor contributed to by FriendCo but results from the loss or denial of a Certificate of Occupancy, or the loss of the right to occupy or access the property other than through an eminent domain proceeding which provides FriendCo with compensation for its loss of business at such location, then for each such terminated restaurant, an allocable portion of the purchase price will be refunded to FriendCo by F.I.C.C. in accordance with the following formula: 1) For each full year less than ten (10) years of occupancy lost through such termination, F.I.C.C. shall refund 10% of the allocable portion of the restaurant purchase price (i.e. 5.3 times the restaurant's 1996 E.B.I.T.D.A.) to FriendCo. 2) For any partial year of occupancy lost through such termination, F.I.C.C. shall refund an amount equal to .00274 times the number of days lost in such partial year times the allocable portion of the restaurant purchase price (i.e. 5.3 times the restaurant's 1996 E.B.I.T.D.A.) to FriendCo. 3) In addition, FriendCo shall be entitled to recover from F.I.C.C. FriendCo's reasonable expenses incurred in attempting to prevent the termination of its right to occupy and operate such restaurant only, if F.I.C.C. does not elect to attempt to prevent the termination of such rights itself. B. No refund shall be due to FriendCo for any of the thirty-four (34) franchised restaurants lost or terminated after ten (10) years of occupancy by FriendCo, for any franchised restaurant lost or terminated due to any action or inaction specifically attributable to FriendCo, or for any newly constructed restaurant beyond the original thirty-four (34) franchised restaurants. C. The sole exceptions to the ten (10) year period of occupancy and operation required under this Paragraph shall be for the expiration of the lease for restaurant numbered 751 and 461, which the parties hereby acknowledge expire on January 31, 2006 and February 28, 2007. 4. HOLDBACK OF PORTION OF PURCHASE PRICE A. Creation of Escrow Account. F.I.C.C. and FriendCo agree to the creation of an Escrow Account at First National Bank of Maryland pursuant to the terms of an Escrow Agreement, in the form attached hereto as Exhibit F, to be funded by the holdback of Two Hundred Fifty Thousand Dollars ($250,000.00), which amount shall be deposited into the Escrow Account. B. Application of Escrow. 1) Subject to subparagraph 4.B.2), below, the parties hereto agree that the amounts in the Escrow Account shall be used to indemnify and hold harmless FriendCo from and against losses relating to cash, inventory and restaurant conditions existing as of the Effective Date in the manner set forth in Paragraph 4 of this Agreement and in the Escrow Agreement. All such amounts shall be disbursed out of the Escrow Account in accordance with the terms of the Escrow Agreement, and any such amounts distributed to FriendCo shall be deemed to reduce the goodwill portion of the Purchase Price as set forth in Paragraph 2 of this Agreement. 2) FriendCo may not make any claim for losses (other than for Restaurant Cash Losses or Inventory Losses) pursuant to this Paragraph 4 unless the claim relates to a condition which existed as of the Effective Date and such claim amounts to Ten Thousand Dollars ($10,000.00) for a loss relating to an individual item, occurrence or event or Twenty Thousand Dollars ($20,000.00) for a claim arising out of or relating to a series of items, occurrences or events or related items occurrences or events (collectively, the "Threshold Amount"). A claim for each of Restaurant Cash Losses or Inventory Losses may not be made unless such claim exceeds One Hundred Dollars ($100.00) on an individual restaurant basis. C. Notice of Claims. 1) For any claims relating to Restaurant Cash Losses or Inventory Losses, FriendCo shall have thirty (30) days from the Effective Date hereof to send written notice of the claim(s) simultaneously to the Escrow Agent and to F.I.C.C. Such written notice shall identify the franchised restaurant(s) to which the claim applies and shall state the factual basis for the claim and well as the exact amount of the claim. 2) For any other claims for losses which exceed the Threshold Amount, FriendCo shall have ninety (90) days from the Effective Date to send written notice of such claims(s) simultaneously to the Escrow Agent and to F.I.C.C. Such written notice shall identify the franchised restaurant(s) to which the claim applies and shall state the factual basis for the claim as well as the exact amount of the claim or an estimate of the amount of the claim if the exact amount is not determinable at the time written notice is given. 3) If F.I.C.C. shall object to either the claim or the amount claimed in the written notice, F.I.C.C. shall send written notice of its objection simultaneously to the Escrow Agent and FriendCo within thirty (30) days of its receipt of the written notice of the claim. If no objection is provided within such thirty (30) day period, F.I.C.C. shall be deemed to have acknowledged the validity of the amount claimed, and the Escrow Agent shall thereafter transfer to FriendCo in immediately available funds an amount equal to the claim, pursuant to the terms of the Escrow Agreement. 4) If F.I.C.C. shall have sent a written objection to FriendCo and the Escrow Agent within the thirty (30) day period for objection, F.I.C.C. and FriendCo shall have a period of thirty (30) days thereafter to resolve or compromise the claim. If a resolution or compromise is reached, the parties shall jointly send to the Escrow Agent a notice of resolution, and the Escrow Agent shall make such distribution(s) as are specified in the notice of resolution. If F.I.C.C. and FriendCo are unable to resolve or compromise the claim within the thirty (30) day period, then the Escrow Agent shall retain an amount equal to the amount in dispute between the parties, and either F.I.C.C. or FriendCo shall have the right to refer the disputed claim(s) to arbitration pursuant to Paragraph 12.B, infra. D. Disbursement by Escrow Agent. If the Escrow Agent shall not have received any written notice of claim(s) by the ninety-third (93rd) day following the Effective Date of this Agreement, or if the total amount of all claims received does not equal or exceed the amount of the Escrow Account, the Escrow Agent shall thereafter proceed to disburse to F.I.C.C. the amount by which the Escrow Account exceeds the amount of any claims in immediately available funds, pursuant to the terms of the Escrow Agreement. 5. CLOSING A. Time and Place. The Closing on this Purchase and Sale Agreement will take place at the offices of DavCo Restaurants, Inc., 1657 Crofton Boulevard, Crofton, Maryland, 21114 on Thursday, July 10, 1997, or at such time and place as the parties hereto may agree. Any documents necessary to effectuate the Closing on this Purchase and Sale Agreement may be executed in two (2) or more original counterparts, any one of which need not contain the signatures of more than one (1) party, but all such counterparts taken together will constitute one and the same agreed document. B. Documents Executed at Closing. The following documents shall be executed by all such necessary parties at the Closing: 1) Purchase and Sale Agreement between F.I.C.C. and FriendCo 2) Development Agreement between F.R.F.I. and FriendCo 3) 34 Individual Restaurant Franchise Agreements between F.R.F.I. and FriendCo 4) Trademark License Agreement between F.I.C.C. and FriendCo 5) Software License Agreement between F.I.C.C. and FriendCo 6) Escrow Agreement between F.I.C.C., FriendCo and First National Bank of Maryland 7) Letter Agreement regarding Maryland Science Center restaurant between F.I.C.C. and FriendCo C. Documents Delivered at Closing. The following documents shall be delivered by the designated party at Closing: 1) Non-Disturbance Agreement between Lender's of F.I.C.C., FriendCo and DavCo Restaurants (F.I.C.C.) 2) Opinion of Counsel of FriendCo D. Real Estate Closing. The Closing on all necessary Real Estate Documents will take place at the offices of DavCo Restaurants, Inc., 1657 Crofton Boulevard, Crofton, Maryland, 21114, at 11:00 a.m. on the Effective Date, or at such time and place as the parties hereto may agree. Any documents necessary to effectuate the Real Estate Closing may be executed in two (2) or more original counterparts, any one of which need not contain the signatures of more than one (1) party, but all such counterparts taken together will constitute one and the same agreed document. E. Documents Executed at Real Estate Closing. The following documents shall be executed by all necessary parties at the Real Estate Closing: 1) 13 Prime Leases between F.I.C.C. and FriendCo 2) 21 Subleases between F.I.C.C. and FriendCo F. Documents Delivered Post-Real Estate Closing. The following documents shall be delivered by F.I.C.C. to FriendCo within six (6) months of the Effective Date, pursuant to paragraph 8.G.: 1) 11 Landlord Consents to Sublease (F.I.C.C.) 2) Lease Extensions on Restaurants Nos. 404, 411, 751 and 813 3) Evidence of Financing 4) 34 Memoranda of Lease or Sublease between F.I.C.C. and FriendCo 5) 21 Estoppel Certificates on Subleases 6) 21 Non-Disturbance Agreements from Lenders of Subleased Properties 6. CONDITIONS OF F.I.C.C.'S OBLIGATION TO CLOSE The obligations of F.I.C.C. to close on this Purchase and Sale Agreement shall be subject to the fulfillment at or prior to the Closing of each of the following conditions: A. Board of Director Approval. The Board of Directors of F.I.C.C. shall have approved the transactions contemplated under this Purchase and Sale Agreement and shall have authorized its execution by F.I.C.C. B. Approval of Non-Disturbance Agreement By Voting Majority of Lending Group. F.I.C.C. shall have received the approval of a majority of the votes of the Lending Group for the Non-Disturbance Agreement between the Lenders, FriendCo and DavCo Restaurants, as evidenced by the signature of the Collateral Agent on the Non-Disturbance Agreement. C. Representations and Warranties. The representations and warranties of FriendCo set forth in Paragraph 9 shall be true and correct in all material respects as of the date of this Agreement and as of the Effective Date. D. Opinion of FriendCo's Counsel. F.I.C.C. shall have received an opinion of FriendCo's counsel, Mason, Ketterman & Morgan, dated as of the Closing Date, as to FriendCo's authority to execute the Purchase and Sale Agreement, DavCo Restaurants, Inc.'s authority to execute any guarantee, and the lack of any conflict between this transaction and any contracts with Wendy's International, Inc., whether executed by FriendCo, its corporate parent, or any affiliate. E. Evidence of Payment. F.I.C.C. shall have received by the Real Estate Closing Date evidence of FriendCo's ability to transfer sufficient funds to F.I.C.C. to satisfy the purchase price set forth in Paragraph 2, supra. 7. CONDITIONS OF FRIENDCO'S OBLIGATION TO CLOSE The obligations of FriendCo to close on the Purchase and Sale Agreement shall be subject to the fulfillment at or prior to the Closing of each of the following conditions: A. Board of Director Approval of FriendCo and DavCo Restaurants, Inc. The Boards of Directors of FriendCo and its corporate parent, DavCo Restaurants, Inc., shall both have approved of this Purchase and DavCo's guarantee and shall both have authorized execution. B. Receipt of Executed Non-Disturbance Agreement. FriendCo shall have received an original Non-Disturbance Agreement between F.I.C.C.'s Lenders, FriendCo and DavCo Restaurants, Inc., in the form attached hereto as Exhibit G, executed by the Collateral Agent for F.I.C.C.'s Lenders. C. Representations and Warranties. The representations and warranties of F.I.C.C. set forth in Paragraph 8 shall be true and correct in all material respects as of the date of this Agreement and the Effective Date. 8. REPRESENTATION AND WARRANTIES OF F.I.C.C. F.I.C.C. hereby represents and warrants to FriendCo as follows: A. Organization. F.I.C.C. is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to execute all documents contemplated in this transaction. B. Authorization. F.I.C.C. has full corporate power and authority to perform its obligations under this Agreement and the documents to be signed at Closing and all other transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the other transactions contemplated hereby have been duly and validly authorized by all necessary corporate action by F.I.C.C. The Board of Directors of F.I.C.C. has approved the execution, delivery and performance of this Agreement and the consummation of all other transactions contemplated hereby. This Agreement has been duly executed and delivered by F.I.C.C. and constitutes the valid and binding agreement of F.I.C.C., enforceable against F.I.C.C. in accordance with its terms, subject to applicable bankruptcy, insolvency and other similar laws affecting the enforceability of creditors' rights generally, general equitable principles and the discretion of courts in granting equitable remedies. C. No Violations. The execution, delivery and performance of this Agreement, the consummation of the other transactions contemplated hereby and the fulfillment of a compliance with the terms and conditions of this Agreement do not and will not violate or conflict with (i) any terms or provisions of the Articles of Incorporation or By-laws of F.I.C.C. or (ii) any judgment, decree, order, statute, rule or regulation applicable to F.I.C.C. or any of its assets listed in Paragraph 1, supra, except for such violations which could not reasonably be expected to materially impair or delay the ability of F.I.C.C. to consummate the transactions contemplated hereby. D. Title to Assets. Title to all assets identified in Paragraph 1, supra, which F.I.C.C. will transfer, lease or license to FriendCo is valid and transferable by F.I.C.C., except as specifically excluded. The trademarks and service marks to be licensed to FriendCo are validly held by F.I.C.C. or licensed to F.I.C.C. for use without dispute or challenge. F.I.C.C. maintains current and valid Certificates of Occupancy for each of the thirty-four (34) franchised restaurants and fourteen (14) managed restaurants, the cash flow represented to FriendCo as the 1996 E.B.I.T.D.A. for the thirty-four (34) franchised restaurants is correct and accurate to the best of F.I.C.C.'s knowledge and understanding, and each of the thirty-four (34) franchised restaurants have valid and existing primary access as of the Effective Date, provided, however, any breach of this warranty of access shall have as its sole remedy the rights provided under Paragraph 3, supra. E. Joint Inspection. Repairs reasonably determined to be necessary to the Restaurant and Premises to bring them into standard operating condition through a Joint Inspection will be made by F.I.C.C. at its sole cost and expense, in a good and workmanlike manner at a time mutually convenient to F.I.C.C. and FriendCo. F. No Brokers. None of F.I.C.C., F.R.F.I., or any of their respective executive officers or directors has employed any broker, finder or investment banker or incurred any liability for commissions or finders fees in connection with the transactions contemplated hereby. G. Post Closing. F.I.C.C. shall employ reasonable and good faith efforts to expeditiously obtain and deliver to FriendCo all third party landlord consents to sublet, lease extensions, estoppel certificates and non-disturbance certificates for the twenty-one (21) subleased franchised restaurants. A breach of this warranty shall be deemed to have occurred upon any third party landlord (or its successor-in-interest) terminating or attempting to terminate its lease with F.I.C.C.; however, FriendCo's sole remedy for a breach of this warranty shall be pursuant to Paragraph 3, supra. 9. REPRESENTATIONS AND WARRANTIES OF FRIENDCO FriendCo hereby represents and warrants to F.I.C.C. as follows: A. Organization. FriendCo is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to execute all documents contemplated in this transaction. B. Authorization. FriendCo has full corporate power and authority to perform its obligations under this Agreement and the documents to be signed at Closing and all other transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the other transactions contemplated hereby have been duly and validly authorized by all necessary corporate action by FriendCo. The Board of Directors of FriendCo has approved the execution, delivery and performance of this Agreement and the consummation of all other transactions contemplated hereby. This Agreement has been duly executed and delivered by FriendCo and constitutes the valid and binding agreement of FriendCo, enforceable against FriendCo in accordance with its terms, subject to applicable bankruptcy, insolvency and other similar laws affecting the enforceability of creditors' rights generally, general equitable principles and the discretion of courts in granting equitable remedies. C. No Violations. The execution, delivery and performance of this Agreement, the consummation of the other transactions contemplated hereby and the fulfillment of a compliance with the terms and conditions of this Agreement do not and will not violate or conflict with (i) any terms or provisions of the Articles of Incorporation or By-laws of FriendCo or (ii) any judgment, decree, order, statute, rule or regulation applicable to FriendCo or any of its assets listed in Paragraph 1, supra, except for such violations which could not reasonably be expected to materially impair or delay the ability of FriendCo to consummate the transactions contemplated hereby. D. No Conflict with Wendy's International. The execution, delivery and performance of this Agreement and the consummation of the other transactions contemplated hereby will not violate or conflict with any agreements, contracts or obligations between FriendCo or its corporate parent, DavCo Restaurants, Inc. and Wendy's International, Inc. E. No Brokers. Neither FriendCo nor its respective executive officers or directors has employed any broker, finder or investment banker or incurred any liability for commissions or finders fees in connection with the transactions contemplated hereby. F. Offer of Employment. FriendCo agrees to make an offer of employment to the restaurant level employees at the thirty-four (34) Friendly's Restaurants identified in Schedule A upon substantially the same terms as each employee is presently employed. For purposes of this Paragraph 9F only, restaurant level employees shall include waiter/waitress, host/hostess, guest services, supervisor, grill workers, fountain worker, dish washer, district manager, general manager and assistant manager. 10. INDEMNIFICATION A. Pre-Effective Date Expenses. Except as provided in subparagraph 10.D. infra, F.I.C.C. will indemnify and hold FriendCo harmless for any and all expenses of restaurant occupation or operation which arise or are fully due prior to the Effective Date hereof. Further, F.I.C.C. will indemnify and hold FriendCo harmless for F.I.C.C.'s pro rata portion of any expenses of restaurant occupation or operation which do not become due until after the Effective Date hereof. B. Post-Effective Date Expenses. Except as provided in subparagraph 10.D., infra, FriendCo will indemnify and hold F.I.C.C. harmless for any and all expenses of restaurant occupation or operation which arise or are fully due after the Effective Date hereof. Further, FriendCo will indemnify and hold F.I.C.C. harmless for FriendCo's pro rata portion of any expenses of restaurant occupation or operation which become due prior to the Effective Date hereof. C. General Indemnification. Except as otherwise provided in this Paragraph 10, F.I.C.C. and FriendCo will indemnify, defend, and hold each other harmless from claims, demands and causes of action asserted against the indemnitee by any person (including, without limitation, F.I.C.C.'s and FriendCo's employees, agents, contractors or any third party) for personal injury or death or for loss of or damage to property and resulting from the indemnitor's active or passive negligence or willful misconduct. Where personal injury, death, or loss of or damage to property is a result of the joint active or passive negligence or willful misconduct of F.I.C.C. and FriendCo, the indemnitor's duty of indemnification shall be in proportion to its allocable share of joint active or passive negligence or willful misconduct. D. Environmental Indemnification. In the event of any leak, spill, discharge, seepage or other contamination which occurred or was first present in any of the thirty-four (34) franchised restaurants or the surrounding leased or subleased premises prior to the Effective Date, or which occurred or was present in any of the fourteen (14) managed restaurants at any time prior to their conversion to the status of a franchised restaurant, F.I.C.C. shall indemnify and hold FriendCo harmless from any and all claims, losses, demands, remediation, testing or clean-up arising from such leak, spill, discharge, seepage or other contamination. In the event of any leak, spill, discharge, seepage or other contamination which occurred or was first present in any of the thirty-four (34) franchised restaurants after the Effective Date, FriendCo shall indemnify and hold F.I.C.C. harmless from any and all claims, losses, demands, remediation, testing or clean-up, unless such leak, spill, discharge, seepage or other contamination first occurs or is first present after the reversion of control over such property to F.I.C.C. 11. DEFINITIONS A. As used in this Agreement, the following terms shall have the following meanings: 1) "Certificate of Occupancy" shall mean all documentation issued from the appropriate state or county authorities which permit the occupation and use of the restaurant as a retail food service establishment. 2)"Closing" shall mean the execution of all documents set forth in Paragraph 5B of this Agreement 3)"Closing Date" shall mean the date of execution of all documents set forth in Paragraph 5B of this Agreement. 4)"Effective Date" shall mean the date of transfer of operational control, title to all assets and right to receive all income of the thirty-four (34) franchised Friendly's Restaurants purchased by FriendCo from F.I.C.C. and the receipt of the purchase price by F.I.C.C. 5)"Escrow Agent" shall mean First National Bank of Maryland or such affiliated banking entity as may be designed by First National Bank of Maryland. 6) "Inventory" shall mean all saleable food products, merchandise, supplies, flatware, dishes or other items maintained as restaurant inventory by F.I.C.C. 7) "Inventory Losses" shall mean any damaged, missing or unsaleable food products, merchandise, unusable, missing or unservicable supplies. 8) "Joint Inspection" shall mean F.I.C.C. and FriendCo shall jointly inspect each Restaurant and Premises to determine what if any repairs are necessary to the Building, the Outside Areas, the Systems, the Trade Fixtures or the Equipment to bring the foregoing into standard operable condition. 9) "Lending Group" or "Lenders" shall mean those financial institutions identified in the Second Amended and Restated Revolving Credit. 10) "Restaurant Cash" shall mean all cash maintained at any individual restaurant. 11) "Restaurant Cash Losses" shall mean any shortfall or negative discrepancy between the amount of Restaurant Cash determined to be present upon the Joint Inspection and paid for by FriendCo, and the amount of Restaurant Cash determined to be present upon the opening of the restaurant for business by FriendCo's employees. 12. CHOICE OF LAW AND JURISDICTION A. Governing Law and Forum. This Agreement shall be governed and interpreted in accordance with the substantive laws (but not the choice of law provisions) of the State of Delaware. No party to this Agreement may bring or maintain an action against, or which includes, another party to this Agreement except in the federal or state courts located in the State of Delaware unless the sole and exclusive forum for such claim lies in another jurisdiction. All parties to this Agreement expressly waive any defense of lack of jurisdiction or improper venue to any action brought in the State of Delaware. B. Arbitration of Minor Disputes. For any action or dispute in which the damages claimed, less costs and attorneys fees, do not exceed Two Hundred Fifty Thousand Dollars ($250,000.00), the parties expressly agree that the sole and exclusive forum shall be in arbitration before the American Arbitration Association, pursuant to its rules in effect at the time the action or dispute is brought, with the situs of the arbitration in Wilmington, Delaware. C. Award of Costs and Attorney's Fees. For any action or dispute between the parties, the forum court or arbitration panel shall have the power to award costs and attorneys fees incurred along with a judgment in favor of the prevailing party. 13. SURVIVAL OF TERMS, REPRESENTATIONS AND WARRANTIES None of the terms, obligations, representations or warranties contained in this Agreement shall be deemed merged with the Closing of this Agreement or the execution of any documents contemplated hereunder but rather shall survive the Closing until the expiration or termination of such terms, obligations, representations and warranties by the written action of all parties hereto. 14. SEVERABILITY Any provision hereof which is prohibited or unenforceable in any jurisdiction will, 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 will not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by law, the parties hereto waive any provision of law which renders any such provision prohibited or unenforceable in any respect. 15. NOTICES All notices, communications and deliveries hereunder shall be made in writing signed by the party making the same, shall specify the Paragraph of this Agreement pursuant to which it is being made or given, and shall be deemed given or made on (a) the date delivered if delivered in person or sent by telecopier, (b) the first business day after the date it is sent by a nationally recognized courier, or (c) the third business day after the date it is mailed if mailed by registered or certified mail, return receipt requested, with all postage and other fees prepaid, as follows: To F.I.C.C.: Friendly Ice Cream Corporation 1855 Boston Road Wilbraham, Massachusetts 01095 Attention: Donald N. Smith Chairman and President Telecopier: (413)543-3186 with a copy to: Aaron B. Parker, Esquire Associate General Counsel Friendly Ice Cream Corporation 1855 Boston Road Wilbraham, Massachusetts 01095 Telecopier: (410)543-3282 To FriendCo: FriendCo Restaurants, Inc. 1657 Crofton Boulevard Crofton, Maryland 21114 Attention: Ronald D. Kirstien Chairman and President Telecopier: (410)793-0754 with a copy to: David J. Norman, Esquire Mason, Ketterman and Morgan 1657 Crofton Boulevard Suite 100 Crofton, Maryland 21114 Telecopier: (410)7930522 IN WITNESS WHEREOF, the parties hereto have caused their hands and seals to be subscribed on the day and date first set forth above. ATTEST: FRIENDLY ICE CREAM CORPORATION ______________________ By:_______________________ (Seal) Name: Name: Title: Title: FRIENDCO RESTAURANTS, INC. ______________________ By:_______________________ (Seal) Name: Name: Title: Title: E X H I B I T H GUARANTY As an inducement to FRIENDLY ICE CREAM CORPORATION ("Friendly's") to execute the Purchase and Sale Agreement and all Exhibits thereto, dated July 10, 1997 between Friendly's and FRIENDCO RESTAURANTS, INC. ("FriendCo") and all addenda and amendments thereto (collectively the "Agreement"), the undersigned, jointly and severally, hereby unconditionally warrant to Friendly's and its successors and assigns that all FriendCo's representations in the Agreement are true and guarantee that all of FriendCo's obligations and covenants under the Agreement will be punctually paid and performed. Upon notice by Friendly's of a default by FriendCo the undersigned will within the applicable cure period make each payment and perform each obligation required of FriendCo under the Agreement. Without affecting the obligations of the undersigned, Friendly's may extend, modify or release any indebtedness or obligation of FriendCo or any of the undersigned or settle, adjust or compromise any claims against FriendCo of any of the undersigned. The undersigned waive notice of amendment of the Agreement, notice of demand for payment or performance by FriendCo, and all other notices or demands of any nature whatsoever. The undersigned further agrees that this Guaranty shall continue to be effective or be reinstated as the case may be, if at any time payment of any of the guaranteed obligations is rescinded or must otherwise be restored or returned by Friendly's upon the insolvency, bankruptcy, or reorganization of FriendCo, all as though such payment has not been made. The Guarantor specifically waives any obligation of Friendly's to proceed against FriendCo on any other money or held by FriendCo or any other person as collateral security, by way of set-off or otherwise. IN WITNESS WHEREOF, the undersigned has signed this Guaranty as of the date of the Agreement. ATTEST: GUARANTOR: ________________________________________ DavCo Restaurants, Inc. By: Name: Title: S C H E D U L E B Management Agreement Properties (14 Total) No. Rest. No. City Address State ---- --------- ---- ------- ----- 1 0384 Baltimore 6901 Security Boulevard MD 2 0780 Cockeysville 240 Hunt Valley MD 3 0880 Randallstown 9428 - 30 Liberty Road MD 4 0905 Laurel 14750 Baltimore Washington Blvd. MD 5 0919 Gaithersburg 701 Russell Avenue MD 6 0929 Fredericksburg 280 Spotsylvania Mall VA 7 0939 Waldorf 2850 Crain Highway MD 8 0956 Manassas 8891 Centerville Road VA 9 0972 Alexandria 6550-A Little River Turnpike VA 10 1013 Columbia 8660 Guilford Road MD 11 1028 Glen Burnie 7900 Ritchie Highway MD 12 0393 Wilmington Concord Mall DE 13 0452 Towson 825 Dulaney Valley Road MD 14 0835 Woodbridge 14510 Jefferson Davis Highway VA EX-10.10 11 EXHIBIT 10.10 SOFTWARE LICENSE AGREEMENT BETWEEN FRIENDLY ICE CREAM CORPORATION 1855 Boston Road Wilbraham, Massachusetts 01095 AND FRIENDCO RESTAURANTS, INC. 1657 Crofton Boulevard Crofton, Maryland 21114 DATED July ____, 1997 TABLE OF CONTENTS SectionPage 1. Grant of License 1 2. Support 2 3. Term 3 4. Fee 4 5. Ownership of the Product: Confidentiality 4 6. Warranty; Exclusion of Warranties 5 7. Hold Harmless and Indemnity 7 8. Limitation of Liability 8 9. Documentation 8 10. Notices 9 11. Payment 9 12. Modifications to Product 9 13. Entire Agreement 10 14. Governing Laws 10 15. Invalid Provision 10 EXHIBITS Exhibit A: Maintenance Agreement SOFTWARE LICENSE AGREEMENT THIS AGREEMENT, entered into as of the _____ day of __________, 199__, is by and between FRIENDLY'S RESTAURANTS FRANCHISE, INC. (hereinafter ("Friendly's") and FRIENDCO RESTAURANTS, INC. hereinafter ("Franchisee"). This Agreement states the terms, covenants and the conditions under which Friendly's will make available to the Franchisee a proprietary computer program or programs (hereinafter individually and collectively, depending on context, referred to as "Product"). 1. Grant of License. Friendly's has developed, or obtained the rights to use and license Franchisee to use, the Product. Friendly's hereby grants to the Franchisee the non-exclusive, nonassignable, limited right to use the Product on the computer system located at the Franchisee's Restaurant ("Restaurant") located at ______________________________________. The right granted to the Franchisee hereunder is personal in nature and, further, may not be used at a location other than the location stated herein unless and until the Franchise is transferred to a replacement restaurant pursuant to the terms of the Development Agreement or the Franchise Agreement. The Product may not be used for any purpose other than processing the Restaurant's data. The Product shall include both the Fischer Processing System and the Automated Labor Scheduling System, when available. 2. Support. Friendly's will provide personnel to assist Franchisee with the installation of the Product on Franchisee's computer system at the Restaurant under one of two options to be selected by the franchisee a) Friendly's personnel will spend up to five days training the Franchisee's designated training team (not to exceed 4 people) on location at no charge; additional days needed beyond the five days will be billed at reasonable costs and expenses. b) Friendly's personnel will develop and execute a comprehensive training plan for the restaurant staff (not to exceed 60 people); this customized and more extensive approach will be billed at an amount mutually agreed to by Friendly's and Franchisee. Friendly's will make available to Franchisee certain support services. During the first year of the term of this Agreement, Franchisee agrees to enter into and maintain a software maintenance agreement (attached as Exhibit A) with Friendly's covering maintenance, upgrades and enhancements to the Product. Provided that Franchisee has a software maintenance agreement in effect with Friendly's, Friendly's will provide to Franchisee later versions of or enhancements to the Product, and Franchisee agrees to install and use such later versions or enhancements, subject to the terms of this Agreement. The software maintenance agreement currently provides for a Six Hundred Dollar ($600.00) annual fee per restaurant and is cancelable on two (2) month's notice to Friendly's and renewal shall be at the discretion of Franchisee and Friendly's. Provided that Franchisee elects to enter into and maintain a software maintenance agreement, the Franchisee may opt to obtain "Help Desk" service for each restaurant franchised by Friendly's to Franchisee at a cost to Franchisee of One Hundred Dollars ($100.00) per month per franchised restaurant. 3. Term. This Agreement is effective as of the date hereof and shall terminate on the earlier of: a) the termination or expiration of the franchise or license agreement for the Restaurant between Friendly's and Franchisee; b) the Franchisee's failure to cure any default under this Agreement within thirty (30) days after Franchisee's receipt of written notice of such default; or if such default is not curable within thirty (30) days; Franchisee's failure to commence and diligently pursue such cure within thirty (30) days after written notice; or c) Friendly's delivery of notice to Franchisee that further use of the Product is not legally authorized due to the decision of a court of law, government authority or other legal enforcement body. Upon termination of this Agreement, Franchisee shall: (i) cease using the Product, (ii) cause the Product to be completely erased from its computer system, including any backup copies, (iii) promptly return each and every Product, including all documentation and copies thereof, and (iv) certify within fifteen (15) business days of the termination that the obligations of this Section 3 have been complied with. Franchisee may terminate this Agreement and the license granted hereunder at any time by ceasing to use the Product and otherwise complying with the preceding paragraph. 4. Fee. The one time license fee for the use of the Product is One Thousand Five Hundred Dollars ($1,500.00), plus a Five Hundred Dollar ($500.00) X Cellnet License fee, per restaurant, which shall be waived for the thirty-four (34) original Franchised Restaurants. The annual software maintenance fee is Six Hundred Dollars ($600.00) per restaurant per year and may be adjusted from time to time. The software maintenance fee shall be waived for the first year for the thirty-four (34) original Franchised Restaurants and any managed restaurants which are converted to Franchised Restaurants pursuant to subparagraph 1B of the Purchase and Sale Agreement dated July 10, 1997. Franchisee is responsible for the acquisition of the required hardware, as outlined in the UFOC, in order to insure that the Product runs properly, and for obtaining an approved hardware maintenance contract in order for Friendly's to perform its obligations pursuant to the software maintenance agreement. 5. Ownership of the Product: Confidentiality. Friendly's is the owner of the Product, or is otherwise authorized to make available to Franchisee the Product, and warrants that it has full and complete authority to enter into this Agreement with Franchisee. Franchisee acknowledges that the Product is a valuable trade secret of Friendly's, the author or the owner of the Product. Friendly's, the author or the owner of the Product developed the Product through the expenditure of substantial time, effort and money. Friendly's, the author and the owner of the Product wish to, and Franchisee agrees to, maintain in strict confidence and withhold from disclosure to unauthorized persons any data or information concerning the Product. Franchisee hereby agrees that the Product and any information, knowledge and factual data related to the Product which may be imparted to the Franchisee by Friendly's, the author or the owner of the Product at any time, or from time to time, will not be copied (except one back-up copy of the Product is permitted) or communicated to any third party, except for information required by employees of the Franchisee for use only in performing their duties on behalf of Franchisee and which is to be retained in confidence by such employees. This Agreement creates in the Franchisee a license to obtain and utilize the Product for the limited purposes provided herein, but confers no right, title or interest in or to the Product, which title shall continue to vest solely in Friendly's, the author or owner of the Product. 6. Warranty; Exclusion of Warranties. Friendly's warrants that the Product will function in accordance with the specifications contained in the Friendly's authored documentation delivered by Friendly's, so long as Franchsee uses a Friendly's-supported version of the Product. THIS WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES EXPRESSED OR IMPLIED, INCLUDING BUT NOT LIMITED TO A WARRANTY BY FRIENDLY'S OF MERCHANTABILITY OF THE PRODUCT OR A WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OF THE PRODUCT. NEITHER FRIENDLY'S, THE AUTHOR NOR THE OWNER OF THE PRODUCT WARRANTS THE PERFORMANCE OR RESULTS FRANCHISEE MAY OBTAIN BY USING THE PRODUCT. Franchisee hereby acknowledges that Friendly's has made no representations or warranties to Franchisee with respect to the Product inconsistent with those described in materials previously provided to Franchisee. All warranties and guarantees, if any, that affect Franchisee's use of the Product are expressly contained herein. In the event of significant malfunction of the Product, provided that Franchisee promptly notifies Friendly's thereof, Friendly's will use all commercially reasonable efforts to correct any fault occurring in the Product or replace the Product with a comparable substitute, other than faults caused by the intentional or negligent acts of the Franchisee or Franchisee's employees or independent contractors, or by the malfunction of Franchisee computer system. Provided that Franchisee is not in default of this Agreement during the term hereof, Friendly's will defend Franchisee against any claim or suit brought against Franchisee on the basis of a claim that Franchisee's use of the Product infringes third party patent, copyright or other proprietary rights, provided that Friendly's is promptly notified of such claims or suits and Franchisee has given Friendly's full authority, information and assistance in the defense thereof. Friendly's will not be responsible for fees or costs of counsel retained by Franchisee, or for any settlement made without Friendly's written consent. Provided that Franchisee is not in default of this Agreement, in the event Friendly's receives notice of Franchisee's alleged infringement of a third party's rights or if Franchisee's use of the Product is prevented by an injunction based on alleged infringement of a third party's rights, Friendly's, may, at its option, (a) obtain the rights to continue using the Product, (b) substitute other suitable software, or (c) modify or obtain modifications to the Product so it is no longer infringing. If none of the above options are reasonably available, in Friendly's discretion, upon written notice from Friendly's, Franchisee shall stop using the Product and comply with Section 3 of this Agreement, in which event Friendly's will refund to Franchisee the license fee paid by Franchisee under this Agreement. 7. Hold Harmless and Indemnity. Franchisee has read the description of the Product's features and capabilities, and has participated in one or more demonstrations of the Product's capabilities. Franchisee acknowledges that it has exercised its independent judgment in making its decision to acquire the Product and enter this Agreement. Franchisee hereby agrees that it will not pursue a claim of any sort against Friendly's or its officers, directors, partners, employees or representatives, or the author or owner of the Product in the event the Product fails to perform in a manner or produce the results anticipated by Franchisee. Franchisee agrees to indemnify and hold harmless Friendly's, the author and the owner of the Product from any claims, demands, losses and expenses, including attorney fees and court costs, including such costs on appeal, from any third party resulting from the actions of Franchisee, its agents or employees which cause or contribute to any loss, destruction, unauthorized access or misappropriation of programs, information or data stored on the computer on which the Product is installed or to which any such computer may have access, except to the extent caused or contributed to by Friendly's, its agents or employees. 8. Limitation of Liability. In no event shall Friendly's, the author or the owner of the Product be liable, whether based on breach of warranty or contract, in tort or strict liability or otherwise, for (a) any damages arising from performance or nonperformance of the Product, (b) any lost profits, loss of use, or other consequential or incidental damages, even if Friendly's, the author or the owner of the Products have been advised of the possibility of such damage, or (c) any claim against Franchisee by any other party, except as provided for in Section 5 or Section 7 with respect to infringement of the rights of others. In no event shall Friendly's liability to Franchisee for any cause related to this Agreement or the Product exceed the license fee paid by Franchisee to Friendly's pursuant to this Agreement, except as may be provided above. 9. Documentation. Franchisee will be provided with all necessary documentation by Friendly's, the author or the owner of the Product, which documentation will be required to operate the Product effectively. All material, both written and otherwise, furnished to Franchisee by Friendly's, the author or the owner of the Product, shall remain the property of the provider of such material, and Franchisee shall save and preserve any such material except those that may be consumed in the normal course of business operations. 10. Notices. Any notice permitted or required to be given pursuant to this Agreement shall be sent via certified mail, return receipt requested, or overnight courier, or telecopy, to the party intended to receive the same at such address as either party may provide to the other. 11. Payment. any amounts due hereunder, including the help desk fee, on the same schedule as royalty payments are made pursuant to the Franchise Agreement. All past due amounts are subject to 1.5% per month late fee. Payment of support fees where the second training option is elected under Paragraph 2, are subject to the separate negotiations related to that support option. 12. Modifications to Product. Franchisee will not modify, amend, add to, decompile, disassemble, reverse engineer or otherwise alter the Product or the menu or menus of the Product without the prior written consent of Friendly's. Franchisee will not alter or remove any copyright notice or other notice of proprietary interest of Friendly's, the author or the owner of the Product. Franchisee shall not use the Product in connection or combination with software not provided or approved by Friendly's for the Product. 13. Entire Agreement. This Agreement constitutes the entire understanding of the relationship between the parties with respect to the Product. No prior or contemporaneous representation or agreement outside of this Agreement shall have any effect whatsoever on the terms hereof. 14. Governing Laws. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. 15. Invalid Provision. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid, such provision shall be stricken and the remaining provisions shall be given full force and effect. WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date and year first above written. FRIENDLY'S RESTAURANTS FRANCHISE, INC. By: Its: FRANCHISEE By: Its: EX-10.13 12 EXHIBIT 10.13 Exhibit 10.13 [LETTERHEAD OF FRIENDLY'S] Mr. Larry W. Browne Executive Vice President, Corporate Finance, General Counsel & Secretary THE RESTAURANT COMPANY One Pierce Place, Suite 100 East Itasca, IL 60143 Dear Mr. Browne: This letter is being written to confirm the maximum annual management fee payable to The Restaurant Company. This amount will not exceed $800,000 in 1996, $824,000 in 1997 and $848,720 in 1998 unless the increase is approved by a vote of fifty-one percent (51%) of Friendly's Board of Directors, including at least one director nominated by the Class B stockholders. In addition, this management fee can be terminated at any time with written notice from Friendly and upon the immediate payment of all management fees due at the time of notice and a lump sum payment of $500,000. This written notice would also be approved by a vote of fifty-one percent (51%) of Friendly's Board of Directors, including at least one director nominated by the Class B stockholders. Please indicate your agreement and acceptance by signing below. You should keep one original and return the other to me. Regards, /s/ Garrett J. Ulrich - ------------------------------------ Garrett J. Ulrich GJU/nf Agreed To And Accepted: THE RESTAURANT COMPANY /s/ Larry W. Browne - ------------------------------------ Larry W. Browne Executive Vice President, Corporate Finance, General Counsel & Secretary cc: Mike Donahue, The Restaurant Company EX-10.14 13 EXHIBIT 10.14 Exhibit 10.14 TRADEMARK LICENSE AGREEMENT This License Agreement, made and entered into effective September 2, 1988, between and among Hershey Foods Corporation, a Delaware corporation (hereinafter called "Hershey"), Dogwood Restaurants, Inc., a Delaware Corporation (hereinafter called "Licensor"), and Dogwood II, Inc., a wholly owned subsidiary of Tennessee Restaurant Company (hereinafter called "Licensee"). WITNESSETH: WHEREAS Licensor is the owner of certain trademarks, trade names, service marks and packaging trade dress used in connection therewith; and WHEREAS Licensee wishes to obtain a sole and exclusive license of said trademarks, trade names, service marks and packaging trade dress used in connection therewith for use in connection with its products and services. WHEREAS, Licensor and Licensee desire to safeguard, promote and maintain the good will and excellent reputation for quality now associated with the services and goods sold under the Trademarks (as hereinafter defined) and desire to safeguard and maintain the Trademarks. NOW, THEREFORE, the parties do hereby agree as follows: 1. Definitions. "Trademarks" shall mean collectively all of the trademarks, tradenames and service marks listed on Schedule A hereto and any packaging trade dress used in connection with such trademarks. -2- "Licensee's Products" means any food product, packaging or other product or service now or hereafter manufactured, distributed, sold or provided by Licensee or any sub-licensee. "Licensed Territory" shall be worldwide. 2. Grant. (a) Licensor hereby grants to Licensee the sole and exclusive license of the Trademarks upon and in connection with the manufacture, advertising, distribution and sale of any of Licensee's Products in the Licensed Territory and to sub-license the Trademarks to others for use in connection with the Licensee's Products in the Licensed Territory provided the quality control protections afforded by this Agreement are incorporated in any such sub-license. (b) All proprietary rights and goodwill in the Trademarks shall inure to the benefit of Licensor and not Licensee. Licensee shall acquire no property rights in the Trademarks by reason of its use thereof, and if, by operation of law, or otherwise, Licensee is deemed to or appears to own any property rights in any of the Trademarks, Licensee shall, at Licensor's request, execute any and all documents necessary to confirm or otherwise establish Licensor's rights therein. (c) License shall have all the proprietary rights of Licensor to make, or to have made and to sell Licensee's Products: (1) using the Trademarks, (2) combining the Trademarks with a trademark, name or logo of Licensee in the Licensed Territory, any use of both trademarks being subject to the provisions of Section 3 hereof, and provided such use does not create confusion as to the source of the goods or services associated therewith, or -3- (3) using any trademark of Licensee's choosing. All rights and title in the Licensee's use of a trademark other than the Trademarks shall be in Licensee. (d) Nothing in this Agreement shall be construed to require Licensee to use the Trademarks on or in connection with any of Licensee's Products. 3. Provisions Relating to the Use of the Trademarks By Licensee. (a) Licensee (and any sub-licensee) may use the Trademarks on all of Licensee's Products distributed by Licensee or any sub-licensee and on all menus, labeling, packaging, advertising and promotional materials used in connection with Licensee's Products. The Trademarks and any trademark(s) of Licensee may be used on the same package in a manner not detrimental to Licensor's ownership of and goodwill in the Trademarks. (b) Licensee covenants that all of Licensee's products associated with the Trademarks shall be of a high standard and quality so as to reflect favorably upon the businesses of both Licensor and Licensee and the goodwill associated with the Trademarks, and Licensor, to insure conformance herewith, shall have the right of inspection and the right to receive from Licensee a reasonable number of samples of products and advertising material, all upon reasonable notice to Licensee. If it is determined through reasonable inspection that any of Licensee's Products associated with the trademarks are not of a high standard and quality, Licensee agrees to cooperate with Licensor in facilitating a return of such products to a high standard and quality. - 4 - 4. Terms of Payment. Licensee hereby agrees to pay Licensor a fee of $37,500,000, due upon execution of this Agreement, for the license granted herein. The parties acknowledge this payment, as well as the mutual promises made herein, as full and adequate consideration for this Agreement. 5. Registration and Protection of Trademarks. (a) Licensee has agreed to be bound by the terms and conditions of this Agreement and recognizes and acknowledges Licensor's exclusive ownership and title to the Trademarks and the value of the associated goodwill. Licensee agrees that it will not challenge the title of any rights of Licensor in and to the Trademarks in the Licensed Territory or make any claim or take any action adverse to Licensor's rights therein, or challenge the validity of this Agreement. Licensee further agrees that its every use of the Trademarks in the Licensed Territory shall inure to the benefit of Licensor. (b) Licensee agrees to cooperate fully and in good faith with Licensor and to execute such documents as Licensor reasonably requests for the purpose of securing and preserving Licensor's rights in and to the Trademarks in the Licensed Territory. Notwithstanding anything to the contrary contained herein, Licensor makes no claim and asserts no rights to the Trademarks outside of the Licensed Territory. (c) Licensor shall use reasonable efforts to obtain and maintain registrations for the Trademarks in the Licensed Territory to the extent available in accordance with the terms and conditions of this Agreement. All costs of protection and registration of the Trademarks shall be borne by licensee. - 5- (d) Licensor and Licensee agree, both during and after the term of this Agreement, to cooperate fully and in good faith with each other and to execute such documents as either party reasonably requests for the purpose of securing and preserving Licensor's rights in and to the Trademarks. (e) Licensor and Licensee shall each promptly notify the other of any event or action of which it obtains knowledge which might constitute any infringement, counterfeit or unfair competition with request to the Trademarks. Licensor may take action, but shall be under no obligation to take any action, with respect to any such infringement, counterfeit or unfair competition. If Licensor or Licensee elects to commence any action or proceeding to protect the Trademarks in the Licensed Territory, each party shall cooperate fully with the other to whatever extent is necessary to prosecute such action or proceeding, but in any event all expenses (including attorney's fees) and costs incurred in any such actions or proceedings whether commenced by Licensee or Licensor shall be borne by Licensee. Each party shall keep the other advised of the status of such actions or proceedings. Recoveries in such actions or proceedings shall be for the account of Licensee to the extent of the expenses which it has borne; any recovery in excess of such expenses shall be for the account of the damaged party or parties. 6. Term of License. This Agreement and the licenses hereby granted shall become effective immediately upon the execution hereof and, unless extended as hereinafter provided, shall expire on the anniversary date hereof in 2028. At any time within 180 days prior to the anniversary date hereof in 2028, Licensee shall - 6 - have the right, upon written notice to Licensor and the payment to Licensor of $20,000,000 dollars not later than sixty (60) days after the date of notice, to extend the term of this Agreement and the licenses hereby granted to the anniversary date hereof in 208. Should Licensee not wish to exercise the foregoing option, then the payment of $20,000,000 dollars need not be made. 7. Licensor's Representations, Warranties and Covenants. In further consideration of Licensee's entering into this License Agreement, Licensor represents and covenants as follows: (a) The Licensor has the corporate power to execute, deliver and perform its obligations under this License Agreement, and has taken all corporate action necessary to permit it to do so. (b) Licensor shall not make use of the Trademarks on any of its products or in any other manner without the prior written consent of the Licensee. (c) Licensor represents that, to the best of its knowledge, the Trademarks do not, as of the date hereof, infringe any contract, copyright, trademark or other property right of any third party in the areas and on the products with respect to which the Trademarks are actually being used by Licensor. 8. Licensee's Representations, Warranties and Indemnity. Licensee represents and warrants that: (a) The execution and delivery of this Agreement and the performance by Licensee of the transactions contemplated hereby have been duly authorized by all appropriate corporate action. -7- (b) The performance by Licensee of any of the terms and conditions of this Agreement on its part to be performed will not constitute a breach or violation of any other agreement or understanding, written or oral, to which it is a party. (c) Licensor will not be liable for any third party infringement claims based upon Licensee's use of the Trademarks on new products or services or in new areas. 9. Indemnification by Licensor. Licensor agrees to indemnify and hold harmless Licensee from and against any and all claims, liabilities, costs, damages and expenses, including attorney's fees and accrued costs incurred by Licensee in connection with or arising from (a) any breach by Licensor of any of its covenants contained in this Agreement, and (b) any breach of any representation or warranty of Licensor contained in this Agreement. 10. Indemnification by Licensee. Licensee agrees to indemnify and hold harmless Licensor from and against any and all claims, liabilities, costs, damages and expenses, including attorney's fees and court costs, incurred by Licensor in connection with or arising from (a) any breach by Licensee of any of its covenants contained in this Agreement, and (b) any breach of any representation or warranty of Licensee contained in this Agreement. 11. Rights Upon Termination or Expiration. Upon expiration of this Agreement, Licensee shall have the right to sell or otherwise dispose of existing products bearing the Trademarks, components and raw materials related thereto within a reasonable period of time. Except as required in connection with such sales and dispositions, -8- Licensee will, on expiration of this License Agreement, discontinue and cease to use the Trademarks and not initiate any promotional activities relating thereto. 12. Benefit and Assignment. This Agreement is not assignable to any party without the consent of the remaining parties, provided, however, that (a) such consent will not be unreasonably withheld nor any compensation nor consideration be expected or required therefor, (b) Licensee may assign to another party in its own corporate group or to any of its affiliates, as long as it remains liable for the obligation hereunder, and (c) Licensor may assign its rights hereunder directly to Hershey or indirectly through an intermediate assignment to an affiliated company who shall make a further assignment to Hershey, but thereafter Hershey may not assign its rights other than under clause (a) above. 13. Applicable Law. This Agreement shall be governed by and construed in accordance with the Laws of the State of Delaware without reference to choice of law rules. 14. Waivers. The failure of either party to insist upon the strict performance of the terms, conditions and provisions of this Agreement shall not be a waiver of future compliance or a waiver of any other provisions hereof. No waiver by either party of any provisions hereof shall be deemed to have been made unless expressed in writing and signed by a duly authorized officer of such party. -9- 15. Notice. Any notice or communication required or permitted to be sent hereunder shall be duly made and shall be valid and effective if in writing and sent by certified or registered mail, postage prepaid, or if delivered: (a) If to Licensee: Dogwood II, Inc. 1855 Boston Road Wilbraham, Massachusetts 01095 Attention: General Counsel (b) If to Licensor: Dogwood Restaurants, Inc. 1855 Boston Road Wilbraham, Massachusetts 01095 Attention: General Counsel (c) If to Hershey Foods Corporation: Hershey Foods Corporation 100 Mansion Drive Hershey, Pennsylvania 17033-0810 Attention: General Counsel 16. Miscellaneous. (a) No modifications, amendments or supplements to this agreement shall be effective for any purpose unless duly recorded in writing and signed by authorized representatives of all parties hereto or their successors or assigns. (b) If any provision of this Agreement should be invalid or inoperable, this shall not affect the validity of the remaining provisions of this Agreement. The parties hereto shall in such event use their best efforts to substitute for any invalid or inoperable provision a valid or operable arrangement which achieves results as nearly equivalent as possible to the invalid or inoperable provision. -10- (c) Nothing contained herein shall be construed to place the parties in the relationship of agents, partners or joint venturers. 17. Counterparts and Other Agreements. This Agreement may be executed in one or more counterparts, each of which shall be considered an original. 18. Hershey Guarantee. By its execution hereof, Hershey guarantees to Licensee the performance by Licensor of its obligations under this Agreement. 19. TRC Guarantee By its execution hereof, TRC guarantees to Licensor, and its assignee, the performance by Licensee of all of Licensee's duties and obligations under this Agreement. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. DOGWOOD RESTAURANTS, INC. /s/ Thomas C. Fitzgerald ----------------------------------------- By: HERSHEY FOODS CORPORATION /s/ [ILLEGIBLE] ----------------------------------------- By: TENNESSEE RESTAURANT COMPANY /s/ [ILLEGIBLE] ----------------------------------------- By: -11- DOGWOOD II, INC. /s/ [ILLEGIBLE] ----------------------------------------- By: SCHEDULE A ---------- FEDERAL REGISTRATIONS --------------------- REGISTRATION NUMBER MARK - ------------------- ---- 845,093 FRIBBLE and Design (TM) 1,010,077 CLAMBOAT (SM) 1,015,495 FISHAMAJIG (SM) 1,072,831 FRIBBLE (TM) 1,093,903 CLAMBOAT (TM) 1,100,306 FISHAMAJIG (TM) 1,245,504 A.M. FRIES (TM) (Section 8 affidavit not to be filed as of 7/12/89) 1,245,629 A.M. FRIES (SM) (Section 8 affidavit not to be filed as of 7/12/89) 1,262,053 GREAT AWAKENINGS (SM) 1,282,706 CREAMY COW (TM) 1,286,573 Design of Wizard Character (SM) 1,313,682 WATTAMELON ROLL (TM) 1,346,611 HAPPY ENDING (TM) 1,420,679 DUTCH FUDGE ROLL (TM) 1,459,665 FLAVORLAND (SM) STATE REGISTRATIONS ------------------- State Registration Number Mark - ----- ------------------- ---- CONNECTICUT 251 BIG BEEF (TM) - ----------- 3260 CLAMBOAT (TM) 2570 FISHAMAJIG (TM) 4659 FRIBBLE with Design (TM) DELAWARE TM 158-19 BIG BEEF (TM) - -------- TM 161-14 CLAMBOAT (TM) TM 158-21 FISHAMAJIG (TM) TM 158-20 FRIBBLE (TM) FLORIDA TO8381 BIG BEEF (TM) - ------- TO8380 CLAMBOAT (TM) TO8379 DUTCH FUDGE ROLL (TM) TO8378 FISHAMAJIG (TM) TO8373 FRIBBLE (TM) TO8386 GREAT AWAKENINGS (SM) TO8374 HAPPY ENDING (TM) TO8387 WATTAMELON ROLL (TM) ILLINOIS 45479 CLAMBOAT (SM) - -------- 45478 FISHAMAJIG (TM) 45473 FRIBBLE with Design (TM) INDIANA 5009-734 BIG BEEF (TM) - ------- 5009-733 CLAMBOAT (TM) 5009-735 FISHAMAJIG (TM) 5009-757 FRIBBLE (TM) MAINE 820011T BIG BEEF (TM) - ----- 820010T CLAMBOAT (TM) 850144T(R) FISHAMAJIG (TM) 820008T FRIBBLE (TM) MARYLAND 81-5776 BIG BEEF (TM) - -------- 84-6256 CLAMBOAT (TM) 81-5774 FISHAMAJIG (TM) 81-5775 FRIBBLE (TM) MASSACHUSETTS 29083 A.M. FRIES (SM) not to be - ------------- renewed as of January 8, 1989 29089 A.M. FRIES (TM) not to be renewed as of January 8, 1989 29085 AT LAST, FAST FOOD AT FAST FOOD PRICES (SM) not to be renewed as of January 8, 1989 29084 BACON-EGGER (SM) not to be renewed as of January 8, 1989 29090 BACON-EGGER (TM) not to be renewed as of January 8, 1989 35549 BIG BEEF (TM) 29086 BREAKFAST (SM) not to be renewed as of January 8, 1989 29082 BREAKFAST (TM) not to be renewed as of January 8, 1989 29081 BURGERBLAST (SM) not to be renewed as of January 8, 1989 29088 BURGERBLAST (TM) not to be renewed as of January 8, 1989 34981 CLAMBOAT (TM) 31451 FISHAMAJIG (TM) 36266 FRIBBLE (TM) 29087A SPECIAL'S (SM) not to be renewed as of January 8, 1989 29087 SPECIAL'S (TM) not to be renewed as of January 8, 1989 MICHIGAN M83-002 BIG BEEF (TM) - -------- M28-006 CLAMBOAT (TM) M64-011 FISHAMAJIG (TM) M44-012 FRIBBLE (TM) NEW HAMPSHIRE BIG BEEF (TM) - ------------- CLAMBOAT (TM) FISHAMAJIG (TM) FRIBBLE (TM) NEW JERSEY BIG BEEF (TM) - ---------- CLAMBOAT (TM) FISHAMAJIG (TM) FRIBBLE (TM) NEW YORK R-12853 BIG BEEF (TM) - -------- R-22216 CLAMBOAT (TM) R-20261 FISHAMAJIG (TM) R-11852 FRIBBLE (TM) OHIO SM 1980 CLAMBOAT (TM) - ---- TM 7147 FISHAMAJIG (TM) TM 7149 FRIBBLE (TM) PENNSYLVANIA 3-1-75; 11-534 CLAMBOAT (TM) - ------------ 81-34 1684 FISHAMAJIG (TM) 81-34 1690 FRIBBLE (TM) RHODE ISLAND 85-3-1 CLAMBOAT (TM) - ------------ 81-3-20 FISHAMAJIG (TM) 76-6-47 FRIBBLE (TM) VERMONT 4447 BIG BEEF (TM) - ------- 4615 CLAMBOAT (TM) 4440 FISHAMAJIG (TM) 4585 FRIBBLE (TM) VIRGINIA BIG BEEF (TM) - -------- CLAMBOAT (TM) FISHAMAJIG (TM) FRIBBLE (TM) UNREGISTERED TRADEMARKS ----------------------- SCOOPY RISE 'N SHINE CLASSIC with Design EXPRESS LUNCH MERRY MINT with Design ORIGINAL with Design PASTA PLEASERS SILVER SERVICE ULTIMATE with Design ASSIGNMENT OF MARKS REGISTERED IN THE UNITED STATES PATENT AND TRADEMARK OFFICE ASSIGNMENT WHEREAS, Friendly Ice Cream Corporation, a Massachusetts corporation, having a principal place of business at 1855 Boston Road, Wilbraham, Massachusetts 01095, is the owner of the trademarks and service marks set forth on Schedule A attached hereto which are registered in the United States Patent and trademark office; WHEREAS, in order to effectuate a dividend, Friendly Ice Cream Corporation wishes to assign to Hershey Foods Corporation, a Delaware corporation, having a principal place of business at 100 Mansion Road East, Hershey, Pennsylvania 17033, all its right, title and interest in and to the marks; and WHEREAS, Hershey Foods Corporation is desirous of acquiring said marks and the registrations therefor. NOW, THEREFORE, for good and valuable consideration, Friendly Ice Cream Corporation does hereby assign and transfer to Hershey Foods Corporation all right, title and interest in and to the marks set forth on Schedule A attached hereto, together with the good will of the business symbolized by the marks and the identified registrations therefor, together with all rights of action accrued and to accrue under and by virtue hereof, including the right to sue and recover for past infringement of said marks. IN WITNESS WHEREOF, this Assignment has been executed as of the 2nd day of September, 1988. Attest: FRIENDLY ICE CREAM CORPORATION /s/ Daniel J. Killi By: /s/ William Lehr, Jr. - --------------------------------- --------------------------------- Daniel J. Killi William Lehr, Jr. Assistant clerk Clerk COMMONWEALTH OF PENNSYLVANIA ) : ss. COUNTY OF DAUPHIN ) On this 2nd day of September , 1988, before me personally appeared William Lehr, Jr. , to me known, who, being by me duly sworn, did depose and say that he is Clerk of Friendly Ice Cream Corporation, a corporation of the Commonwealth of Massachusetts, the corporation described in and on whose behalf he executed the foregoing instrument, and the he executed said instrument for the purposes contained therein under authority of the Board of Directors of said corporation. /s/ [ILLEGIBLE] --------------------------------- Notary Public My Commission Expires: 5/29/89 Derry Twp.- Dauphin Co.-PA. EX-12.1 14 EXHIBIT 12.1 EXHIBIT 12.1 FRIENDLY ICE CREAM CORPORATION AND SUBSIDIARIES SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED ------------- SEPTEMBER 29, 1992 1993 1994 1995 1996 1996 --------- --------- --------- --------- --------- ------------- Earnings Income (loss) before (provision for) benefit from income taxes and cumulative effect of changes in accounting principles................................ $ (12,121) $ (30,670) $ (8,597) $ (25,234) $ (13,640) $ (10,236) Interest and amortization of deferred finance costs.... 37,630 38,786 45,467 41,904 44,141 33,084 Implicit rental interest expense....................... 4,986 5,171 5,590 5,729 5,990 4,507 --------- --------- --------- --------- --------- ------------- Total earnings....................................... 30,495 13,287 42,460 22,399 36,491 27,355 --------- --------- --------- --------- --------- ------------- Fixed Charges Interest and amortization of deferred finance costs.... 37,630 38,786 45,467 41,904 44,141 33,084 Capitalized interest................................... 128 156 176 62 49 44 Implicit rental interest expense....................... 4,986 5,171 5,590 5,729 5,990 4,507 --------- --------- --------- --------- --------- ------------- Total fixed charges.................................. 42,744 44,113 51,233 47,695 50,180 37,635 --------- --------- --------- --------- --------- ------------- Earnings insufficient to cover fixed charges............. $ 12,249 $ 30,826 $ 8,773 $ 25,296 $ 13,689 $ 10,280 --------- --------- --------- --------- --------- ------------- --------- --------- --------- --------- --------- ------------- Ratio of ernings to fixed charges........................ -- -- -- -- -- -- Pro Forma Data (a): Earnings Income (loss) before (provision for) benefit from income taxes and cumulative effect of changes in accounting principles................................ $ 2,643 $ 1,978 Interest and amortization of deferred finance costs.... 28,804 21,580 Implicit rental interest expense....................... 5,990 4,507 --------- ------------- Total earnings....................................... 37,437 28,065 --------- ------------- Fixed Charges Interest and amortization of deferred finance costs.... 28,804 21,580 Capitalized interest................................... 49 44 Implicit rental interest expense....................... 5,990 4,507 --------- ------------- Total fixed charges.................................. 34,843 26,131 --------- ------------- Earnings sufficient to cover fixed charges............... $ 2,594 $ 1,934 --------- ------------- --------- ------------- Ratio of earnings to fixed charges....................... 1.1x 1.1x --------- ------------- --------- ------------- SEPTEMBER 28, 1997 ------------- Earnings Income (loss) before (provision for) benefit from income taxes and cumulative effect of changes in accounting principles................................ $ 215 Interest and amortization of deferred finance costs.... 32,972 Implicit rental interest expense....................... 4,540 ------------- Total earnings....................................... 37,727 ------------- Fixed Charges Interest and amortization of deferred finance costs.... 32,972 Capitalized interest................................... 27 Implicit rental interest expense....................... 4,540 ------------- Total fixed charges.................................. 37,539 ------------- Earnings insufficient to cover fixed charges............. $ -- ------------- ------------- Ratio of ernings to fixed charges........................ 1.0x ------------- ------------- Pro Forma Data (a): Earnings Income (loss) before (provision for) benefit from income taxes and cumulative effect of changes in accounting principles................................ $ 11,570 Interest and amortization of deferred finance costs.... 21,617 Implicit rental interest expense....................... 4,540 ------------- Total earnings....................................... 37,727 ------------- Fixed Charges Interest and amortization of deferred finance costs.... 21,617 Capitalized interest................................... 27 Implicit rental interest expense....................... 4,540 ------------- Total fixed charges.................................. 26,184 ------------- Earnings sufficient to cover fixed charges............... $ 11,543 ------------- ------------- Ratio of earnings to fixed charges....................... 1.4x ------------- -------------
- ------------------------------ (a) As adjusted to give effect to the Recapitalization and the change in accounting principle for pensions. See Note 10 of Notes to Consolidated Financial Statements. EX-23.2 15 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report (and to all reference to our Firm) included in or made a part of this Registration Statement. ARTHUR ANDERSEN LLP Hartford, Connecticut October 17, 1997 EX-24.2 16 POWER OF ATTORNEY EXHIBIT 24.2 LIMITED POWER OF ATTORNEY The undersigned, a director of Friendly Ice Cream Corporation, a Massachusetts corporation (the "Company"), hereby constitutes and appoints Paul J. McDonald, George G. Roller and Allan Okscin, and each of them, the true and lawful attorneys-in-fact and agents of the undersigned, with full power of substitution and resubstitution, for and in the name, place and stead of the undersigned, in any and all capacities, to sign any and all amendments (including post-effective amendments) to the Registration Statements on Form S-1 of the Company (File nos. 333-34633 and 333-34635), each originally filed with the Securities and Exchange Commission on August 29, 1997, including any filings pursuant to rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute, or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: October 17, 1997 /S/ Charles A. Ledsinger, Jr. -------------------------------------- By: Charles A. Ledsinger, Jr. EX-99.2 17 CONSENT OF BURT MANNING EXHIBIT 99.2 CONSENT TO BE NAMED IN THE REGISTRATION STATEMENTS To: Friendly Ice Cream Corporation The undersigned hereby consents to be named as a Director in the Registration Statements on Form S-1 (the "Registration Statements"), as first filed by Friendly Ice Cream Corporation (the "Company") on August 29, 1997, and to the statements in such Registration Statements concerning the undersigned's intended nomination to the Board of Directors of the Company. Dated October 6, 1997 By: /s/ BURTON J. MANNING ----------------------------------------- Name: Burton J. Manning
-----END PRIVACY-ENHANCED MESSAGE-----